In the first stage, the investment target is selected, including obtaining necessary information and evaluating its potential investment value.
The second stage is to organize investment, determine the investment structure, that is, determine the type and quantity of investment, and discuss the specific terms of the investment agreement, which will affect the limited partnership company's ability to intervene in enterprise management.
The third stage is to supervise investment, that is, to actively participate in the management of the enterprise, so that the managers of the limited partnership company can control and support the development of the invested enterprise through the seats on the board of directors and other informal channels.
The fourth stage is the public listing or equity transfer of the invested enterprise. Due to the limited duration of the limited partnership company, investors hope to get returns in the form of cash or securities, so this exit strategy is an indispensable part of the investment process. In the above-mentioned investment process, the limited partnership company coordinates the information asymmetry and incentive between it and the start-up enterprises through a series of investment procedures and contractual arrangements.
1, select an investment enterprise.
Choosing high-quality enterprises is very important to ensure the success of investment. Managers of limited partnership companies mainly rely on investment bankers, brokers, investment consultants, lawyers and accountants to obtain investment information, and sometimes they also obtain relevant information through relationships established in previous successful investments. The size of a limited partnership company is usually positively related to the amount of information it obtains.
2. Determine the investment structure
After choosing an investment enterprise, the manager begins to negotiate an investment agreement with the enterprise to determine the financial structure and governance structure. The core issue of finance is the shares of a limited partnership company; There are two problems in corporate governance structure, that is, the incentive of enterprise management and the degree of control of limited partnership companies, especially when enterprises have difficulties in operation.
(1) Limited partnership shares
Limited partnership enterprises usually adopt the discounted cash flow method, that is, to estimate the value of the enterprise at a certain point in the future and determine the rights and interests of the original owner of the enterprise according to a certain rate of return. Enterprise value is generally the after-tax profit or cash flow of the enterprise multiplied by a multiplier. Different investment types have different rates of return. The return rate of start-ups in the initial stage of investment is 15%, while the return rate of more mature enterprises is around 25%.
(2) the terms of the governance structure
The information asymmetry between investors and managers of start-up enterprises will produce potential "moral hazard", that is, managers seek their own interests at the expense of investors' damage. Limited partnership companies coordinate the relationship between management and investors through a series of mechanisms. These mechanisms can be divided into two categories:
The first category: enterprise performance incentive.
Management's equity share
In start-ups, the management occupies a large share of the company's equity, and at the same time allows the management to increase its shareholding after achieving its business objectives. This part of the equity share is the vast majority of management income.
The nature of investors' rights and interests.
In the venture capital market, there are more convertible preferred shares. The biggest difference between them and common stocks is that in the liquidation of enterprises, the holders of preferred stocks have priority over the holders of common stocks. This equity nature, first, reduces the investment risk of limited partnership companies; The second is to motivate management, because management holds common stock.
Manage employment contracts
Because management owns certain shares, they may engage in high-risk but high-return projects. In order to offset the risk preference of management and punish managers with poor performance, the terms of employment usually stipulate under what circumstances the management can be replaced and the shares held by managers can be repurchased.
The second category: direct supervision mechanism
Although the incentive of management is very important to coordinate the interests of management and investors, the most important aspect of venture capital is that investors maintain strong monitoring of enterprises to protect their own interests. Specific measures are as follows:
Join the board of directors
The board of directors of an enterprise is responsible for the operation of the enterprise, including appointing or dismissing the general manager, and supervising or evaluating the operation of the enterprise. In many cases, limited partnership companies occupy a dominant position in the board of directors of enterprises. In enterprises with a small share of limited partnership companies, limited partnership companies have at least one seat on the board of directors in order to effectively participate in the management of enterprises and obtain corresponding information in time.
Distribution of voting rights
Usually, the voting right of a limited partnership company does not depend on the type of its shares. For example, holders of convertible preferred shares can have the voting rights of common shares, and long-term creditors can also have certain voting rights.
Control additional financing
The seats on the board of directors do not fully reflect the control ability of the limited partnership company, and the ability to continuously provide financing is also an important bargaining chip to enhance its status, especially for newly established venture capital enterprises.
Other monitoring mechanisms
Including the limited partnership company has the right to inspect the equipment and account books of the enterprise and obtain relevant financial statements in time; Without the consent of the limited partnership company, it is not allowed to sell shares or sign important contracts.
3. Managing investment
After completing the investment, managers should not only supervise the enterprise, but also provide a series of consulting services for the enterprise. Limited partnership companies believe that the main difference from other external directors is that they can "add value" to the enterprise by providing help for the management of the enterprise.
In the supervision and management of enterprises, managers help to design the manager's income structure, change managers when necessary, arrange external financing, solve problems in operation and formulate the company's long-term development strategy.
Because venture capital requires in-depth understanding of the situation of enterprises, limited partnership companies specializing in venture capital are very professional in industry and region, and it is easier to help venture enterprises with strong industries, while it is more convenient to visit enterprises with strong regions.
4. Withdraw investment
An important feature of a limited partnership company is that within a certain period of time, the limited partnership company is dissolved and the limited partners get a return on investment. Managers should try their best to make the limited partnership company withdraw from the investment smoothly. There are three main ways to withdraw from investment, namely, public listing, agreement transfer and stock repurchase by enterprises.
Different exit methods have different effects on the limited partners, managers and managers of enterprises. Public listing can usually maximize the value of enterprises and maintain their independence. At the same time, enterprises have channels for continuous financing, which is the preferred exit method.
However, after an enterprise is publicly listed, according to the relevant laws and regulations, the shares owned by a private limited partnership company cannot be sold for two years, and the limited partnership company must continue to participate in the operation of the enterprise until the shares it holds can be sold.
Private agreement transfer is also very attractive to limited partnership companies, which enables limited partners to obtain cash or securities quickly and quit the enterprise completely. However, the management of start-ups generally does not welcome this practice, because private agreement transfer usually means that the enterprise is acquired by a large company and loses its independence.
The third way is for the startup company to buy back the equity of the limited partnership company. Usually, the mandatory repurchase clause and the calculation method for determining the equity value will be signed in advance. For the minority equity of a limited partnership company in a startup company, it is necessary to sign a repurchase clause in advance, because repurchase is the only way to realize the equity of a limited partnership company. However, for most investments, repurchase is usually just a backup exit method, which is often adopted when the investment is unsuccessful.