In 2003, venture capitalists and investors dispensed over $18 billion to promising young U.S. companies, according to VentureOne and Ernst & Young Quarterly Venture Capital Report. Less documented and reported is venture leasing's activity and volume. This form of equipment financing contributes greatly to the growth of U.S. start-ups. Yearly, specialty leasing companies pour hundreds of millions of dollars into start-ups, permitting savvy entrepreneurs to achieve the biggest 'bang for their buck' in financing growth. What is venture leasing and how do sophisticated entrepreneurs maximize enterprise value with this type of financing? Why is venture leasing a cheaper and smarter way to finance needed equipment when compared to venture capital? For answers, one must look closely at this relatively new and expanding form of equipment financing specifically designed for rapidly growing venture capital-backed start-ups. The term venture leasing describes the leasing of equipment to pre-profit, start-ups funded by venture capital investors. These companies usually have negative cash flow and rely on additional equity rounds to fulfill their business plans. Venture leasing allows growing start-ups to acquire needed operating equipment while conserving expensive venture development capital. Equipment financed by venture leases usually includes essentials such as computers, laboratory equipment, test equipment, furniture, manufacturing and production equipment, and other equipment to automate the office.
Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership. Venture leasing is also very flexible. By structuring a fair market value purchase or renewal option at the end of the lease, the start-up can slash monthly payments. Lower payments result in higher earnings and cash flow. Since a fair market value option is not an obligation, the lessee has a high degree of flexibility and control. The resulting reduction in payments and shift of lease expense beyond the expiry of the transaction can deliver a higher enterprise value to the savvy entrepreneur during the initial term of the lease. The higher enterprise value results from the start-up's ability to achieve higher earnings, upon which most valuations are based. Customers benefit more from venture leasing as compared to traditional bank financing in two ways. First, venture leases are usually only secured by the underlying equipment. Additionally, there are usually no restrictive financial covenants. Most banks, if they lend to early stage companies, require blanket liens on all of the companies' assets. In some cases, they also require guarantees of the start-ups' principals. More and more, sophisticated entrepreneurs recognize the stifling effects of these limitations and their impact on growth. When start-ups need additional financing and a sole lender has encumbered all company assets or required guarantees, these young companies become less attractive to other financing sources. Correcting this situation can sap the entrepreneurs' time and energy.
Commercial leases can be further described by the type of use associated with the property - office, retail, warehouse, pad, or "ground". An office lease is generally used in buildings intended for non-industrial business use. Retail leases are generally utilized for shopping malls and strip centers. Warehouse leases are generally seen for industrial or light industrial uses. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for building and maintaining the structure. Texas law does not require a commercial landlord to utilize any specific form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord.
Venture lessors target lessee prospects that have good promise and that are likely to fulfill their leases. Since most start-ups rely on future equity rounds to execute their business plans, lessors devote significant attention to credit review and due diligence - evaluating the caliber of the investor group, the efficacy of the business plan and management's background. A superior management team has usually demonstrated prior successes in the field in which the new venture is active. Additionally, management's expertise in the key business functions -- sales, marketing, R&D, production, engineering, finance --- is essential. Although there are many professional venture capitalists financing new ventures, there can be a significant difference in their abilities, staying power and resources. The better venture capitalists achieve excellent results and have direct experience with the type of companies being financed. The best VCs have developed industry specialization and many have in-house specialists with direct operating experience within the industries covered. Also important to the venture lessor are the amount of capital VCs provide the start-up and the amount allocated to future funding rounds.
Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership. Venture leasing is also very flexible. By structuring a fair market value purchase or renewal option at the end of the lease, the start-up can slash monthly payments. Lower payments result in higher earnings and cash flow. Since a fair market value option is not an obligation, the lessee has a high degree of flexibility and control. The resulting reduction in payments and shift of lease expense beyond the expiry of the transaction can deliver a higher enterprise value to the savvy entrepreneur during the initial term of the lease. The higher enterprise value results from the start-up's ability to achieve higher earnings, upon which most valuations are based. Customers benefit more from venture leasing as compared to traditional bank financing in two ways. First, venture leases are usually only secured by the underlying equipment. Additionally, there are usually no restrictive financial covenants. Most banks, if they lend to early stage companies, require blanket liens on all of the companies' assets. In some cases, they also require guarantees of the start-ups' principals. More and more, sophisticated entrepreneurs recognize the stifling effects of these limitations and their impact on growth. When start-ups need additional financing and a sole lender has encumbered all company assets or required guarantees, these young companies become less attractive to other financing sources. Correcting this situation can sap the entrepreneurs' time and energy.
Commercial leases can be further described by the type of use associated with the property - office, retail, warehouse, pad, or "ground". An office lease is generally used in buildings intended for non-industrial business use. Retail leases are generally utilized for shopping malls and strip centers. Warehouse leases are generally seen for industrial or light industrial uses. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for building and maintaining the structure. Texas law does not require a commercial landlord to utilize any specific form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord.
Venture lessors target lessee prospects that have good promise and that are likely to fulfill their leases. Since most start-ups rely on future equity rounds to execute their business plans, lessors devote significant attention to credit review and due diligence - evaluating the caliber of the investor group, the efficacy of the business plan and management's background. A superior management team has usually demonstrated prior successes in the field in which the new venture is active. Additionally, management's expertise in the key business functions -- sales, marketing, R&D, production, engineering, finance --- is essential. Although there are many professional venture capitalists financing new ventures, there can be a significant difference in their abilities, staying power and resources. The better venture capitalists achieve excellent results and have direct experience with the type of companies being financed. The best VCs have developed industry specialization and many have in-house specialists with direct operating experience within the industries covered. Also important to the venture lessor are the amount of capital VCs provide the start-up and the amount allocated to future funding rounds.
Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
About the Author:
Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Pay-day Loans Should Be Paid Off Fast You have full permission to reprint this article provided this box is kept unchanged.
No comments:
Post a Comment