Capital Financing of Private Equity Firms- Financing a Unicorn (Case Study Sample)

Square Inc.: Financing a Unicorn Student’s Name: Course Title: Instructor’s Name: Date: Structure of Venture Capital Private Equity and Compensation of Private Equity Firms Venture capital private equity are structured in such a manner that the firm seeking funding sets out to involve investors in supplying the capital requirements to drive the business. The firm seeking funding becomes the general partner and is responsible for the management and operational activities. The investors involved in the provision of venture capital are referred to as the limited partners, and they include individuals of high financial standing, financial institutions such as banks and insurance organizations (Herciu, 2017). The limited partners inject the required amount of money in exchange for limited percentage equity in the company seeking capital financing. The motivational factor for the limited partners to engage in the venture capital injection is usually the growth prospects due to the fact the company is a startup with a bright future in the investment area. High growth sectors such as biotechnology and communication technology comprise the majority of venture capital private equity cases. Private equity firms get compensated through the profit sharing plan stipulated in the venture capital agreement with the limited partners. The compensation happens through carried interests and management fees. The limited partners pay management fees that are a given percentage of the value of the assets under the management of the general partners. The management fee paid by the limited partners is usually in the range of 1% to 3% of the asset value per year. The management fees are meant to cater for the ongoing expenses such as remuneration for the employees and fees paid to investment consultants to drive the business and investment strategy. The private equity firms also get compensation through carried interest which is a fraction of the profits made from the investment activities using the funds provided by the limited partners (Kerai, 2017). The percentage interest to the general partner usually gets determined under stipulated conditions for instance if the profits are above a given percentage of investment per years. The private equity firm management, therefore, works hard to surpass the stipulated percentage profit for them to get a share of the returns. Khosla Ventures may be motivated to push for Square to seek an exit as that would result in high profits. It is important to note that Khosla Ventures is a private equity investor in the company and the exit would mean a liquidation that would give Khosla Ventures huge proceeds for its equity in the company. The trend in the growth of Square is a clear indication that an exit at the opportune stage would be advantageous to the private equity investor. The fact that Square is among the group of venture capital financed firms referred to as unicorns whose valuation happens after investment could also be a motivation for Khosla Ventures to push for the exit. The valuation would be high, and that would mean high returns for private equity investors. Common Characteristics of the Firms in Case Exhibit 2 The common characteristic of the firms in case Exhibit 2 is that their valuation is done after investment. The post-money valuation in these group of venture capital financed enterprises results in high valuations that place the companies at the high investment pedestals. I agree with Marc Andreessen that the concerns by investors that the high valuation of unicorns was a semblance of the dot-com bubble of 2000-2002 are incorrect. The concept of software eating the world is a notion that I agree with because the technology firms have the high potential to transform industrialization across the world (Au-Yong-Oliveira et al., 2018). That means a high value for the unicorns and gives support for the post-money valuation. The high valuation emanates from after investment determinations are justified by the fact that the unicorns have high growth prospects courtesy of their presence in the technology business. The increasing growth and development in the technology arena is a concept that would make the unicorns to gain more value due to the expected high demands for technology-related products and services. I, therefore agree with Marc Andreessen concerning the high post-money valuation levels of unicorns. The appearance of Capitalization table after the Series E Issuance The changes in the capitalization table after the series E issuance would reflect the rise in the number of shares issued to the investors as well as the increase in the price of a single stock in the company. The capitalization table would include a new row for the series E issuance of shares to venture investors, and the post-money valuation would move from $370,967,000 to $520,967,073. The new turn of events after the capital financing move through the issuance of shares to the investors would mean a higher valuation of the firm and increased prospects for high returns. The increased valuation level is an indication of the development prospects that Square would gain from the capital injection. The flight of the firm to the realms of high revenues and profit margins would be a result of the capital injection through the venture capital financing engagement. Returns to each Class of Investors realize in the Exit of Square The exit of Square through an IPO would benefit the individual and private equity investors as they get returns for the business commensurate wi...