Start Up Finance & Venture CapitalSerdar Temiz

Is there a universal cure for successful new ventures and commercialization of new technology?

• Start up!• Venture Cup• Public seed capital• Incubators• Business angels• Venture Capital

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Who or What is the first Investor of your start up

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Raising Capital

1. Self-funding & bootstrapping2. Customers (funding growth via retained

earnings)3. Debt financing (lender charges interest for

money loaned)4. Equity financing (investor provides money

in exchange for an ownership share)5. Crowdfunding6. Other: government grants, business plan

competitions, incubators, etc.

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Five different kinds of services

• ICT-related business models: These Can distribute services instantaneously to everyone

• Manual services at many different locations.• Knowledge intensive services• Infraservice• Manufacturing companies integrating forward

Source: Eric Giertz, KTH

• Personal savings• Credit cards• Creditors (delay payables)• Pre-payment (sell first, then build/ship)• Extreme cost controls• Trade Credit

Bootstrapping

Source: Bill Snow, Venture Capital 101, Iteration 1.8, February 8, 2004

using creative means to obtain resources other than borrowing money or raising capital from traditional sources

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1. Family & friends2. Network3. Alumni association4. Board of directors 5. Board of advisors6. Mentors7. Volunteers8. Interns9. Unpaid workers (stock options)10.Industry experts11.Incubators12.Bartering

Non-Financial Resources for Start-Ups

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The Art of Bootstrapping

Do not buy new what you can...buy used

...lease...borrow...barter...beg

...scavenge...get for free

...what someone will pay you for...what someone will bid for

ggrowthstrategies

© 2008 growthstrategies; Terrence Brown 8

Bootstrapping

Pros

• Bootstrapped firms almost always spend cash more effectively than equity-financed ventures

• Requires being close to customers, clearly identifying problems and solutions

Cons

• Resources for product development and market development constrained by cash flows

• May miss big opportunities

• May be left behind by competitors 9

Structuring 3F Deals(“friends, families, & fools”)

Source: Norman Scarborough, Essentials of Entrepreneurship & Small Business Management, Pearson 2011

1. Consider the impact on everyone involved2. Never accept more than they can afford to lose3. Strictly business (market-based interest rates)4. Prepare a business plan5. Settle details upfront with written contract6. Treat as “bridge financing” to other investments7. Develop realistic payment schedule that suits all8. Exit plan: how investors repaid or cash out

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Matching Financing with the Venture

3 F’s & Bootstrappi

ng• Weak cash

flow• Low-to-

moderate growth

• Unproven management

Debt Financing

• Strong cash flow

• Audited financial statements

• Good management

• Healthy balance sheet

Equity Financing

• Unique business idea

• High growth• Proven

management

• High-risk, high-reward

Source: Bruce Barringer & R. Duane Ireland, Entrepreneurship: Successfully Launching New Ventures (Pearson, 2010) 11

Equity Financing

Advantages

• Common interest in success

• No regular interest payments

• Dividends at discretion of the board

• In absence of profits, investors do not get paid

• Cannot force firm into bankruptcy to recoup investment

Disadvantages

• Founders must share profits with other equity investors

• Seeking higher return than lenders due to higher risk

• Investors may interfere (inquiries, scrutiny, advice, etc.)

• Founders can lose control

Source: Mariotti & Glackin, Entrepreneurship and Small Business Management 12

Examples:• Individuals with rather small funding• Angel Investors Networks• Very rich Angels (entrepreneurs)

- 3Fs- Angels- VCs

Angel Investors

invest their personal capital directly in new ventures

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Angels (vs. VCs)

1. Simpler term sheets, BMC, Business Plan2. Don’t squeeze as hard on valuations3. More realistic on time frames4. Exert less control over the team5. Exert less financial control over the firm, strategy, and exit plans6. Don’t add as much money or value as VCs

14Marty Zwilling, ”7 Key Drivers to the Best Investor for Your Startup,” Startupprofessionals blog, April 7, 2012

Vetting an Angel

1. Do they have investment criteria? Industry focus? Investment size range? Geographic focus?

2. Expected ROI & time horizon?3. Chemistry & fit (values & vision)?4. Reputation?5. Can they help you raise VC money in next stages?

(relationships)

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VENTURE CAPITAL

Business Plan Funnel

Source: National Venture Capital Association, Venture Impact, Fourth Edition, 2007

100

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1

business plans come in to VC

left after quick screen

receives funding after extensive due diligence

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600,000 new businesses are started in the U.S. each year, and the number of startups funded by VCs was about 300. This means that the probability

of an average new business getting VC is about 0.0005 (300/600,000)

Source: http://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-wasting-time-seeking-venture-capital/18

Investor returns require a successful “exit” or “liquidity event”:

1. Sale of the company ... OR ...

2. Initial public offering (IPO): - issuing shares to the public for the first time

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“The day you take a dollar or pound or rupee from most venture capital investors is the day you have agreed to sell your business.” -John Mullins

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“The little-known secret is that nowadays the vast majority of venture capital exits are the sale of the company to another, larger company. IPOs happen... but not very commonly.”

-John Mullins & Randy KomisarGetting to Plan B

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# of Venture-Backed IPOs vs. Acquisitions: U.S.

Source: National Venture Capital Association

222009 2010

0

50

100

150

200

250

300

350

400

450

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72

272

427

Venture-backed IPOsVenture-backed acquisi-tions

what VCs look for

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industry of focusExceptional

team

and/or

Exceptional technology

Traction/ momentum

Investments by Stage: U.S.

Source: Robert Wiltbank & Warren Boeker, Returns to Angel Investors in Groups, Angel Capital Education Foundation; PWC Moneytree Report

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Choosing a VC Firm

1. Do we meet their investment criteria? What stage of growth do they focus on? Industry focus? Investment size range? Geographic focus?

2. Expected ROI & time horizon?3. Involvement level?4. Chemistry & fit (values & vision)?5. Reputation?6. Mechanics: who will serve on our board? how

many other boards serving on? Other VCs to work with on this deal?

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Business plan submission

Preliminary decision

Company visit/meeting

VC Steps

Source: McKinsey, Starting Up, modified version of Scheidegger et al., Swiss Venture Capital Guide, 1998-9926

Analysis & discussions

Due diligence Contract negotiations

Support & monitoring

LETTER OF INTENT

TERM SHEET

CONTRACT & FINANCING

EXIT

liquidation preferencefirst claim to all assets & technology if the venture fails (100% preference over common shares)

blockingdisproportional voting rights over key decisions (e.g., sale, IPO timing)

antidilution clauses (ratchets)protect against equity dilution is subsequent financing rounds occur at lower values

warrantsform of investment security which gives owners the right to purchase a # of shares of stock at a set price before the expiration date

Preferred Stock vs Common Stockpreferred stock usually doesn't carry the same voting rights as common stock, it does have priority when it comes to dividends and bankruptcy

common VC deal terms

Bob Zider,”How Venture Capital Works,” Harvard Business Review, Nov-Dec 199830