Financing High Growth Ventures

ETP 3700

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Life Cycle of a Business Venture

Bootstrapping

Self, Friends and Family

Equity Financing

Stages of High Growth Business Funding

1. Initial stage (usually angels and angel networks)

2. First round financing (angels and some venture capitalists)

3. Second round financing (usually venture capitalists)

4. Late round financing5. Liquidation Event

Initial Stage Funding

• File for incorporation

• Write business plan

• Find office and development space

• Completion of initial design

• Hire key development personnel

• Complete prototype unit

• Complete prototype testing

First Round Financing(Series A)

• Secure key vendors • Hire key service or manufacturing personnel• Rent or build manufacturing facility• Purchase manufacturing equipment• Market testing• First sales contract• Production of first manufactured unit• First 100, 1000, 10000 units, etc.

Second Round Financing(Series B)

• Break-even level of sales

• Development of next generation of product

Venture Capital Financing

• Looking for larger deals

• Expectations of 70-100% annualized returns (want to average 30% for their investors)

• 3-5 year pay-off

• Don’t want control, but will take control if dissatisfied with management

Venture Capital Financing

• Most prefer providing second or even third stage financing, with plans for liquidation event

• Tend to specialize

• Fund about 1% or less of plans they review

• Local Venture Capital Firms

Initial Contact with a Venture Capitalist • Funding amount • Duration • Summary of the project • Use of funding • Confirm how the transaction will be liquidated • Existing investment in the project • Names of bankers, lawyers, accountants and

consultants • Unusual or sensitive information

Venture Capital Term Sheet1. Amount the venture capitalist wishes to invest.

2. Percentage of ownership to the venture capitalist.

3. The nature of the investment such as loan, stock, warrants, etc.

4. Governance rights of the venture capitalist.

5. Right to eventually register shares for a public offering.

6. Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc.

7. An estimate of valuation of the company.

8. Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds.

Liquidation Event

• Sale of business

• Initial public offering

Advantages of Initial Public Offering

• Diversification and liquidity

• Ability to raise new cash

• Valuation

• Future business deals

• Publicity

Disadvantages of Initial Public Offering

• Requirements of Sarbanes-Oxley

• Reporting costs

• Disclosure of information

• Maintenance of control

• Culture will likely change

• Control is greatly reduced

Process of the IPO

1. Selecting an investment banking firm

2. The decision to underwrite or not underwrite

3. Getting the paperwork in order and certifying the price of the offering

4. The road show

5. Determine the size of the book

6. The first day of trading