start up finance & venture capital

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  • 1. Start Up Finance & Venture CapitalSerdar Temiz

2. Is there a universal cure for successfulnew ventures and commercialization ofnew technology? Start up! Venture Cup Public seed capital Incubators Business angels Venture Capital2 3. Who or What is the first Investor of your startup3 4. Raising Capital1. Self-funding & bootstrapping2. Customers (funding growth via retainedearnings)3. Debt financing (lender charges interest formoney loaned)4. Equity financing (investor provides moneyin exchange for an ownership share)5. Crowdfunding6. Other: government grants, business plancompetitions, incubators, etc.4 5. Five different kinds of services ICT-related business models: These Candistribute services instantaneously toeveryoneManual services at many different locations.Knowledge intensive services InfraserviceManufacturing companies integrating forwardSource: Eric Giertz, KTH 6. Bootstrappingusing creative means to obtain resources otherthan borrowing money or raising capital fromtraditional sources Personal savings Credit cards Creditors (delay payables) Pre-payment (sell first, then build/ship) Extreme cost controls Trade CreditSource: Bill Snow, Venture Capital 101, Iteration 1.8, February 8, 20046 7. Non-Financial Resources for Start-Ups1. Family & friends2. Network3. Alumni association4. Board of directors5. Board of advisors6. Mentors7. Volunteers8. Interns9. Unpaid workers (stock options)10. Industry experts11. Incubators12. Bartering7 8. The Art of BootstrappingDo not buy new what you for free...what someone will pay you for...what someone will bid forggrowthstrategies 2008 growthstrategies; Terrence Brown 8 9. BootstrappingPros Bootstrapped firmsalmost always spendcash more effectivelythan equity-financedventures Requires being closeto customers, clearlyidentifying problemsand solutionsCons Resources for productdevelopment andmarket developmentconstrained by cashflows May miss bigopportunities May be left behind bycompetitors9 10. Structuring 3F Deals(friends, families, & fools)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 outSource: Norman Scarborough, Essentials of Entrepreneurship & Small Business Management, Pearson 201110 11. Matching Financing with the Venture3 Fs &Bootstrapping Weak cashflow Low-to-moderategrowth UnprovenmanagementDebtFinancing Strong cashflow Auditedfinancialstatements Goodmanagement Healthybalance sheetEquityFinancing Uniquebusiness idea High growth Provenmanagement High-risk,high-rewardSource: Bruce Barringer & R. Duane Ireland, Entrepreneurship: Successfully Launching New Ventures (Pearson, 2010) 11 12. Equity FinancingAdvantages Common interest in success No regular interest payments Dividends at discretion ofthe board In absence of profits,investors do not get paid Cannot force firm intobankruptcy to recoupinvestmentDisadvantages Founders must share profitswith other equity investors Seeking higher return thanlenders due to higher risk Investors may interfere(inquiries, scrutiny, advice,etc.) Founders can lose controlSource: Mariotti & Glackin, Entrepreneurship and Small Business Management 12 13. Angel Investorsinvest their personal capitalExamples: Individuals with rather small funding Angel Investors Networks Very rich Angels (entrepreneurs)- 3Fs- Angels- VCsdirectly in new ventures13 14. Angels (vs. VCs)1. Simpler term sheets, BMC, Business Plan2. Dont 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. Dont add as much money or value as VCs14Marty Zwilling, 7 Key Drivers to the Best Investor for Your Startup, Startupprofessionals blog, April 7, 2012 15. Vetting an Angel1. 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)15 16. 16VENTURECAPITAL 17. Business Plan Funnel100business plans come in to VC10left after quick screen1receives funding afterextensive due diligenceSource: National Venture Capital Association, Venture Impact, Fourth Edition, 200717 18. 600,000 new businesses are started in the U.S. eachyear, and the number of startups funded by VCs wasabout 300. This means that the probability of anaverage new business getting VC is about 0.0005(300/600,000)Source: 19. 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 time19 20. The day you take a dollar or pound orrupee from most venture capitalinvestors is the day you have agreed tosell your business. -John Mullins20 21. The little-known secret is that nowadaysthe vast majority of venture capital exitsare the sale of the company to another,larger company. IPOs happen... but notvery commonly.-John Mullins & Randy KomisarGetting to Plan B21 22. # of Venture-Backed IPOs vs. Acquisitions: U.S.45040035030025020015010050Source: National Venture Capital Association22127227242702009 2010Venture-backed IPOsVenture-backedacquisitions 23. what VCs look for23industry of focusExceptionalteamand/orExceptionaltechnologyTraction/momentum 24. Investments by Stage: U.S.Source: Robert Wiltbank & Warren Boeker, Returns to Angel Investors in Groups, Angel Capital Education Foundation; PWC Moneytree Report24 25. Choosing a VC Firm1. 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 manyother boards serving on? Other VCs to work withon this deal?25 26. Business plansubmissionPreliminarydecisionCompanyvisit/meetingVC StepsLETTER OF INTENTTERM SHEETCONTRACT & FINANCINGSource: McKinsey, Starting Up, modified version of Scheidegger et al., Swiss Venture Capital Guide, 1998-9926Analysis & discussionsDue diligenceContractnegotiationsSupport & monitoringEXIT 27. common VC deal termsliquidation preferencefirst claim to all assets & technology if the venture fails (100% preferenceover 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 atlower valueswarrantsform of investment security which gives owners the right to purchase a #of shares of stock at a set price before the expiration datePreferred Stock vs Common Stockpreferred stock usually doesn't carry the same voting rights as common stock, itdoes have priority when it comes to dividends and bankruptcyBob Zider,How Venture Capital Works, Harvard Business Review, Nov-Dec 199830