technology ventures : from idea to enterprise

Technology Ventures: From Idea to Enterprise

Summary

Chapter 18: Summary

Capital is to the progress of society what gas is to a car.

James Truslow Adams

What are the sources of capital that a new venture can use to finance the start and growth of its company?

Entrepreneurs can estimate the capital required for their new business by reviewing the financial projections they prepare using the methods detailed in Chapter 17. Typically, several stages of investment will be required over the life of the business.

Sources of CapitalSources of Capital

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Chapter 18: Figure 18.1

Cumulative Cash Flow ($millions)

-3

+3

+2

+1

20

10 30 40 50 Time (months)

Cash Breakeven

0

-1

-2

Idealized cash flow diagram for a new enterprise


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*Burn rate of $100K per month for the first 20 month.

Real Option: the right to invest in (or purchase) a real asset (a new start-up firm) at a future date.

V = IV + OV

IV = Intrinsic Value (Economic Capital)

OV = Option Value (Strategic Capital)

Chapter 18: Real Option


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Professional investors of the think of an opportunity as OPTIONS.

OPTIONS may be defined as rights but not obligations to take some actions in the future.

Mathematical model of venture investment.

Chapter 18: Table 18.2 – value of a real option

The Value of A Real Option Based on Four Factors

•Increases with the level of uncertainty measured by the standard deviation σ.

•Increases with the length of time, T, the person holding the option has to decide whether or not to exercise it.

•Increases with the ratio of the current stock price, P, to the exercise price, X. The ratio is P/X.

•Increases with the discount rate, r.


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Chapter 18: Table 18.3 – Sources of capital

Sources of Capital•Founders•Family•Friends•Small Business Investment Companies (SBIC)•Small Business Innovation Research (SBIR)•Professional Investors — Angels•Venture Capitalists•Banks•Leasing Companies•Established Companies•Public Stock Offering•Government Grants and Credits•Customer Prepayments•Pension Funds•Insurance Companies


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Chapter 18: Table 18.4 – sources of growth capital

Comparison of major selected sources of growth capital


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1. Founding Stage

The Entrepreneurial Team Begins with a Vision, Business Model and Strategy

2. Seed Stage

Initial Financial Capital

3. Growth Stage

Growth Capital Required

4. Harvest Stage

IPO or Acquisition Provides Return to Investors and Founders

Four financial steps in building a successful firm.


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Chapter 18: Bootstrap Financing

Bootstrap Financing: to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family, and friends.


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Chapter 18: Table 18.4

•Advantages •Disadvantages

Low pressure on valuation

Easy terms on ownership

Control by founders

Little time spent on finding investors

Unable to fund growth phase

Lack of funding commitment for future

Loss of advice from professional investors

Advantages and disadvantages of bootstrap financing


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Technology Ventures: From Idea to OpportunityChapter 18: Bootstrap Financing

Grants from such organizations as SBIR and STTR can be used to support small businesses, especially in industries in which the technical challenge is the primary risk.


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Chapter 18: Angels

Angels are wealthy individuals, usually experienced entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures.


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Criteria for Angel Investments

The New Venture is/has:

•Within the industry that the angel has experience.

•Located within a few hours driving distance

•Recommended by trusted business associates

•Entrepreneurs with attractive personal characteristics such as integrity and coach-ability.

•Good market and growth potential for the opportunity.

•Seeking an investment of $100,000 to $1 million and offers minority ownership, less than 40%


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Chapter 18: Venture Capital

Venture capital is a source of funds for new ventures that is managed by investment professionals on behalf of the investors in the venture capital fund.


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50

40

30

20

10

0

Treasury Bonds

Corporate Bonds

Franchises

Imitations, Improvements

Innovations, Technology

Strong Growth Companies

Acquisitions

Money Market Funds

Risk: Low Medium High

Chance of 0 30% 60% Total Loss

E x p e c t e d

A n n u a l

R e t u r n

(%)

The Risk and Reward Profile for Various Investments

0


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Characteristics of An Attractive Venture Capital Investment

•Potential to Become a Leading Firm in a High Growth Industry with few competitors.

•Highly Competent and Committed Management Team and High Human Capital (Talent).

•Strong competitive Abilities and a Sustainable Competitive Advantage.

•Viable Exit or Harvest Strategy.

•Reasonable Valuation of the New Venture.

•Outstanding Opportunity.

•Founders Capital Invested in the Venture.

•Recognizes Competitors and Has a Solid Competitive Strategy.

•A sound business plan showing how cash flow turns positive within a few years.

•Demonstrated progress on the product design and good sales potential.


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Chapter 18:Valuation Rule

The valuation rule is the algorithm by which an investor such as an angel or venture capitalist assigns a monetary value to a new venture.

Capital Return after N years:

CR = M x I

Market Value in Year N:

MV = PE x EN or PS x SN

NG)(1 M where

%100 x MV

CR PO

I = investment

EN = earnings in year N

G = expected annual return


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I ssues to be resolved within the Terms of the Deal

Percent Ownership for the Investor Group

Timing of Investment

Control Exerted by Investor

Vesting Periods for Ownership by the Entrepreneur Team

Rights to Require an IPO, Registration Rights

Type of Security

Reservation of Ownership for Employees (Stock Option Pool)

Anti-dilution Provisions

Milestones of Achievement, if there are multiple tranches (steps) to the investment

Stock Option Plans


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Chapter 18: IPO

Initial Public Offering: the first public equity issue of stock made by a company.


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Advantages and Disadvantages of I ssuing on IPO

Advantages

Raising new capital with the possibility of later, additional offerings

Liquidity — Ability to convert ownership to cash, potential of harvest for investors and founders

Visibility — Build brand and reputation

Disadvantages

Offering costs and effort required

Disclosure requirements and scrutiny of operations

Perceived pressures on achieving short-term results

Possible loss of control to a majority shareholder


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Chapter 18: Principle

Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully.


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Chapter 18: Exercise

A new firm intends to sell specialized integrated circuits for wireless applications. Its projections show:

Year 1 2 3

Sales ($ millions) 3.0 6.2 9.8

Profit ($ millions) -1.0 1.0 3.2 Use the valuation rule to determine PO required when investors provide $5 million and expect a return of at least 55% per year. Assume the investors use PE = 14 and PS =4.


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Chapter 18: Venture Challenge

VENTURE CHALLENGE1) What sources of capital will you use?

2) Why did you select these sources?

3) How much capital is needed now and for what purpose?

4) What percentage of your venture do you plan to offer to outside investors?


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Chapter 18: DVD Videos

DVD Videos

“Venture Capital versus Customer Funding”

Vic Verma (Savi Technology)

“The Benefit of Picking the Right Venture Capitalist”

Marc Fleury (Jboss)


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technology ventures : from idea to enterprise

Documents

new business

venture capital fund

new ventures

new startup firm

new enterprise

business startups

real option

growth potential