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    1. 1. Document Transcript

    • Ten3 Business e-Coach Innovation unlimited! www.1000ventures.com Venture Financing Demo version The step-by-step comprehensive guide for start-up venture managers Opportunity Introduction Initial Screening Due Diligence Negotiating Funding Ten3 mini-course By: Vadim Kotelnikov http://www.kotelnikov.biz Inventor & Founder, Ten3 Business e-Coach, http://www.1000ventures.com 2006 © Vadim Kotelnikov, www.kotelnikov.biz, Author & Founder, Ten3 Business e-Coach, www.1000ventures.com
    • Table of Content 1. Understanding the Venture Financing Chain 1.1. Sources of Finance for High-Growth Firms 1.2. Case in Point: A Financial Chronology of Amazon.com 1.3. Start-Up Capital Formation Process 1.4. Providers of Finance Throughout the Evolution of an Entrepreneurial Firm 1.5. The Equity Gap 1.6. Company Ownership Structure and Types of Venture Finance 1.7. Start-Up Business Success: 10 Steps 2. Venture Capital Basics 2.1. Selecting Type of Finance: Debt of Equity? 2.2. Specific Features of the Venture Capital 2.3. Language of the Venture Capital 2.4. Venture Capital Funding Stages 2.5. Main Sources of Funds for Entrepreneurial Firms 2.6. Realization of Financial Returns for VC Investor and Exit Strategies 3. Understanding Venture Capital Investors 3.1. Business Angels versus Venture Capital Firms 3.2. Business Angels 3.3. The Pros and Cons of Business Angel Investments 3.4. Business Angel Syndicates 3.5. Examples of Business Angels Deals and How To Find Business Angels 3.6. Types of Business Angels and Their Involvement in the Venture 3.7. Venture Capital Firms 3.8. Finding and Selecting Suitable Venture Capital Investors 3.9. Corporate Investors 3.10. Banks 4. Introducing Venture Opportunity To Investors 4.1. Asking Yourself the Right Questions 4.2. Key Documentation To Be Prepared By the Entrepreneur 4.3. Initial Introduction 4.4. Milestone Chart and Milestone-based Operations and Funding 4.5. Venture Presentation to Investors 4.6. Start-Up Business Plan 4.7. What Every Investor Wants To Know? 5. Opportunity Evaluation By Investors 5.1. The Process and Success Rates 5.2. Venture Capital Investor’s View of a Start-Up Firm 5.3. Investment Selection Criteria: Ranking by Business Angels and VC Firms 5.4. Evaluating the Management Team 5.5. What VC Firms Look For In a Business Plan 5.6. Due Diligence 5.7. Due Diligence Study Areas 6. Negotiating and Structuring the Deal 6.1. Required Rate of Return for Different Business Stages 6.2. Defining Ownership Structure 6.3. Valuating a Start-Up Company 6.4. Negotiating the Deal 6.5. Structuring the Deal 6.6. Characteristics of Sensible Deals Annexes Annex I: Convertible Preferred Stock: A Sample Agreement Annex II: Terms and Conditions for Securities Offerings Annex II: Sample Company Valuation Term Sheet © Vadim Kotelnikov, www.kotelnikov.biz, Author & Founder, Ten3 Business e-Coach, www.1000ventures.com
    • 1. Understanding Venture Financing Chain 1.1. Sources of Finance for High-Growth Firms Venture Financing Source of Funds for High-Growth and Life-style Firms revenue Maturity Expansion IPO, Acquisition Banks Growth Inception Roll out Prototype Debt Financing Founders Venture Capital Firms & Angel Financing Corporate Investors High-Growth Life Style time 1000ventures.com The nature of the ‘new’ economy has profound implications for the way the new business is financed. High-tech start-ups go through multiple funding rounds. Equity financing conventionally follows a trajectory from friends & family, business angels, through venture capital (VC), to an initial public offering (IPO). Venture capital cannot finance innovation on its own. Too many VC funds remain unwilling to invest in high-tech start-ups in the early stage, often because they lack the investment appraisal capacity to act as ‘first investor’. To be fully effective, venture capital must form part of an unbroken investment chain. Dynamic innovation demands an unbroken financing chain, from seed capital to stock market. Development of networks of business angels as sources of pre-revenue seed funding and management guidance is essential and will encourage VC funds to make more early-stage investments. Business angels are wealthy individual investors - usually, people who have made their own money as entrepreneurs. Better equipped than banks and most capital funds to assess the potential of very young business, they contribute not only equity but also much needed business expertise, offering company founders hands-on support and advise. Angels bridge the gap between the personal savings of entrepreneurs and their families and friends - often an important source of seed capital - and the ‘second round’ financing which venture capitalists are able to offer. In US they have helped to fuel the remarkable self-sustaining innovation and economic growth of the past decade by recycling entrepreneurial wealth and talent locally and regionally. In Europe, Business Angel Networks (BANs), generally funded by public money, have proved to be remarkably effective - raising awareness among potential investors, providing and independent and confidential matching service, and training entrepreneurs to prepare and present the information that angels will require. BANs stimulate the flow of informal risk capital to start-ups with high growth potential. To ensure seamless integration of financing through the life cycle of a company, good relations between the business angel and VC communities are essential. Stock markets for high growth companies also stimulates venture capital activity by offering an ‘exit route’ of flotation. They offer a means for venture capital funds to realize a return on their investment in new companies. © Vadim Kotelnikov, www.kotelnikov.biz, Author & Founder, Ten3 Business e-Coach, www.1000ventures.com
    • 1.2. Case Study: Amazon.com Venture Financing Chain A Financial Chronology of Amazon.com Price/Share $52.11 (exercise price on loan warrants) December Loan & Bond $326 million bond issue is used $1,327.5 (in April 1999, adjusted for two stock splits) 1997 to retire $75 million in loan debt Issue and to finance operations $18 May Three million shares are offered on the IPO equity market, raising $49.1 million 1997 $2.3417 June Venture Two venture capital funds invest $8 million 1996 Capitalists $.3333 May 1996 Family Founder’s siblings invest $20,000 $.3333 December Angel Twenty angels invest $46,850 each on average, for a 1995 Syndicate total of $937,000 $.1287 August Business Two angels invest a total of $54,408 1995 Angels $.1717 February Family Founder’s father and mother invest a combined $245,500 1995 July $.001 Founder Jeff Bezos starts Amazon.com; he invests $10,000 and borrows $44,000 1994 Source: data partially adapted from “Entrepreneurial Finance”, Smith.R., and Kiholm.J., 2001 1000ventures.com Amazon.com is a company that is closely tied with the e-commerce phenomenon. Jeff Bezos, the founder of the company, broke the rules of the book business by using the Internet rather than conventional distribution channels. Based in Seattle, USA, the company has grown from a book seller to a virtual Wall Mart of the Web selling products as diverse as music CDs, software, office products, electronics, toys, games, cookware, hardware, food, and health products. The company has also grown at a tremendous rate with revenue rising from about US$150 million in 1997 to US$5.2 billion in 2003. The company was founded by Jeff Bezos, a computer science and electrical engineering graduate from Princeton University. Bezos had moved to Seattle after resigning as a Senior Vice-President at D.E.Shaw, a Wall Street investment bank. He didn’t know much about the Internet. But he came across a statistic that the Internet was growing at 2300%, which convinced him that it was a large growth opportunity. Not knowing much more, he plunged into the world of e-commerce with no prior retailing experience. He chose to locate the company in Seattle because it had a large pool of technical talent and since it was close to one of the largest book wholesalers located in Rosenburg, Oregon. He was thinking of the company as a bookseller at the beginning. Moreover, the sales tax laws for online retailers state that one has to charge sales tax in the state in which one is incorporated. Therefore it was logical to locate in a small state. The company went online in July 1995. In May 1997, Amazon.com went public. As a symbol of the company’s frugality, Jeff and the first team built desks out of doors and four-by-fours. The company was started in a garage. Initial business meetings were conducted at a local Barnes and Noble store. Bezos picked the name Amazon for his company because it started with the letter A, signified something big, and it was easy to spell. (“Amazon.com – A Business History,” Sandeep Krishnamurthy, 2001) For his contribution, Jeff Bezos was picked as the 1999 Time person of the year at the age of 35 making him the fourth-youngest person of the year. Describing why it choose Bezos, Time magazine said, “Bezos’ vision of the online retailing universe was so complete, his Amazon.com site so elegant and appealing that it became from Day One the point of reference for anyone who had anything to sell online.” © Vadim Kotelnikov, www.kotelnikov.biz, Author & Founder, Ten3 Business e-Coach, www.1000ventures.com
    • We invented inspirational Business e-Coaching in 2001. Today, we have customers in 80+ countries! We help you change the world! http://www.1000ventures.com © Vadim Kotelnikov, www.kotelnikov.biz, Author & Founder, Ten3 Business e-Coach, www.1000ventures.com