Attaining Equity Financing in the Silicon Valley  Professor Mark V. Cannice, Ph.D. Associate Professor of Entrepreneurship...
Topics of Discussion <ul><li>Sources of Equity Financing </li></ul><ul><li>Venture Capital Criteria for Financing </li></u...
Sources of Equity Financing <ul><li>FFFF </li></ul><ul><li>Angel Investors </li></ul><ul><li>Venture Capitalists </li></ul...
Venture Capital Criteria for Funding <ul><li>Characteristics of a fundable business </li></ul><ul><ul><li>Meets an importa...
Venture Capital Criteria  (continued) <ul><li>A fundable business </li></ul><ul><ul><li>Recurring revenue  </li></ul></ul>...
Developing Sustainable Competitive Advantage <ul><li>Sustainable Competitive Advantage – some aspect of your business (whi...
Sustainable Competitive Advantage <ul><li>Company resources that may lead to sustainable competitive advantage </li></ul><...
Funding Timeline <ul><li>How much money do you need and when (time-line)? </li></ul><ul><ul><li>Seed capital - product dev...
Valuation Methods <ul><li>Valuation- determining what a company is worth; </li></ul><ul><ul><li>This is critical so an app...
Valuation Methods <ul><ul><li>P/E </li></ul></ul><ul><ul><ul><li>Value equals multiple of earnings at given point in time;...
Valuation <ul><ul><li>Venture Capitalist way </li></ul></ul><ul><ul><ul><li>Ex. $1 million investment with 50% ror, 5 year...
After Valuation - then what? <ul><li>Agree upon valuation then negotiate with investors for needed funds and ownership dil...
Pre/post money <ul><li>Pre-money/post-money: </li></ul><ul><ul><li>Pre-money valuation set at $5 million.  Investor puts i...
Staged Financing/Dilution example <ul><li>1st stage financing: </li></ul><ul><ul><li>Valuation is $5million </li></ul></ul...
Process to find equity funding <ul><li>Prepare an elevator pitch </li></ul><ul><li>Talk to people (lots of people) </li></...
Thank You! <ul><li>Questions? </li></ul><ul><li>USF Silicon Valley Venture Capitalist Confidence Index Report (Bloomberg t...
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Attaining Equity Financing in the Silicon Valley

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Attaining Equity Financing in the Silicon Valley

  1. 1. Attaining Equity Financing in the Silicon Valley Professor Mark V. Cannice, Ph.D. Associate Professor of Entrepreneurship Executive Director, USF Entrepreneurship Program University of San Francisco [email_address] www.EntrepreneurshipProgram.org
  2. 2. Topics of Discussion <ul><li>Sources of Equity Financing </li></ul><ul><li>Venture Capital Criteria for Financing </li></ul><ul><li>Attaining Competitive Advantage </li></ul><ul><li>Valuation of your Company </li></ul><ul><li>Process of Finding Equity Funding </li></ul>
  3. 3. Sources of Equity Financing <ul><li>FFFF </li></ul><ul><li>Angel Investors </li></ul><ul><li>Venture Capitalists </li></ul><ul><li>Corporate Venture Division (e.g. Intel Capital) </li></ul><ul><li>M&A </li></ul><ul><li>Public Markets (IPO) </li></ul>
  4. 4. Venture Capital Criteria for Funding <ul><li>Characteristics of a fundable business </li></ul><ul><ul><li>Meets an important consumer or business need </li></ul></ul><ul><ul><ul><li>(it solves a problem) </li></ul></ul></ul><ul><ul><li>Competitive (Unfair) Advantage & Sustainable Business Model </li></ul></ul><ul><ul><li>Large market size with high growth rate </li></ul></ul><ul><ul><li>Potential to gain 20% of market over time </li></ul></ul><ul><ul><li>High durable margins (40% or better) </li></ul></ul>
  5. 5. Venture Capital Criteria (continued) <ul><li>A fundable business </li></ul><ul><ul><li>Recurring revenue </li></ul></ul><ul><ul><li>High valuation multiples (specific industries) </li></ul></ul><ul><ul><li>High return to investors (25 - 40%/year) </li></ul></ul><ul><ul><li>Is a good fit with the management teams desires and capabilities </li></ul></ul><ul><ul><li>Clear exit mechanism and strategy </li></ul></ul>
  6. 6. Developing Sustainable Competitive Advantage <ul><li>Sustainable Competitive Advantage – some aspect of your business (which is not easily copied) that allows you to enjoy greater market demand (greater market share and/or better pricing power) or lower costs than your competitors </li></ul>
  7. 7. Sustainable Competitive Advantage <ul><li>Company resources that may lead to sustainable competitive advantage </li></ul><ul><ul><li>Intellectual property whose functionality cannot be easily replicated </li></ul></ul><ul><ul><li>Brand </li></ul></ul><ul><ul><li>Exclusive distribution network </li></ul></ul><ul><ul><li>Exclusive supply sources </li></ul></ul>
  8. 8. Funding Timeline <ul><li>How much money do you need and when (time-line)? </li></ul><ul><ul><li>Seed capital - product development/test marketing? </li></ul></ul><ul><ul><li>Series A or 1st round: cover 1 year of cash needs - operations and investment </li></ul></ul><ul><ul><li>Series B or 2nd round: awarded if company met early objectives (proof of concept/customer acceptance) - used for marketing campaign and sales growth </li></ul></ul><ul><ul><li>Series C or 3rd round: awarded if sales growth meets expectations and profitability is achieved or expected; use to accelerate growth </li></ul></ul><ul><ul><li>Mezzanine (get ready to go public capital) - capital infusion to ensure company meets SEC requirements for public offering </li></ul></ul><ul><ul><li>Initial Public Offering (IPO) - if Venture Firm can find investment banker to underwrite firm and current market environment is accepting </li></ul></ul>
  9. 9. Valuation Methods <ul><li>Valuation- determining what a company is worth; </li></ul><ul><ul><li>This is critical so an appropriate deal can be struck between investors and entrepreneurs - (cash for % equity in firm?) </li></ul></ul><ul><ul><li>NPV </li></ul></ul><ul><ul><ul><li>Present value of expected future earnings or cash flows discounted by appropriate discount rate (investors’ ror). </li></ul></ul></ul><ul><ul><ul><li>Example: Determine forecast earnings or cash flows from pro forma income statements or cash flow statements and discount those earnings or cash flows by the investor’s required rate of return </li></ul></ul></ul><ul><ul><ul><ul><li>Forecast earnings = year 1 = ($1 mil), year 2 = (0), year 3 = $1 million, year 4 = $5 million, year 5 = $10 million </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Investor’s ror = 50% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>NPV of company = (1)/1.5 + 0/1.5^2 + 1/1.5^3 + 5/1.5^4 + 10/1.5^5 = </li></ul></ul></ul></ul>
  10. 10. Valuation Methods <ul><ul><li>P/E </li></ul></ul><ul><ul><ul><li>Value equals multiple of earnings at given point in time; discount that value back to present </li></ul></ul></ul><ul><ul><ul><li>Example: year 5 earnings = $10 million, industry P/E is 10; so value of company at end of year 5 is $10 million x 10 = $100 million. Discount that amount to present day by investor’s ROR, - $100 million/1.5^5 = </li></ul></ul></ul>
  11. 11. Valuation <ul><ul><li>Venture Capitalist way </li></ul></ul><ul><ul><ul><li>Ex. $1 million investment with 50% ror, 5 year holding period (FV = $7.6 million), industry P/E of 15, year 5 after-tax profit of $1million (company value of $15 million). </li></ul></ul></ul><ul><ul><ul><ul><li>= ($7.6 FV of investment/$15 million future total value of company) = investor buys 51% of company today with $1million. </li></ul></ul></ul></ul><ul><ul><li>Rule of thumb for emerging industries </li></ul></ul><ul><ul><ul><li>Pre-money = $3 = $4 million </li></ul></ul></ul>
  12. 12. After Valuation - then what? <ul><li>Agree upon valuation then negotiate with investors for needed funds and ownership dilution. </li></ul><ul><ul><li>Dependent greatly on current market demand for any new company as well as demand on your particular industry </li></ul></ul><ul><li>Valuation you determined from your calculations and negotiation is the pre-money valuation for your business. That is the value of your business before any further money is invested. </li></ul>
  13. 13. Pre/post money <ul><li>Pre-money/post-money: </li></ul><ul><ul><li>Pre-money valuation set at $5 million. Investor puts in $1 million. = post-money valuation is $6million. Investor has bought 1/6 of firm equity (16.7%) </li></ul></ul>
  14. 14. Staged Financing/Dilution example <ul><li>1st stage financing: </li></ul><ul><ul><li>Valuation is $5million </li></ul></ul><ul><ul><li>Investor puts in $1million </li></ul></ul><ul><li>2nd stage financing: </li></ul><ul><ul><li>Valuation is $10 million </li></ul></ul><ul><ul><li>Investor puts in $5 million </li></ul></ul><ul><li>3rd stage financing: </li></ul><ul><ul><li>Valuation is $50 million </li></ul></ul><ul><ul><li>Investor puts in $10 million </li></ul></ul><ul><li>IPO </li></ul><ul><ul><li>Valuation is $500 million </li></ul></ul><ul><ul><li>Public invests $100 million </li></ul></ul><ul><li>1st stage dilution is 16.7% (1/6) founders retain 83.3% equity </li></ul><ul><li>2nd stage dilution is 33% (5/15) founders retain 50% equity. </li></ul><ul><li>3rd stage dilution is 16.7% (10/60), founders retain 33.3% </li></ul><ul><li>IPO dilution is 16.7% (1/6), founders retain 16.7% equity worth $100 million. </li></ul>
  15. 15. Process to find equity funding <ul><li>Prepare an elevator pitch </li></ul><ul><li>Talk to people (lots of people) </li></ul><ul><li>Go to business and university events (business plan competitions) </li></ul><ul><li>Referrals to investors </li></ul>
  16. 16. Thank You! <ul><li>Questions? </li></ul><ul><li>USF Silicon Valley Venture Capitalist Confidence Index Report (Bloomberg ticker symbol: USFSVVCI) </li></ul>

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