Technology Ventures : From Idea to Opportunity Summary Chapter 18: Summary Capital is to the progress of society what gas is to 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.
Chapter 18: Figure 18.1 Idealized cash flow diagram for a new enterprise
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 OV = Option Value Chapter 18: Real Option
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.
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.
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 I = investment EN = earnings in year N G = expected annual return
Chapter 18: Principle Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully.
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.
Technology Ventures : From Idea to Opportunity Chapter 18: Venture Challenge
What sources of capital will you use?
Why did you select these sources?
How much capital is needed now and for what purpose?
What percentage of your venture do you plan to offer to outside investors?
Technology Ventures : From Idea to Opportunity 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