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  1. 1. FINANCING OPTIONS By Daniel C. Pagulayan Presented to The Participants of the October 15, 2005 UPEEE Building, UP Diliman, Quezon City ICCP VENTURE PARTNERS, INC.
  2. 2. KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE <ul><li>“ Knowing where you are is the first step to knowing where to go” </li></ul>Seed Start-up Expansion Mezzanine IPO
  3. 3. SEED STAGE CHARACTERISTICS <ul><li>Initial concept of business is being formed </li></ul><ul><li>Working models of products/service being researched, planned, and developed </li></ul><ul><li>Part-time (after-office, after-class , weekend) avocation </li></ul><ul><li>Employees: Founders </li></ul><ul><li>Very High-risk, many would-be companies likely to fall out </li></ul><ul><li>Funding requirement: small </li></ul><ul><li>Duration: can be short (say, up to six months) </li></ul><ul><li>Possible Funding Sources: </li></ul><ul><ul><li>Often self-financed </li></ul></ul><ul><ul><li>Friends & family (“rich uncle”) </li></ul></ul><ul><ul><li>Grants </li></ul></ul><ul><ul><li>PESO prize money </li></ul></ul><ul><ul><li>“ Angel” Investors </li></ul></ul>KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE SEED Start-up Expansion Mezzanine IPO
  4. 4. START-UP STAGE CHARACTERISTICS <ul><li>Operation is formalized, incorporation initiated/done </li></ul><ul><li>Product or service being developed or prototyped (“alpha-test”) </li></ul><ul><li>More-or-less fulltime focus </li></ul><ul><li>Employees: Founders, key engineers/scientists </li></ul><ul><li>Very High-risk, more would-be companies likely to fall out </li></ul><ul><li>Duration: can be short (say, six months) but can stretch to as long as four to five years </li></ul><ul><li>Funding requirement: small (typically service/software) to large (typically computer chips or hardware) </li></ul><ul><li>Possible Funding Sources: </li></ul><ul><ul><li>Early-stage Venture Capital (VC) </li></ul></ul><ul><ul><li>Corporate sponsors </li></ul></ul><ul><ul><li>Suppliers </li></ul></ul><ul><ul><li>“ Angel” Investors </li></ul></ul>KEY TAKEAWAY#1: TYPICAL COMPANY LIFE CYCLE Seed START-UP Expansion Mezzanine IPO
  5. 5. EXPANSION STAGE CHARACTERISTICS <ul><li>Formal operations, some regulatory permits being obtained </li></ul><ul><li>Continued product/service development. First versions being tested (“beta-test”) by target customers or shipped to customers </li></ul><ul><li>Fulltime focus </li></ul><ul><li>Employees: More professional managers being hired </li></ul><ul><li>High-risk, but corporate structure/discipline more-or-less in place </li></ul><ul><li>Revenues start to trickle </li></ul><ul><li>Funding requirement: growing, will likely need several rounds of equity infusion </li></ul><ul><li>Possible Funding Sources: </li></ul><ul><ul><li>Venture capitalists </li></ul></ul><ul><ul><li>Corporate sponsors, strategic investors </li></ul></ul><ul><ul><li>Some banks, leasing companies, financing companies </li></ul></ul>KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE Seed Start-up EXPANSION Mezzanine IPO
  6. 6. MEZZANINE STAGE CHARACTERISTICS <ul><li>Oftentimes the last stage of venture capital funding before IPO </li></ul><ul><li>Continued product/service development. Current versions being shipped in volume. Next-gen versions being tested by customers </li></ul><ul><li>Fulltime focus </li></ul><ul><li>Employees: Growing headcount, skillsets, specialization </li></ul><ul><li>Lower-risk, corporate structure/discipline improving/evolving </li></ul><ul><li>Revenues streams showing stable growth </li></ul><ul><li>Funding requirement: growing, mostly for working capital </li></ul><ul><li>Possible Funding Sources: </li></ul><ul><ul><li>Venture capitalists </li></ul></ul><ul><ul><li>Large corporates, strategic investors </li></ul></ul><ul><ul><li>Bigger banks, leasing/financing companies, receivables factoring </li></ul></ul>KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE Seed Start-up Expansion MEZZANINE IPO
  7. 7. EXPANSION TO MEZZANINE STAGE FINANCING <ul><li>Common to these stages are the “Series _” financing rounds </li></ul><ul><li>Simple Model </li></ul><ul><ul><li>Series A Financing </li></ul></ul><ul><ul><li>First institutional financing with one or more VCs </li></ul></ul><ul><ul><li>Fundraise used to continue product development </li></ul></ul><ul><ul><li>Series B Financing </li></ul></ul><ul><ul><li>More institutional financing, more VCs </li></ul></ul><ul><ul><li>Fundraise used to scale-up, value creation for next round </li></ul></ul><ul><ul><li>Series C Financing </li></ul></ul><ul><ul><li>Much more institutional financing, more VCs </li></ul></ul><ul><ul><li>Fundraise used to strengthen balance sheet, prepare for IPO or acquisition, finance acquisitions, more working capital, among others </li></ul></ul><ul><ul><li>Note: During the period from expansion to mezzanine stages, there may be more than three interim funding rounds, depending on such factors as achievement of milestones, changing market trends, need to further develop technology, among others </li></ul></ul>KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE
  8. 8. Graphic Model Time Valley of Death Angels Friends & Family Founders Venture Capital Strategic Investors Public Markets Seed A B … n Mezzanine Expansion Later Stage IPO Secondary Offerings The Chasm The Wall Value Revenues Profits Note: Foregoing model adopted from WTC Capital, LLC Start-up KEY TAKEAWAY #1: TYPICAL COMPANY LIFE CYCLE
  9. 9. <ul><li>Value is closely related to the life cycle of an idea or a company </li></ul><ul><li>Earlier-stage (seed, start-up, initial expansion) valued less due to higher perceived risks than that of later-stage/mature companies </li></ul><ul><li>Some bases of valuation </li></ul><ul><ul><li>Seed-stage: Very Subjective </li></ul></ul><ul><ul><li>Paucity of information, highly iffy forecasts </li></ul></ul><ul><ul><li>Hard to justify use of traditional financial models (e.g., DCF) </li></ul></ul><ul><ul><li>Valuation is “artsy” </li></ul></ul><ul><ul><ul><li>Appraisal of management/engineering team </li></ul></ul></ul><ul><ul><ul><li>Value proposition </li></ul></ul></ul><ul><ul><ul><li>Intellectual property </li></ul></ul></ul><ul><ul><ul><li>Expected time-to-market, expected path-to-profitability </li></ul></ul></ul><ul><ul><ul><li>Capital needs, burn rate (money spent up to break-even state) </li></ul></ul></ul><ul><ul><li>Surrogate valuation parameters (e.g. price per key headcount, replacement cost) </li></ul></ul>KEY TAKEAWAY #2: VALUATION
  10. 10. <ul><li>Some bases of valuation (cont’d) </li></ul><ul><ul><li>Start-up: Subjective </li></ul></ul><ul><ul><li>Validation of technology, proof-of-principle, market acceptance </li></ul></ul><ul><ul><li>Time-to-market </li></ul></ul><ul><ul><li>Hard to justify use of traditional financial models (e.g., DCF) </li></ul></ul><ul><ul><li>Expansion: Objective + Subjective, Parameter-based </li></ul></ul><ul><ul><li>Preliminary revenue </li></ul></ul><ul><ul><li>Predictable revenue (e.g., design wins, customer LOI, serious negotiations with potential customer/s) </li></ul></ul><ul><ul><li>Easier to use traditional financial models </li></ul></ul><ul><ul><li>Comparable transaction (e.g., recently listed companies, similar acquisitions by other companies </li></ul></ul>KEY TAKEAWAY #2: VALUATION
  11. 11. <ul><li>Some bases of valuation (cont’d) </li></ul><ul><ul><li>Mezzanine: Objective, Parameter-based, More Accurate </li></ul></ul><ul><ul><li>Hard, historical data </li></ul></ul><ul><ul><li>Firm contracts, predictable revenues, revenue pipeline </li></ul></ul><ul><ul><li>Traditional financial models (e.g., DCF, Price-to-Sales, Price-Earnings, Enterprise Value) </li></ul></ul>KEY TAKEAWAY #2: VALUATION
  12. 12. <ul><li>Pre-Money/Post-Money Valuation </li></ul><ul><ul><li>Pre-Money Value </li></ul></ul><ul><ul><li>Notional value of a company before any new money is infused into the company </li></ul></ul><ul><ul><li>Post-Money Value </li></ul></ul><ul><ul><li>Value of the company after new money is infused into the company </li></ul></ul><ul><li>Pre-Money Value + New Equity = Post-Money Value </li></ul>KEY TAKEAWAY #2: VALUATION
  13. 13. <ul><li>Valuation and Evolution of Company Ownership </li></ul><ul><li>Sample Cap Table </li></ul>KEY TAKEAWAY #2: VALUATION
  14. 14. <ul><li>PESO </li></ul><ul><ul><li>Win the competition !!! </li></ul></ul><ul><ul><li>Instant seed money </li></ul></ul><ul><li>Personal Funds </li></ul><ul><ul><li>Seed Money </li></ul></ul><ul><ul><li>Savings </li></ul></ul><ul><ul><li>Credit Card </li></ul></ul><ul><li>Friends & Family </li></ul><ul><ul><li>Seed Money </li></ul></ul><ul><ul><li>Very limited capital </li></ul></ul><ul><ul><li>Very sympathetic </li></ul></ul><ul><li>Friendly Suppliers/Vendors </li></ul><ul><ul><li>Very rare </li></ul></ul>KEY TAKEAWAY #3: KNOW YOUR FUND SOURCE
  15. 15. <ul><li>Angel Investors </li></ul><ul><ul><li>Seed and/or start-up money </li></ul></ul><ul><ul><li>Individuals who have their own excess capital to invest in equity of new and existing firms </li></ul></ul><ul><ul><li>Likely to invest only in areas where they have domain expertise or previous experience </li></ul></ul><ul><ul><li>Likely capable to invest more money than Friends & Family </li></ul></ul><ul><ul><li>May even invest during funding rounds involving institutions (e.g. VCs) </li></ul></ul><ul><ul><li>Can be a good source of advise and connections </li></ul></ul><ul><ul><li>Hard to find, but here are leads: </li></ul></ul><ul><ul><li>1. Philippine Venture Capital Investment Group Email: </li></ul></ul><ul><ul><li> Phone: (632) 894-1516 to 17 or (632) 818-5606 </li></ul></ul><ul><ul><li> Web: </li></ul></ul><ul><ul><li>2. Small Business Guarantee Fund </li></ul></ul>KEY TAKEAWAY #3: KNOW YOUR FUND SOURCE
  16. 16. <ul><li>Venture Capitalists </li></ul><ul><ul><li>Professional investors </li></ul></ul><ul><ul><li>Provides: </li></ul></ul><ul><ul><ul><li>Long-term funding (three to six years) </li></ul></ul></ul><ul><ul><ul><li>Value-added services (e.g., management and technical assistance, prestige, strategic guidance, network of contacts) </li></ul></ul></ul><ul><ul><li>Likely to invest in more developed companies (expansion to pre-IPO) </li></ul></ul><ul><ul><li>Easier to find. Some leads: </li></ul></ul><ul><ul><li>ICCP Venture Partners: </li></ul></ul><ul><ul><li>Narra Ventures: </li></ul></ul><ul><ul><li> WTP Capital: </li></ul></ul><ul><ul><li>Aureos Capital: </li></ul></ul><ul><ul><li>Walden Int’l: </li></ul></ul><ul><ul><li> Iron Capital: </li></ul></ul>KEY TAKEAWAY #3: KNOW YOUR AUDIENCE
  17. 17. <ul><li>Corporate Investors </li></ul><ul><ul><li>Narrow investment objectives (e.g., seeking complementary services/products to enhance their respective core businesses) </li></ul></ul><ul><ul><li>Provides: </li></ul></ul><ul><ul><ul><li>Long-term funding </li></ul></ul></ul><ul><ul><ul><li>Value-added services (e.g., management and technical assistance, prestige, strategic guidance, network of contacts, revenue source or assured supply) </li></ul></ul></ul><ul><ul><li>Likely to invest in more developed companies (expansion to pre-IPO) </li></ul></ul><ul><ul><li>Can be an option for future exit for financial investors </li></ul></ul><ul><ul><li>Decision process may take much longer </li></ul></ul><ul><li>Leasing Companies, Receivables Factoring Firms, Banks </li></ul><ul><ul><li>Very risk averse </li></ul></ul><ul><ul><li>Funds to finance expansion </li></ul></ul><ul><ul><li>May consider lending only in mature companies (e.g., those with firm contracts, hard assets, A-1 customers) </li></ul></ul>KEY TAKEAWAY #3: KNOW YOUR AUDIENCE
  18. 18. <ul><li>DO know which stage your company is in in order for you to know your funding options </li></ul><ul><li>DON’T solicit an individual investor’s pension money for early-stage financing – avoid potentially being hounded to no end for payback (may divert focus from your business) </li></ul><ul><li>DO seek to understand your prospective VC/Angel </li></ul><ul><ul><li>Experience in similar types of investments </li></ul></ul><ul><ul><li>Active or passive in management </li></ul></ul><ul><ul><li>Competing companies in VC’s portfolio </li></ul></ul><ul><ul><li>Compatibility of personalities </li></ul></ul><ul><ul><li>Strong syndication ties with other VCs for future funding rounds </li></ul></ul><ul><ul><li>Network of contacts for distribution channels, key vendors/suppliers, and executive search </li></ul></ul><ul><ul><li>Reasonableness, integrity, professionalism </li></ul></ul><ul><li>DO take the extra effort to be familiar with financial concepts – after all, your investors, especially VCs, also take pains to understand your business, technology, and products/services </li></ul>KEY TAKEAWAY #4: SOME DOs and DON’Ts (In context of other Business Plan Dos and Don’ts)
  19. 19. <ul><li>DO make your business milestones clear – it facilitates the valuation process </li></ul><ul><li>DO raise a little more than financial calculations provide – you may need the extra cash to help tide you over when adverse events occur (e.g. cost overrun, inflation, delay in raising next round of financing) </li></ul><ul><li>DO seek reasonable valuations that provide attractive returns to current and future investors </li></ul><ul><ul><li>Too high valuations likely lead to unsuccessful fundraising </li></ul></ul><ul><ul><li>Low valuations lead to severe loss of control (less ownership) </li></ul></ul><ul><li>DO meet up with as many VCs/investors at once (whenever possible), this will save you time </li></ul><ul><li>DO prepare for possibility of being declined (for now) – in most cases, approximately 2% of deals are funded by VCs. </li></ul><ul><li>If declined, DO know real reasons – you can learn from the experience and do better the next time around </li></ul>KEY TAKEAWAY #4: SOME DOs and DON’Ts (In context of other Business Plan Dos and Don’ts)
  20. 20. ICCP VENTURE PARTNERS, INC. Guillermo D. Luchangco Chairman William M. Valtos, Jr. Senior Managing Director Edwin J. Lau, PhD Managing Director (Palo Alto) Daniel C. Pagulayan Executive Director Gerry B. Valenciano Director Gladys V. Enhaynes Associate Director Jennifer A. Alcabao Senior Associate Ed Cruz Senior Associate 15/F PSBank Center, 777 Paseo de Roxas Makati, Philippines 1226 Tel. (632) 811-4656 Fax. (632) 819-0941