Basic rules of venture finance at Venture Out Moldova, Fall 2013

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Slides review basic rules of venture finance and considerations when thinking about how to raise money and from whom. Includes overview of crowdfunding.

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Basic rules of venture finance at Venture Out Moldova, Fall 2013

  1. 1. Acquiring  Resources:     Thinking  About  Growth     VentureOut  Moldova   #VOMoldova     October  28  –  November  1,  2013     Prof.  David  A.  Kirsch   Robert  H.  Smith  School  of  Business   University  of  Maryland,  College  Park   dkirsch@umd.edu   @darchivist    
  2. 2. Outline   Basic Rules   Mental Models   Sources of Capital   Comparison
  3. 3. New Venture Finance: Basic Rules Rule 1: Do Not Run Out of Cash
  4. 4. CIMITYM = Cash is more important than your mother.
  5. 5. Accidents in North American Moutaineering
  6. 6. Accidents in North American Moutaineering “…and they fell to their death.”
  7. 7. New Venture Finance: Basic Rules Rule 1: Do Not Run Out of Cash Rule 2: Raise the Right Amount From the Right Investor(s)
  8. 8. Rule #3: Valuation as Negotiation
  9. 9. New Venture Finance: Basic Rules, redux Rule 1: Do Not Run Out of Cash Rule 2: Raise the Right Amount From the Right Investor(s) Rule 3: Valuation as Negotiation Rule 4:
  10. 10. New Venture Finance: Basic Rules, redux Rule 1: Do Not Run Out of Cash Rule 2: Raise the Right Amount From the Right Investor(s) Rule 3: Valuation as Negotiation Rule 4: Remember Rule 1
  11. 11. New Venture Finance: Mental Models New venture finance is different because… 1.  High uncertainty   Fundamental, irresolvable 2.  Asymmetric information  Costly to overcome 3.  Nature of assets  Specific, transformed 4.  Nature of markets  Illiquid, high transaction costs
  12. 12. Venture Finance: Mental Models “Splitting up the Pie” “Build the Sandwich” Traditional view Positive sum model Zero sum assumption Longer sandwich = more resources Value extraction
  13. 13. 2500’ Sandwich = GOOG
  14. 14. Sources of Capital
  15. 15. Self-Financing   Savings   Credit cards   Second Mortgages   Sweat   “Affordable Loss”   Bank Robberies
  16. 16. Friends, Family, Fools (and Faculty?)   People who are close to you trust you for other reasons   Family members   Friends (close to you)   Fools (who cannot judge you)   Faculty (4th “F”)?   Solves information asymmetry problem   Reduces general uncertainty   Increases valuation   Mom won’t negotiate with you (but she should!)
  17. 17. Crowdfunding   W/w, in 2012, more than 500 platforms in operation   Expected to raise ~$5B USD in 2013, with possibility to go much higher   Four basic models     Reward-based, Donation-based, Equitybased & Lending-based Campaigns       Average 9 weeks, raise $7,000 USD Fee structures vary, 10-35% Converts social into financial capital, but not always reversible or readily replenished.
  18. 18. Fred Wilson, Union Square Ventures Networks and markets are slowly changing the global economy and the creative sector is at the forefront of these changes. Instead of going to Hollywood studios for the funds to make their next movie, directors are choosing to harness the network of their fans. Instead of going to the publishing industry for their book advance, authors are choosing to harness the network of their fans. Instead of signing a deal with a record label, musicians are harnessing the network of their fans. The same thing is happening with comic books, video games, theater productions, and many other creative endeavors. Kickstarter has changed the way creative projects come to life. http://bit.ly/1cmqVuS
  19. 19. Flow chart guide to 22 crowdfunding platforms… http://t.co/bFiGjkzZuK
  20. 20. Some words from our sponsors… http://bit.ly/18Ht9AN
  21. 21. Using  CF  to  Access  Capital  Markets  
  22. 22. Angels/Individual Investors   High net-worth individuals who invest in and support companies in the early stages of growth   Invests his or her own money   Weak personal tie to entrepreneur   Varying levels of sophistication       Rich & foolish Rich & wise AngelList syndication?
  23. 23. Venture Capital Limited Partners General (Venture) Partners Foundations Large Funds Universities Regional Funds Small Funds Institutions Special Stage Funds Portfolio Venture Venture Venture Venture Venture Venture Companies
  24. 24. Commercial Loans   Money borrowed from bank or other commercial entity   Interest payments   Cash-flow   Collateral
  25. 25. New Venture Finance: Sources of Capital Source Self-financing Credit cards Friends / family / fools Crowdfunding Angel / individual investors Venture capital Large private equity IPOs Bank / other CP Risk? Return? Legit? Help? Control?
  26. 26. New Venture Finance: Sources of Capital Source Risk? Return? Legit? Help? Control? Self-financing + + + - n/a Credit cards ++ ++ + - n/a Friends / family / fools +++ +++ + - common Crowdfunding +++ +++ ++ - depends Angel / individual investors ++++ ++++ ++ + / ++ com/pref Venture capital +++++ +++++ +++ ++++ pref+ Large private equity ++++ ++++ +++ ++ pref IPOs +++ +++ +++ + public? Bank / other CP ++ ++ ++ + collateral

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