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Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
Entrepreneurship Chap 7
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Entrepreneurship Chap 7

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  • 86-94 less volatility in VC 95-00 comes closer and closer to Nasdaq pattern Why would pension mgr allocate to illiquid VC
  • Transcript

    • 1. Growth Funding Patterns of Entrepreneurship Chapter 7 Session 6: Financial Alternatives for Debt and Equity Capital
    • 2. copyright 2003 Jack M. Kaplan Session Outline • Understand the Venture Capital Process • Private Placement Process • Value the Venture • Select the Valuation Method • Prepare a Presentation to Investors
    • 3. copyright 2003 Jack M. Kaplan  Venture capital firms  Investment banking firms  Insurance companies  Large corporations Growth Equity Investors
    • 4. copyright 2003 Jack M. Kaplan Understand the Venture Capital Process Specialized Industries for the venture The Location of the Venture Stage of Development Early Stage Financing Expansion Financing Acquisioion/Buyout Financing
    • 5. copyright 2003 Jack M. Kaplan  VC firms want returns of 30% or more  Only for high-growth companies  Require deals over $2 million to invest  Most often, VC is not available until the company is ready for commercialization of the product or services  Most want a exit strategy in 3-5 years Venture Capitalists
    • 6. copyright 2003 Jack M. Kaplan The Venture Capital Process Entrepreneurs Venture Capitalists Investment Bankers Private Investors Public Market •Corporations •Angles Funds Ideas Funds IPO’s Money Stock
    • 7. copyright 2003 Jack M. Kaplan The Logic of the Deal • Typical start-up - Venture Capital Fund will invest 2-3 million for 40% preferred equity ownership position. • This gives V.C. a liquidation preference over common shares until the 2-3 million is returned. • If Venture fails, they have first claim to assets and technology. • Also blocking rights over key decisions including sale of the company and IPO.
    • 8. copyright 2003 Jack M. Kaplan • Antidilution clauses or “Rachets” - This protects against equity dilution of additional rounds of financing at lower values take place. • This preferential treatment comes at the expense of all common shareholders. • If company does well, V.C. enjoys upside provision by having right to put additional money at a set price. • Limit risk by co-investing with other firms.
    • 9. copyright 2003 Jack M. Kaplan The VC “LANDSCAPE” in 2000 # of VC Firms in Existence # of Professionals # of First Time VC Funds Raised # of VC Funds Raised This Year VC Capital Raised This Year ($B) Avg VC Fund Size Raised This Year ($M) Source: NVCA Yearbook 2001; Venture Economics 1980 87 1035 24 57 2.08 36.5 1990 375 3794 14 82 3.20 39.0 2000 693 8368 164 497 105.05 211.4
    • 10. copyright 2003 Jack M. Kaplan The Committed Capital Bubble 0 5 10 15 20 25 30 35 40 1995 1996 1997 1998 1999 2000 2001 0 1 2 3 4 5 6Uninvested Venture Capital Years of Uninvested Capital Years of Uninvested Capital at 1995 Investment Pace Source: VentureOne Years AccumulatedCapital Over-commitments($B)
    • 11. copyright 2003 Jack M. Kaplan The Illiquid Bulge From 1995-2000: 14,463 978 1,529 1,180 10,776 Companies funded Went public Were acquired Went out of business Remaining Source: Venture Economics; Venture Source - - -
    • 12. copyright 2003 Jack M. Kaplan A Generic Late 90’s Model Round Type Date Amount Raised (MM) Pre-Money Valuation (MM) IRR Multiple 1 Seed Jan-97 $ 5 $ 35 79% 18.37 2 1st Jan-98 $ 10 $ 100 65% 7.35 3 2nd Jan-99 $ 25 $ 200 59% 4.04 4 3rd Jan-00 $ 60 $ 600 52% 1.52 5 IPO Jan-01 $ 1000 $ 100 Million
    • 13. copyright 2003 Jack M. Kaplan A Generic Early 90’s Model Round Type Date Amount Raised (MM) Pre-Money Valuation (MM) IRR Multiple 1 Seed Jan-90 $ 0.50 $ 2 101% 32.53 2 1st Jan-91 $ 3.00 $ 10 70% 8.13 3 2nd Jan-92 $ 8.00 $ 32 50% 3.30 4 3rd Jan-94 $ 13.50 $ 100 32% 1.32 5 IPO Jan-95 $ 150 $ 25 Million
    • 14. copyright 2003 Jack M. Kaplan Why It’s Great To Be An Entrepreneur - TODAYUS Venture Capital Partnership Returns Versus Public Market Returns Funds Formed 1969-1999 (quarterly returns) -30 -20 -10 0 10 20 30 40 50 60 Sep-86Jun-87M ar-88Dec-88Sep-89Jun-90M ar-91Dec-91Sep-92Jun-93M ar-94Dec-94Sep-95Jun-96M ar-97Dec-97Sep-98Jun-99M ar-00 Quarter QuarterlyReturn VC Partnerships Nasdaq Source: Venture Economics/NVCA
    • 15. copyright 2003 Jack M. Kaplan  The opportunity is considered “hot” area  The venture delivers scalable technology  There are client references  The team is diligent and goal  The entrepreneur is skilled in finance, capital and deal structures  Realistic expectations are incorporated into goals of the company Profile of the Ideal Entrepreneur from a VC Perspective
    • 16. copyright 2003 Jack M. Kaplan Two Formal Methods: • Private placement • Public stock offering Private placement controlled by Regulation D of the Federal Securities Act Rule 504 • Up to $1,000,000 • 12 month completion period • No restrictions on the number of investors Equity Financing
    • 17. copyright 2003 Jack M. Kaplan Rule 505 • Up to $5 million • 12 month completion period • No more than 35 non accredited investors and unlimited number of accredited investors Rule 506 • Unlimited amount of raising funds • No more than 35 unaccredited but sophisticated purchasers.and to unlimited number of accredited investors. • must be able to evaluate merit and risks. Equity Financing
    • 18. copyright 2003 Jack M. Kaplan  First: Determine motive for valuing the business –Selling stock or buying a business  Second: Define what is to be valued –Entire company, product line or a unit division –Income stream determination  Third: Set a point in time for valuation Valuation Process
    • 19. copyright 2003 Jack M. Kaplan  Recent profit history  General conditions of company  Market demand and competition -- at time of offering  Ability to transfer goodwill  Future profit potential  Management team Factors to Assess a Company’s Value
    • 20. copyright 2003 Jack M. Kaplan  Valuation: Select the valuation method –Apply the methods and compute valuation  Weight the Values: Apply a percentage allocation to each value (E.G.: 40% to adjusted book value, 30% price earnings, and 30% to discounted value) Determine Value and Weight
    • 21. copyright 2003 Jack M. Kaplan  Asset Valuations  Earnings Valuations  Discounted Cash Flow Valuation Valuation Techniques
    • 22. copyright 2003 Jack M. Kaplan  No single valuation captures the real value of the firm. Value is the perception of opportunity, risk, and financing resources available.  Difference is determined by vision, market analysis, time pressures, and negotiating. Valuation Statement
    • 23. copyright 2003 Jack M. Kaplan  Asset Valuation –Book Value –Adjusted Book Value –Liquidation Value –Replacement Value What is the Business Worth?
    • 24. copyright 2003 Jack M. Kaplan  Book value –Current assets + property + equipment (net of depreciation) –Total net worth  Used primarily for accounting purposes Asset Valuation
    • 25. copyright 2003 Jack M. Kaplan  Current assets + market value of property + equipment + intangible assets  Adjusts for large discrepancies (land, equipment)  Better reflects actual market value Adjusted Book Value
    • 26. copyright 2003 Jack M. Kaplan  If the business is sold  Value of assets - quick sale  Asset valuation does not consider intangible factors such as reputation, talent, or goodwill Liquidation Value
    • 27. copyright 2003 Jack M. Kaplan  Historical Earnings  Future Earnings –Projected earnings –Nature of industries and similar companies –Anticipated economic conditions Earnings Valuation
    • 28. copyright 2003 Jack M. Kaplan  Prepare Executive Summary –Company, market potential, marketing strategy, competitive position, milestones, product position, financial summary  Prepare Forecast: 1-3 Years –Monthly: year 1 –Quarterly: year 2 and 3  Choose Valuation Process Earning Valuation for Start-Up Companies
    • 29. copyright 2003 Jack M. Kaplan  Determine P.E. Ratio –Select similar public companies if available –Use S&P quarterly industry analysis handbook for your P.E. ratio –Reduce P.E. by 50%, if your size is smaller and illiquidity factor (holder may not be able to sell shares without considerable effort). Earning Valuation
    • 30. copyright 2003 Jack M. Kaplan  Use Factors for Rating Scale of 1-6 –Risk assessment –Competitive position –Industry and company –Growth opportunity –Desirability –Total and average How to Calculate P.E. Multiple
    • 31. copyright 2003 Jack M. Kaplan  Form a corporation  Authorize 2 million shares  Issue 1million shares  Projected P&L is $200,000 Profit after 3 years (EBIT)  Projected P.E. is 12 for your industry (after careful analysis) Guidelines Using Earning Valuation
    • 32. copyright 2003 Jack M. Kaplan  Value company at 2.4 million today  Each share is $2.40 outstanding  Determine amount you require to raise –Sell 100,000 shares @ $2.40 –You are offering 10% of the company for $240,000 Value Guidelines
    • 33. copyright 2003 Jack M. Kaplan  Select adviser(s)  Complete business plan  Define use of funds  Seek qualified advise from lawyer  Select a mentor to advise you  Target investor group – Personal, family, angels, professional Guidelines
    • 34. copyright 2003 Jack M. Kaplan  Prepare a Presentation to Investors –Non-Disclosure / Non-Compete Agreement –Demo of product –Hand-outs –PowerPoint presentation –Determine if you want qualified or determine if you want qualified or non- qualified investors –Subscription Agreements Guidelines
    • 35. copyright 2003 Jack M. Kaplan  Is useful to investors who are attempting to appraise a return on investment and return on time  Forecasts cash flows and discounts them back to the business  Must have positive cash flow - Calculate Discounted Cash Flow Valuation
    • 36. copyright 2003 Jack M. Kaplan  Terminal value –Return of capital via sale  Tax benefits  Operating cash flows –Business related expenses (car, club membership) –Salary and dividends Discounted Cash Flow Valuation

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