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  • The Venture Capital Industry–An Overview Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies. Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.
  • How get VC’s to see you?
  • Seed: proof of concept Start-up: set-up production and initial sales Early stage: full scale operations and market development Second stage: expansion Exit: harvest CCG Seed prototype show to customeres investors: #250K + #50K business plan got oreder for 6 systems Start-up site in Cambridge 2,000sq ft ordered materials and parts 5 people Sales Director cashed check Early 2 sites same business park 5,000 sq ft distributor Europe CFO High margins 60%+ lose control Second stage new location 20,000 sq ft 45 people to 75 Marketing Director bank loans offices in Paris and Frankfurt US market Exit partner Carlton for US #12 million
  • Ahasveruses

    1. 1. MBAX 6100 Entrepreneurship & Small Business Funding Frank Moyes Leeds School of Business University of Colorado Boulder, Colorado
    2. 2. Funding Your New Venture Next 3 Weeks <ul><li>This week: Equity & Venture Capital </li></ul><ul><li>Next week Other forms of funding </li></ul><ul><li>Following week: Negotiating Term Sheets </li></ul>0
    3. 3. Today’s Agenda <ul><li>Equity funding </li></ul><ul><li>Venture Capital </li></ul><ul><ul><li>Tim Connor, Sequel Venture Partners </li></ul></ul><ul><ul><li>Steven Bruny, Aztek Networks </li></ul></ul><ul><ul><li>Rob Balgley, Skyetek </li></ul></ul><ul><li>Due: Mid-term & entrepreneurship papers </li></ul><ul><li>Value Proposition </li></ul>0
    4. 4. How Are Going to Fund Your New Venture? <ul><li>Personal Resources </li></ul><ul><li>Friends & family </li></ul><ul><li>Debt </li></ul><ul><li>Equity </li></ul><ul><li>IPO </li></ul><ul><li>Non-traditional & grants </li></ul>
    5. 5. Stages of Development <ul><li>Seed (proof of concept) </li></ul><ul><ul><li>Personal </li></ul></ul><ul><li>Start-up (set-up production & sales) </li></ul><ul><ul><li>Angels </li></ul></ul><ul><ul><li>PPO </li></ul></ul><ul><li>Early stage (full-scale operations & mkt) </li></ul><ul><ul><li>VC </li></ul></ul><ul><ul><li>Government </li></ul></ul>
    6. 6. Stages of Development <ul><li>Second & third stages (expansion) </li></ul><ul><ul><li>VC </li></ul></ul><ul><ul><li>Financial institutions </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Reinvestment </li></ul></ul><ul><li>Exit (harvest) </li></ul><ul><ul><li>Bridge </li></ul></ul><ul><ul><li>IPO </li></ul></ul>0
    7. 7. Equity <ul><li>Sources </li></ul><ul><ul><li>F & F </li></ul></ul><ul><ul><li>Angels </li></ul></ul><ul><ul><li>Private Placement </li></ul></ul><ul><ul><li>Venture Capital </li></ul></ul><ul><ul><li>Corporate venture subsidiaries </li></ul></ul><ul><ul><li>IPO (Initial Public Offering) </li></ul></ul><ul><li>Advantage </li></ul><ul><ul><li>Permanent capital </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Give up piece of company (dilution) </li></ul></ul><ul><ul><li>Responsibilities to investor </li></ul></ul><ul><ul><li>Exit for investor – achieve a return </li></ul></ul>0
    8. 8. Venture Capital 0
    9. 9. Venture Capital <ul><li>Pool of capital invested in rapidly growing companies </li></ul><ul><li>$21.7 billion in 2005 in 2,939 investments </li></ul><ul><li>Down from $104 billion & 7,832 deals in 2000 </li></ul><ul><li>Private Partnerships </li></ul><ul><ul><li>General partners – manage </li></ul></ul><ul><ul><li>Limited partners – provide funds </li></ul></ul>0
    10. 10. What Are the Advantages to Venture Capital? <ul><li>Can provide lots of money </li></ul><ul><li>Greatest value-added money - consulting, mentoring, network </li></ul><ul><ul><li>Help build management team </li></ul></ul><ul><ul><li>Kick down the door “rolodex” </li></ul></ul><ul><ul><li>Good VC’s know there will be problems </li></ul></ul><ul><li>Validation of your concept </li></ul><ul><li>Know how to exit </li></ul>0
    11. 11. What Are Disadvantages of Venture Capital? <ul><li>Loss of equity, likely control </li></ul><ul><ul><li>But, achieve your dream </li></ul></ul><ul><li>High maintenance </li></ul><ul><ul><li>Long due diligence process </li></ul></ul><ul><ul><li>Expensive: attorneys, accountants, consultants </li></ul></ul><ul><ul><li>Valuation decision can be very stressful </li></ul></ul><ul><li>Majority of investments fail </li></ul><ul><li>Founder often “leaves” </li></ul><ul><li>Must have common objectives </li></ul><ul><ul><li>Exit strategy </li></ul></ul>
    12. 12. VC Decision Making <ul><li>Deal flow </li></ul><ul><ul><li>Less then 2% of deals are funded </li></ul></ul><ul><ul><li>1 to 2 new deals per year per partner </li></ul></ul><ul><li>Due diligence – in-depth investigation of the venture & you </li></ul><ul><li>Syndication </li></ul><ul><li>Time frame to do a deal: 3 to 12 months </li></ul><ul><li>Entrepreneur decision making </li></ul><ul><ul><li>Due diligence </li></ul></ul><ul><ul><li>Chemistry is key </li></ul></ul>
    13. 13. Managing VC Portfolio Companies <ul><li>Objective: invest large amounts of money in high growth, potentially large companies </li></ul><ul><li>Specialize in certain industries </li></ul><ul><li>A, B, C, & D Rounds of preferred stock </li></ul><ul><ul><li>Dry powder </li></ul></ul><ul><ul><li>Each round is often staged with milestones </li></ul></ul><ul><li>Board of Directors </li></ul><ul><li>Hands-on vs. portfolio approach </li></ul>
    14. 14. What Do VC’s Look For? <ul><li>MANAGEMENT TEAM </li></ul><ul><ul><li>Experience </li></ul></ul><ul><ul><li>Expertise in industry </li></ul></ul><ul><ul><li>Passion </li></ul></ul><ul><ul><li>Commitment of CEO </li></ul></ul><ul><li>Market potential - very large & high growth </li></ul><ul><li>Growth stage of development - VC money has the greatest impact </li></ul><ul><li>Proprietary product or service </li></ul>0
    15. 15. Control: Why do VC’s Often Wind-up Owning > 50% of a Venture? <ul><li>Not because want to run company or distrust the management </li></ul><ul><li>To achieve a satisfactory return </li></ul><ul><ul><li>Ref: BZ-Exhibits 6.1 & 6.2 </li></ul></ul><ul><li>Valuation </li></ul>
    16. 16. VC Required Return on Investment <ul><li>Seed 20x </li></ul><ul><li>Start-Up 10x </li></ul><ul><li>Early Stage 8x </li></ul><ul><li>Second Stage 5x </li></ul><ul><li>Third Stage 4x </li></ul><ul><li>Bridge 3x </li></ul><ul><li>80% </li></ul><ul><li>60% </li></ul><ul><li>50% </li></ul><ul><li>40% </li></ul><ul><li>30% </li></ul><ul><li>25% </li></ul>Return DCF Cash on Cash Bygraves & Zacharakis 0
    17. 17. What Are the Implications to the Entrepreneur of VC Returns? <ul><li>The later the stage, the better the deal </li></ul><ul><li>The better the management, the better the deal </li></ul><ul><li>The quicker the exit, the better the deal </li></ul>
    18. 18. Why people want to be VC’s? <ul><li>Partnership </li></ul><ul><ul><li>General partners </li></ul></ul><ul><ul><li>Limited partners </li></ul></ul><ul><li>Management fees 2% </li></ul><ul><li>Specialize in an industry </li></ul><ul><li>Carried interest – 80/20 </li></ul><ul><li>Series of funds </li></ul>
    19. 19. Value Proposition - 3 Elements <ul><li>What are the features? </li></ul><ul><li>Who is the target market? </li></ul><ul><li>What are the benefits? </li></ul>
    20. 20. Value Proposition “ XYZ is a_______[describe] company. By its _______[feature(s)], it provides ______ [unique benefit(s)] to ______[target market]”
    21. 21. Simple Value Proposition SST Corporation “ SST is a stainless steel toothbrush company. By its one bristle brush made of high tensile stainless steel, it provides an exhilarating tooth cleaning experience to thrill-seeking X-gen consumers”
    22. 22. Simple Value Proposition Dell Computer “ Dell Computer sells personal computers to consumers. Our build-to-order manufacturing and customer-direct sales enable us to offer custom built computers at very competitive prices. Our customers get the computer that they have always imagined and save money.”
    23. 23. Simple Value Proposition Vic’s Coffee “ Vic’s Coffee is a Boulder based coffee house. Its gourmet coffee, convenient and fast service, provide a welcoming environment for people who want to meet with their friends or a stimulating morning coffee for on-the-go business people.”
    24. 24. Attributes <ul><li>Performance : durability, quality of materials, defect levels, tolerances, construction, dependability, functional performance (acceleration, nutrition, taste), efficiency, safety, styling, packaging, etc. </li></ul><ul><li>Cost: purchase price, quantity discounts, operating costs, repair costs, cost of extras or options, cost of installation, trade in allowance, likely resale value, etc. </li></ul><ul><li>Availability: carried by local stores, credit terms, quality of service available from local dealer, delivery time, credit card, on-line transactions, etc. </li></ul><ul><li>Service: hours, warrant, guarantee, return/replacement policy, upgrades, maintenance, training, installation, repair service, spare parts, customer support, tech support, training, product design, make to order, level of inventory, quotation response time, lead time, quality certification, employee capabilities, etc. </li></ul><ul><li>Environment: location, atmosphere, layout, fixtures, aesthetics, style, sound, lighting, color, etc. </li></ul>0 Bad Slide
    25. 25. Benefits <ul><li>Emotional: ambition, power, independence, achievement, ambition, pride of ownership, comfort, love, friendship, security, style, self Improvement, etc. </li></ul><ul><li>Social: status, image, popularity with friends or family members, reputation of brand, personal relationships, style, fashionable, etc. </li></ul><ul><li>Health: stress, fitness, mental capacity, strength, sex life, quality of life, muse, etc. </li></ul><ul><li>Financial: revenue, costs, savings, productivity, pricing, profitability, market share, save time, productivity, etc. </li></ul><ul><li>Convenience ? </li></ul><ul><li>Objective is distinguish between benefits and features, not put into categories </li></ul>