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  1. 1. Chapter 17 Funding a Rapidly Growing Venture
  2. 2. Learning Objectives <ul><li>Explain the role of the venture capital market </li></ul><ul><li>Describe the process associated with the initial public offering </li></ul><ul><li>Discuss how to grow with strategic alliances </li></ul><ul><li>Explain ways to value a business </li></ul>
  3. 3. The Cost and Process of Raising Capital <ul><li>Raising money takes time </li></ul><ul><ul><li>It takes twice as long as expected for money to reach the bank </li></ul></ul><ul><ul><li>The chosen financial source many not complete the deal </li></ul></ul><ul><ul><ul><li>Entrepreneurs always need backup investors </li></ul></ul></ul><ul><ul><ul><li>Second round investors often buy out first round funding sources </li></ul></ul></ul><ul><li>“It takes money to make money” </li></ul>
  4. 4. The Venture Capital Market <ul><li>Venture capital: </li></ul><ul><ul><li>A pool of money managed by professionals </li></ul></ul><ul><ul><li>The ability to secure funding depends upon </li></ul></ul><ul><ul><ul><li>The status of the venture capital industry </li></ul></ul></ul><ul><ul><ul><li>What the entrepreneur brings to the table </li></ul></ul></ul>
  5. 5. Figure 17.1: Total U.S. Investment in Billions
  6. 6. Figure 17.2: Venture Capital Investment by Industry for 2006
  7. 7. Sequence of Events - Securing Venture Capital <ul><li>Understand the goals/motivations of the venture capitalists </li></ul><ul><li>VCs are fundamentally risk averse </li></ul><ul><li>Three major stages during which entrepreneurs receive funding </li></ul><ul><ul><ul><li>Idea and proof of concept stage </li></ul></ul></ul><ul><ul><ul><li>Early growth and transition </li></ul></ul></ul><ul><ul><ul><li>Rapid growth </li></ul></ul></ul>
  8. 8. Figure 17.3: Funding Stages and Risk
  9. 9. Funding Stages and Risk <ul><li>Venture capitalists scrutinize new opportunities by evaluating: </li></ul><ul><ul><ul><li>The market </li></ul></ul></ul><ul><ul><ul><li>Management </li></ul></ul></ul><ul><ul><ul><li>Technology </li></ul></ul></ul><ul><li>Venture capitalists also look at potential for significant growth, risk of failure and the quality of the business plan </li></ul><ul><li>Perform due diligence on the venture activity </li></ul><ul><li>Venture capitalists invest in growing businesses through the use of debt and equity instruments to achieve long-term appreciation on the investment in 3 - 5 years </li></ul>
  10. 10. Getting to a Term Sheet <ul><li>Does not guarantee a “done deal ” </li></ul><ul><li>Lays out the amount of investment the VC firm is willing to consider and the conditions under which it is willing to consider the funding </li></ul><ul><li>Entrepreneur not required to accept the term sheet as is </li></ul>
  11. 11. Capital Structure <ul><li>Components of an investment deal </li></ul><ul><ul><li>Amount of money to be invested </li></ul></ul><ul><ul><li>Time and use of the investment monies </li></ul></ul><ul><ul><li>Return on investment to investors </li></ul></ul><ul><ul><li>Level of risk involved </li></ul></ul><ul><li>Provisions of the deal </li></ul><ul><ul><li>Equity and debt positions </li></ul></ul><ul><ul><li>Anti-dilution provision </li></ul></ul><ul><ul><li>Forfeiture provision </li></ul></ul>
  12. 12. The Initial Public Offering-IPO <ul><li>Advantages-disadvantages of going public </li></ul><ul><ul><li>Advantages </li></ul></ul><ul><ul><ul><li>A big source of interest-free capital </li></ul></ul></ul><ul><ul><ul><li>Future option of additional stock offerings </li></ul></ul></ul><ul><ul><ul><li>More prestige and marketplace clout </li></ul></ul></ul><ul><ul><ul><li>Restricted stock and stock options can be used to attract new employees and reward existing employees </li></ul></ul></ul><ul><ul><ul><li>Easier for founders to harvest rewards </li></ul></ul></ul><ul><ul><ul><li>Restricted stock and stock options can be used to attract new employees and reward existing employees </li></ul></ul></ul>
  13. 13. The Initial Public Offering-IPO (continued) <ul><li>Disadvantages </li></ul><ul><ul><li>Dramatic decline in pre-IPO issuer’s financial condition and significant rise in failure rate post-IPO </li></ul></ul><ul><ul><li>Public offering process is expensive </li></ul></ul><ul><ul><li>Going public is very time-consuming </li></ul></ul><ul><ul><li>All company proceedings become public </li></ul></ul><ul><ul><li>Stringent disclosure rules under Sarbanes-Oxley Act </li></ul></ul><ul><ul><li>Intense pressure post IPO to perform in the short term </li></ul></ul>
  14. 14. Figure 17.4: The IPO Process Simplified
  15. 15. Growing Via Strategic Alliances <ul><li>Collaborative relationship between two or more firms </li></ul><ul><li>Intent is to accomplish mutually compatible goals that would be difficult for each to accomplish alone </li></ul><ul><li>Advantages of alliances with big companies: </li></ul><ul><ul><li>Excellent course of growth capital </li></ul></ul><ul><ul><li>Better financial deal for a growing company </li></ul></ul><ul><li>Cautions: </li></ul><ul><ul><li>Investigate the potential partner carefully </li></ul></ul><ul><ul><li>Investigate best business practices </li></ul></ul><ul><ul><li>Ensure that benefits will flow in both directions </li></ul></ul>
  16. 16. Valuing The Business <ul><li>Financial yardsticks </li></ul><ul><ul><li>Fair market value </li></ul></ul><ul><ul><li>Intrinsic value </li></ul></ul><ul><ul><li>Investment value </li></ul></ul><ul><ul><li>Going-concern value </li></ul></ul><ul><ul><li>Liquidation value </li></ul></ul><ul><ul><li>Book value </li></ul></ul>
  17. 17. Calculating the Value of a Business (continued) <ul><li>Non financial yardsticks </li></ul><ul><ul><li>The experience level of the management team </li></ul></ul><ul><ul><li>Firm’s distribution channels level of innovation </li></ul></ul><ul><ul><li>Nature of the company’s relationships in the industry and with customers </li></ul></ul><ul><ul><li>Company’s ability to be fast and flexible </li></ul></ul><ul><ul><li>Amount/kind of the company’s intellectual property </li></ul></ul>
  18. 18. Methods for Valuing a Business <ul><li>Financial measures </li></ul><ul><ul><li>Multiple earnings </li></ul></ul><ul><ul><li>Discounting cash flows </li></ul></ul><ul><ul><li>Real options model </li></ul></ul><ul><ul><li>Venture capital model </li></ul></ul>$ $