Chapter 13 Lecture Slides  Working with Funders Exhibits and Tables Copyright © 2001 by Marketspace LLC
1 in 5 Ideas  Become Business Plans Only 1 in 174 Receive VC Funding 1 in 833 Make it Big 3–5,000 Receive Venture Capital ...
Table 13-1:  Dizzying Devaluation $0.25 (3/6/2001) Stock hovering around $0.21 to $0.25 during Feb and March. $36.86 (7/6/...
Exhibit 13-2:  VC Investments and Allocation to Internet Related Investments 9.1 11.4 15.1 38.2 68.8 30% 37% 53% 78% 83% 0...
Source:  PricewaterhouseCoopers Money Tree Report 2000 $B Number of Deals by Quarter 1997 1998 1999 2000 Exhibit 13-3:  Ve...
Exhibit 13-4:  1999 Capital Commitments By Limited Partner Type Source:  2000 National Venture Capital Association Yearbook
Exhibit 13-5:  How the Venture Capital Industry Works <ul><li>Start-ups receive initial funding and support from angel inv...
Exhibit 13-6: ROI on Various Investments What $1 Invested in Different Markets in 1989 Grew to be Worth in 1994 and 1999 S...
Exhibit 13-7:  Venture Capital Investments — Breakdown by Stage $BB Venture Capital Investments by Stage: 1985 - 1999 Note...
Table 13-2:  Summary of Sources of New Venture Financing   Dark Grey=Primary Focus, Light Grey=Secondary Focus or focus of...
Table 13-3:  Definition of Other Sources of Funding   Source:  Jack S. Levin. Structuring Venture Capital, Private Equity,...
Table 13-4:  Example of Discounted Cash Flow Analysis   Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 FCF (in Millions) 10 50 ...
Table 13-5:  Discount Rates Source:  James L. Plummer, QED Report on Venture Capital Financial Analysis (QED Research, Pal...
Zero Coupon Bond With Warrants attached--must wait one year after debt is redeemed and warrants are exercised to sell unde...
Table 13- 6: Pre- and Post-Money Valuations Made Easy       Cumulative   Round of Financing Amount invested this round % R...
Exhibit 13-9:  Exit Strategies of VC Firms — IPOs and M&A Note: Venture Economics estimates that through Q2 2000, there we...
Table 13-7:  IPO Pros and Cons   Pro Con Provides founders and shareholders with liquidity (although not immediate liquidi...
Exhibit 13-10:  Allocation of VC Investment to Internet Related Ventures 63% 72% 74% 78% 81% 80% 75% 74% 60% 65% 70% 75% 8...
Exhibit 13-11: Decline of Mergers in 2000 Number of Deals / Year Source:  Thomson Financial, from “Garage Startup to Garag...
Exhibit 13-12: Recent Seed Financing by Industry Seed Financing (Millions) Source:  Venturewire, from “Where the Seed Mone...
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  1. 1. Chapter 13 Lecture Slides Working with Funders Exhibits and Tables Copyright © 2001 by Marketspace LLC
  2. 2. 1 in 5 Ideas Become Business Plans Only 1 in 174 Receive VC Funding 1 in 833 Make it Big 3–5,000 Receive Venture Capital 5–15,000 Receive Other Financing 500,000 Business Plans Shopped 2.5 Million Entrepreneurs with a Big Idea 600 IPO / Get Acquired Source: Red Herring Exhibit 13-1: Venture Capital Pyramid
  3. 3. Table 13-1: Dizzying Devaluation $0.25 (3/6/2001) Stock hovering around $0.21 to $0.25 during Feb and March. $36.86 (7/6/99) drkoop.com (KOOP) Leading online medical content site $0.125 (2/21/2001:Last day of traded) Stockholders voted for liquidation and dissolution Jan. 16, 2001 $11 (2/11/00) Pets.com (IPET) Leading online pet retailer $0.0938 (2/26/200: Last day traded) Filed for chapter 11 March 7, 2001 $84.25 (10/11/99) eToys (ETYS) Leading online toy retailer Current Status High Company
  4. 4. Exhibit 13-2: VC Investments and Allocation to Internet Related Investments 9.1 11.4 15.1 38.2 68.8 30% 37% 53% 78% 83% 0 25 50 75 1996 1997 1998 1999 2000 Year $ Billion 0% 25% 50% 75% 100% % Internet related investments
  5. 5. Source: PricewaterhouseCoopers Money Tree Report 2000 $B Number of Deals by Quarter 1997 1998 1999 2000 Exhibit 13-3: Venture Capital — Market Size
  6. 6. Exhibit 13-4: 1999 Capital Commitments By Limited Partner Type Source: 2000 National Venture Capital Association Yearbook
  7. 7. Exhibit 13-5: How the Venture Capital Industry Works <ul><li>Start-ups receive initial funding and support from angel investors, corporations and the government </li></ul><ul><li>As the business concept develops the start-up attracts venture capital to fund initial stages of business rollout </li></ul><ul><li>As business matures, successful start-ups may seek to go public. I-banks take the company public and distribute the capital to the shareholders (VC and entrepreneurs) minus commissions and fees </li></ul><ul><li>Public market and corporations invest in IPOs </li></ul>Source: Bob Zider, “How Venture Capital Works,” Harvard Business Review Angel Investors, Corporations and Government Public Markets and Corporations Start-ups Investment Bankers Private Investors Venture Capitalists $ $ $ $ Stock $ IPOs $ Ideas
  8. 8. Exhibit 13-6: ROI on Various Investments What $1 Invested in Different Markets in 1989 Grew to be Worth in 1994 and 1999 Source: Red Herring.com
  9. 9. Exhibit 13-7: Venture Capital Investments — Breakdown by Stage $BB Venture Capital Investments by Stage: 1985 - 1999 Note: 1998 was atypical because Warburg, Pincus Equity Partners (NY) raised $5BB to start its fund Source: 2000 National Venture Capital Association Yearbook
  10. 10. Table 13-2: Summary of Sources of New Venture Financing Dark Grey=Primary Focus, Light Grey=Secondary Focus or focus of a subset of investors of that type Source: Smith, Entrepreneurial Finance, p. 34. Note: 1 Asset-based lenders are the debt financing sources that include commercial bank loans Further definition of sources not covered in the chapter are available in Table 13-3 Sources of New Venture Financing Financier Development Startup Early Growth Rapid Growth Exit   Entrepreneur           Friends and Family           Angel Investors           Strategic Partner           Venture Capital           Asset-based Lender 1           Equipment Lessor           SBIC           Trade Credit           Mezzanine Lendor           IPO           Acquisition, LBO, MBO          
  11. 11. Table 13-3: Definition of Other Sources of Funding Source: Jack S. Levin. Structuring Venture Capital, Private Equity, and Entrepreneurial Transactions. Panel Publishers, 2000 John Downes & Jordan Elliot Goodman. Dictionary of Finance and Investment Terms. New York, Barrons, 1995. An MBO is the purchase of all a company’s publicly held share by the existing management, which takes the company private MBO – Management Buyout An LBO is a takeover of a company using borrowed funds. Most often, the target company’s assets serve as security for the loans taken out by the acquiring firm, which repays the loan out of cash flow of the acquired company. LBO – Leveraged Buyout A mezzanine lender (like the VC professional) generally employs active investment professionals who negotiate the purchase of privately-placed securities in venture capital/private equity transactions, such as buyouts, but the securities purchased are normally from the portfolio company and are predominantly debt securities - generally, a slice of common stock, warrants, or conversion rights. Mezzanine Lender <ul><li>Equipment lessors finance various equipment types general costing $1 million or more (ex. production equipment, R&D equipment, etc.) for midsize companies and large corporations, typically for lease terms of three to seven years. </li></ul>Equipment Lessor Definition Funding Source
  12. 12. Table 13-4: Example of Discounted Cash Flow Analysis   Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 FCF (in Millions) 10 50 50 75 85 100 Terminal Value     588   Present Value 8 35 29 36 270  
  13. 13. Table 13-5: Discount Rates Source: James L. Plummer, QED Report on Venture Capital Financial Analysis (QED Research, Palo Alto, CA), 1987 25%-35% IPO 30% to 40% Fourth Stage 30% to 50% Third Stage 35% to 50% Second Stage 40% to 60% First Stage 50% to 70% Startup
  14. 14. Zero Coupon Bond With Warrants attached--must wait one year after debt is redeemed and warrants are exercised to sell underlying stock. Zero Coupon Bond is the ultimate in locking in a return: upon maturity get interest at a fixed rate and interest on interest. Convertible Debentures Redeemable preferred Convertible Preferred Participating Convertible Preferred Common Essentially loans convertible to equity shares. Can sell immediately upon conversion as long as not deemed an affiliate. Investor profile: likes upside potential leavened with downside protection. No convertibility into equity, only face value (FV) plus any dividend. Always carries a term specifying when redemption occurs, usually at the option of the shareholder. Not considered outstanding for EPS purposes. Converted at shareholder’s option into common. Usually a mandatory conversion at IPO. Usually includes a provision to redeem--par plus some form of ROIC as if dividends had been declared but not paid. Receive FV and conversion to common. Term usually in event of sale or liquidation. Typically used in later rounds when investors have to pay a higher price to play. (Essentially preferred stock bundled with common.) Each share has one vote. Class A common is a form of preferred. DEBT SECURITIES Highest Liquidation Preference/Can Force Liquidation Safest COMMON Lowest Liquidation Preference Riskiest Sources: Fundamentals of Venture Capital, Bartlett; HBS Note on Deal Making; HBS Note on Private Equity Securities; Venture Capital and Private Equity, a Casebook, Lerner; The Entrepreneurial Venture, HBS Publishing. Exhibit 13-8: The Spectrum of Securities
  15. 15. Table 13- 6: Pre- and Post-Money Valuations Made Easy       Cumulative   Round of Financing Amount invested this round % Received this round VC’s Share Founder’s Share Implied Valuation (Post Money) Seed-stage Round $1,000,000 40% 40% 60% $2,500,000 First Round $4,000,000 20% 52% 48% $20,000,000 Second Round $15,000,000 20% 62% 38% $75,000,000
  16. 16. Exhibit 13-9: Exit Strategies of VC Firms — IPOs and M&A Note: Venture Economics estimates that through Q2 2000, there were 131 VC backed IPOs for a total of $12.8B. Through Q2 2000, there were 132 M&A transactions of venture-backed firms for $37.5B (the 2000 numbers above simply double the current available numbers through Q2 2000). Source: Venture Economics and 2000 National Venture Capital Association Yearbook Offering Size ($BB) VC-Backed IPOs: 1985-2000* # of Offerings Venture-Backed M&A Deals 1985-2000* Acquisition Amount ($BB) # of Acq
  17. 17. Table 13-7: IPO Pros and Cons Pro Con Provides founders and shareholders with liquidity (although not immediate liquidity because of lock out periods, signals to the market, etc.) IPOs are expensive and time-consuming. An unfavorable market (something that the company can not control or predict) might necessitate pulling the IPO at the last second Provides capital to fuel expansion and growth within the company Strict SEC reporting requirements Possibility of attracting and retaining employees at lower than market rates because of granting of stock options and promise of eventual liquidity Pressure to product quarterly numbers for analysts The price of the company’s shares should increase dramatically with an IPO, providing (at least paper) wealth to the founders and other shareholders Increased Officer and Director liability As long as the company is performing well, it can return to the market to raise additional cash Hostile takeover is possible The ability to use stock as currency Doesn’t necessarily provide a liquid market for all shareholders because of restrictions on trading the stock
  18. 18. Exhibit 13-10: Allocation of VC Investment to Internet Related Ventures 63% 72% 74% 78% 81% 80% 75% 74% 60% 65% 70% 75% 80% 85% Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Quarter % of Total VC Deals <ul><li>Source: PWC Moneytree Survey 2000 </li></ul>
  19. 19. Exhibit 13-11: Decline of Mergers in 2000 Number of Deals / Year Source: Thomson Financial, from “Garage Startup to Garage Sale.” The Industry Standard . February 19, 2001. Thousands of Dollars Year 2000
  20. 20. Exhibit 13-12: Recent Seed Financing by Industry Seed Financing (Millions) Source: Venturewire, from “Where the Seed Money Is.” The Industry Standard . February 19, 2001

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