ModULE 4 - Sources of Capital.ppt

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ModULE 4 - Sources of Capital.ppt

  1. 1. Module 4 The Search for Capital
  2. 2. Module 4 Topics <ul><li>Sources of Capital </li></ul><ul><li>Background </li></ul><ul><li>Start-up </li></ul><ul><li>Ongoing Operations </li></ul><ul><li>Growth </li></ul>
  3. 3. Review
  4. 4. The Search for Capital <ul><li>We Know That Small Firms </li></ul><ul><li>need capital </li></ul><ul><li>don’t have access to capital markets </li></ul><ul><li>have limited choices </li></ul><ul><li>owners are often inexperienced </li></ul>
  5. 5. The Search for Capital <ul><li>Finance Theories: Common Themes </li></ul><ul><li>(CAPM, Agency theory, Signaling theory, Pecking order theory) </li></ul><ul><li>Applicable to large firms, but less applicable to small firms </li></ul><ul><li>Most firms have a preferred target capital structure </li></ul><ul><li>Preferred target capital structure may vary by firm </li></ul><ul><li>Capital structure may affect value </li></ul><ul><li>Appropriate capital structure affected by many factors (taxes, cost, collateral, uncertainty, owner preferences) </li></ul>
  6. 6. Perspective on Raising Capital <ul><li>http://edcorner.stanford.edu/authorMaterialInfo.html?mid=1374 </li></ul><ul><li>(3 minutes) </li></ul>
  7. 7. General Sources of Capital <ul><li>Equity Personal Sources </li></ul><ul><li>Profits </li></ul><ul><li>Angel Capital </li></ul><ul><li>Venture Capital </li></ul><ul><li>Debt Financial Institutions </li></ul><ul><li>Credit Cards </li></ul><ul><li>Other (Home Equity Loan, Life Insurance) </li></ul><ul><li>Other Local Community Grants and Loans </li></ul><ul><li>Government Programs </li></ul><ul><li>Other (customer, suppliers) </li></ul>
  8. 8. Common Sources of Start-Up Capital <ul><li>Personal Equity </li></ul><ul><li>Friends and Family </li></ul><ul><li>Loans from Financial Institutions </li></ul><ul><li>Bootstrap Financing </li></ul>
  9. 9. Common Sources of Growth Capital <ul><li>“ Angel” Investors </li></ul><ul><li>Venture Capital </li></ul><ul><li>Sale of Stock </li></ul><ul><li>Profits </li></ul>
  10. 10. Angel Investors <ul><li>Local Wealthy Individuals </li></ul><ul><ul><li>234,000 active investors in US </li></ul></ul><ul><li>Work in informal groups </li></ul><ul><li>Pool investments </li></ul><ul><li>300 informal “angel” groups in US </li></ul>
  11. 11. Angel Investors <ul><li>Invest < $1 million dollars </li></ul><ul><li>Average = $500,000 </li></ul><ul><li>Annual Angel Investment = VC Investment </li></ul><ul><li>(2006: 25.6 billion vs $26.1 billion) </li></ul><ul><li>Invest in 10 times number of firms as VCs </li></ul><ul><li>(2006: 51,000 firms vs 3522 firms) </li></ul>
  12. 12. Angel Investor Expectations <ul><li>Return of > 10 times investment </li></ul><ul><li>Exit within 5 years </li></ul><ul><li>Defined exit strategy </li></ul>
  13. 13. Finding Angel Investors <ul><li>Not Easy </li></ul><ul><li>Cluster </li></ul><ul><li>Personal Network </li></ul><ul><li>Referrals: attorneys, accountants, bankers </li></ul><ul><li>Local Associations </li></ul>
  14. 14. Angel Investors: Due Diligence <ul><li>Business Plan </li></ul><ul><li>Product </li></ul><ul><li>Nature of Opportunity </li></ul><ul><li>ROI </li></ul><ul><li>Cashflow </li></ul><ul><li>Management Team (Background Checks) </li></ul><ul><li>Exit Opportunity </li></ul>
  15. 15. “ Portals” to Angels <ul><li>“ Gatekeepers” (Initial introduction) </li></ul><ul><li>Venture Capital Clubs </li></ul><ul><li>Regional-Based Groups of Investors </li></ul><ul><li>Matching Networks </li></ul>
  16. 16. Venture Capital: Background <ul><li>Professionally Managed Investment Funds </li></ul><ul><li>$29.4 billion into 3,800 U.S. start-ups in 2007 </li></ul><ul><li>$6.6 billion in 800 deals in U.S. – 3 rd quarter, 2006 </li></ul><ul><li>1300 Venture Capital Firms in US </li></ul><ul><li>Invest in 1 of 400 proposals </li></ul>
  17. 17. Venture Capital <ul><li>35 years VCs > $441 billion </li></ul><ul><li>> 57,000 companies </li></ul><ul><li>½ of IPOs have VC investment </li></ul><ul><li>Europe (2006) 71 billion invested in 2006 </li></ul><ul><li>8.3% Seed 21% Expansion </li></ul><ul><li>70% Buyout financing </li></ul><ul><li>US (2007) $1.4 billion in China </li></ul><ul><li>$1.0 billion in India </li></ul>
  18. 18. US Venture Capital <ul><li>VC investment down 8.5% - 1st quarter 2008 vs 4 th quarter 2007 (consistent with slowdown of US economy) </li></ul><ul><li>VCs and angel investors more cautious, pursued later stage investments </li></ul><ul><li>Shortage of money for seed and early stage ventures </li></ul><ul><li>US Investment (California, Massachusetts, Texas, Washington, NY) </li></ul><ul><li>Invested in >1,400 companies </li></ul><ul><li>Life sciences, clean technology and information technology </li></ul><ul><li>55 new venture capital funds </li></ul>
  19. 19. Identifying a Venture Capitalist Needs Of Firm Characteristics of VC Firm
  20. 20. Identifying a Venture Capitalist <ul><li>Stage of Development </li></ul><ul><li>Amount of Investment </li></ul><ul><li>Industry </li></ul><ul><li>Services Offered </li></ul><ul><li>Reputation </li></ul><ul><li>Successful Record </li></ul>
  21. 21. VC Investment Criteria <ul><li>Entrepreneur </li></ul><ul><li>Rate of Potential (50%/year) </li></ul><ul><li>Board of Directors </li></ul><ul><li>Management Team </li></ul><ul><li>Intellectual Property </li></ul><ul><li>Exit Opportunity </li></ul>
  22. 22. Venture Capital in Portugal <ul><li>VC sector is one of smallest in OECD relative to size of economy </li></ul><ul><li>1999-2002 0.09% of GDP </li></ul><ul><li>vs </li></ul><ul><li>0.29% of GDP for OECD </li></ul><ul><li>Dominated by banks and public VC companies </li></ul>
  23. 23. Venture Capital Process <ul><li>Screening </li></ul><ul><li>Due Diligence </li></ul><ul><li>Deal Structure and Negotiation </li></ul><ul><li>Post Investment Monitoring </li></ul>
  24. 24. VC Due Diligence <ul><li>Management Team </li></ul><ul><li>Competitive Advantage </li></ul><ul><li>Growth Potential </li></ul><ul><li>Exit Opportunity </li></ul><ul><li>Financial Projections </li></ul><ul><li>Intellectual Property </li></ul>
  25. 25. Venture Capital in Portugal <ul><li>Most investment in Lisbon and Porto </li></ul><ul><li>2002 50% of investments in Lisbon </li></ul><ul><li>16% in Porto </li></ul><ul><li>23% rest of country </li></ul><ul><li>10% other European countries </li></ul>
  26. 26. Venture Capital in Portugal <ul><li>Favor expansion stage projects </li></ul><ul><li>Average deal = 1.2 million Euros (2001) </li></ul><ul><li>Investments 40% manufacturing </li></ul><ul><li>18% services </li></ul><ul><li>15% IT </li></ul><ul><li>9% retail </li></ul>
  27. 27. Going Public <ul><li>Process </li></ul><ul><ul><li>Underwriter </li></ul></ul><ul><ul><li>Security and Exchange Commission </li></ul></ul><ul><ul><li>Road Show </li></ul></ul><ul><li>Very Expensive (~ $3,000,000 in US) </li></ul>
  28. 28. <ul><li>Discussion </li></ul>
  29. 29. Assignment <ul><li>How much money to start your proposed business? </li></ul><ul><li>Where will money come from? </li></ul>

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