SOURCES OF FUNDING University of Adelaide eChallenge

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  • Sourcing funding usually is a challenging experience for Companies as must give up control for the cash Aim to present brief summary of the various funding possibilities available at each stage of a company’s development.
  • Company Characteristics Business planning phase (Really pre business stage) Would typically have an embryonic business plan Is developing production capabilities and conducting product research & test marketing Highly speculative start up Controlled by founder Founder usually has skills in only one area – scientist/ inventor, the entrepreneur Will eventually have to give up control to ensure continued company growth
  • Funds usually raised by founder from people that they know family, other wealthy individuals Investors do not seek control of business Key Investment Criteria Focus on Founder and to lesser extent product Investment is really a gut feel, not much financial analysis done Cost Negligible at this stage
  • Company Characteristics Very early stage Business plan finished Begun Marketing and sales
  • Funding Provider’s Characteristics Professional Investor Expertise in specific market areas or specific technology Will invest with a view to exit in up to 5 years Will seek to share control of business with founder Key Investment Criteria Investment usually more analytical and less subjective Focus on Product and to lesser extent Route to market. Founder now less important. Cost Professional fees for preparation of Info Mem Accountants and Lawyers Est $10k -$25k
  • Company Characteristics Rapidly expanding Has an established market and is increasing market share Often yet to make a profit VC usually introduces new, professional management Founder’s role diminishes
  • Funding Provider’s Characteristics Usually corporate bodies set up for the express purpose of investing early stage Typically demands control of the entity in exchange for funding Invests for 3 to 5 years Introduces new professional skill set and takes active role in managing company Will requires complex shareholder agreement Key Investment Criteria Investment now based solely on analytic benchmarks Product and competitive edge, route to market now key factors. Founder not important Cost Can often be the most expensive source of funding Professional fees Reimbursement of due diligence Legals for shareholder agreement Options and convert notes IPO no longer regarded as default exit strategy
  • Development or sometimes known as pre-IPO finance Company Characteristics Fully operating and successful business Continuing expansion or New Product launch Usually 12 months prior to IPO/Trade sale A new issue or sale of shares enables the orderly exit of some founding/VC shareholders
  • Funding Provider’s Characteristics Usually corporate bodies that invest in later stage, mature companies Not usually interested in taking management control But wants to see return on funds in next 12 to 18 months Required defined and identified exit strategy Key Investment Criteria Investment now based based solely on analysis of business rather than just product Product and competitive edge and route to market important factors. But increasing focus on profitability and future growth - Product now less important Cost Prospectus/Info Mem Professional fees Legals, Accountants, Promoter Est $25k -$50k
  • Company Characteristics Fully operating and successful business Usually lists to enable sell down by founding shareholders Or to raise funds for expansion/acquisition Once Listed No longer limited access to capital Increased public scrutiny Mgt more focussed on delivering dividends and growth
  • Funding Provider’s Characteristics Retail investors and some institutional investors (super funds etc) Key Investment Criteria Share market analysis now looks at business fundamentals. Increase focus on profit and growth as should have established product and route to market. Costs 10 – 12% of capital raised Prospectus Accountants, Legal Fees Broker and Underwriter Fees
  • Cost: 5 -7% of capital raised Don’t necessarily need prospectus Underwriter and broker fees
  • SOURCES OF FUNDING University of Adelaide eChallenge

    1. 1. SOURCES OF FUNDING University of Adelaide eChallenge 7 July 2004
    2. 2. 1. Seed Capital – less than $250k <ul><li>Company Characteristics </li></ul><ul><ul><li>Business planning phase </li></ul></ul><ul><ul><li>Developing production capabilities </li></ul></ul><ul><ul><li>Product research & test marketing </li></ul></ul><ul><ul><li>Highly speculative start up </li></ul></ul><ul><ul><li>Controlled by founder </li></ul></ul>Seed Capital Company Life Line
    3. 3. 1. Seed Capital – less than $250k <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>Own funds, Family and Friends </li></ul></ul><ul><ul><li>Other Seed Investors known to Founder </li></ul></ul><ul><ul><ul><li>High net-worth individuals </li></ul></ul></ul><ul><ul><ul><li>Sophisticated Investors </li></ul></ul></ul><ul><ul><li>Subjective investment analysis </li></ul></ul>Seed Capital Company Life Line <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>
    4. 4. 2. Angel Investors - $100k to $500k <ul><li>Company Characteristics </li></ul><ul><ul><li>Product development phase </li></ul></ul><ul><ul><li>Market research done & route to market known </li></ul></ul><ul><ul><li>Initial marketing of product </li></ul></ul><ul><ul><li>High growth and high risk </li></ul></ul>Company Life Line Angel Investors Seed Capital
    5. 5. 2. Angel Investors - $100k to $500k <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>Target early-stage start-ups </li></ul></ul><ul><ul><li>Provide seed money to get business running </li></ul></ul><ul><ul><li>Usually invest in areas related to expertise </li></ul></ul><ul><ul><li>May take role in company’s development </li></ul></ul><ul><ul><li>Long time horizon (up to 5 years) </li></ul></ul>Company Life Line Angel Investors Seed Capital <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>
    6. 6. 3. Venture Capital - $500k to $5m <ul><li>Company Characteristics </li></ul><ul><ul><li>Expansion phase </li></ul></ul><ul><ul><li>Establishing market presence </li></ul></ul><ul><ul><li>Has an asset – device, process or technology </li></ul></ul><ul><ul><li>No profit history but rapid growth prospects </li></ul></ul>Company Life Line Venture Capital Seed Capital Angel Investors
    7. 7. 3. Venture Capital - $500k to $5m <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>VC Funds, Investing Syndicates </li></ul></ul><ul><ul><li>Time horizon typically (3-5 years) </li></ul></ul><ul><ul><li>Must have defined exit strategy </li></ul></ul><ul><ul><li>Stringent investment criteria </li></ul></ul><ul><ul><li>Takes an active board role </li></ul></ul><ul><ul><li>Requires detailed documentation </li></ul></ul>Company Life Line Venture Capital Seed Capital Angel Investors <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>
    8. 8. 4. Development Finance – up to $5m <ul><li>Company Characteristics </li></ul><ul><ul><li>Development of Marketing or Distribution </li></ul></ul><ul><ul><li>Continuing expansion or New Product launch </li></ul></ul><ul><ul><li>Similar characteristics to VC stage </li></ul></ul><ul><ul><li>Usually 12 months prior to IPO/Trade sale </li></ul></ul><ul><ul><li>Enables orderly exit of some founding/VC shareholders </li></ul></ul>Company Life Line Venture Capital Development Finance Angel Investors Seed Capital
    9. 9. 4. Development Finance – up to $5m <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>Private Equity Funds (AMP, Colonial, CPH) </li></ul></ul><ul><ul><li>Sophisticated Investors </li></ul></ul><ul><ul><li>Investment Banks </li></ul></ul><ul><ul><li>Corporates </li></ul></ul><ul><ul><ul><li>Internal R&D Dept </li></ul></ul></ul><ul><ul><ul><li>Alliance/ JV Partners </li></ul></ul></ul>Company Life Line Venture Capital Angel Investors Seed Capital <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>Development Finance
    10. 10. 5. Initial Public Offering - >$10m <ul><li>Company Characteristics </li></ul><ul><ul><li>Need a proven business model </li></ul></ul><ul><ul><li>Profit history preferred </li></ul></ul><ul><ul><li>Sell down by some existing shareholders </li></ul></ul><ul><ul><li>Raising of new capital for continued expansion </li></ul></ul><ul><ul><li>Now a Public Company </li></ul></ul>Company Life Line Venture Capital Seed Capital Angel Investors Initial Public Offering Development Finance
    11. 11. 5. Initial Public Offering - >$10m <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>Retail Investors </li></ul></ul><ul><ul><li>Limited Institutional Investors </li></ul></ul><ul><ul><li>Require dividends and profit growth </li></ul></ul><ul><ul><li>Lower risk investment due to liquidity </li></ul></ul>Company Life Line Venture Capital Seed Capital Angel Investors Development Finance <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>Initial Public Offering
    12. 12. 6. Secondary Capital Raisings >$5m <ul><li>Company Characteristics </li></ul><ul><ul><li>Expansion or Acquisition Capital </li></ul></ul><ul><ul><li>Mature business </li></ul></ul><ul><ul><li>History of profit and share price performance </li></ul></ul><ul><ul><li>Increased share liquidity </li></ul></ul>Company Life Line Venture Capital Angel Investors Seed Capital Secondary Capital Raisings Initial Public Offering Development Finance
    13. 13. 6. Secondary Capital Raisings >$5m <ul><li>Funding Provider’s Characteristics </li></ul><ul><ul><li>Institutional Investors </li></ul></ul><ul><ul><li>New Retail Investors </li></ul></ul><ul><ul><li>Require dividends and profit growth </li></ul></ul>Company Life Line Venture Capital Angel Investors Seed Capital Secondary Capital Raisings Initial Public Offering Development Finance <ul><li>Key Criteria </li></ul><ul><li>Founder/Personnel </li></ul><ul><li>Product </li></ul><ul><li>Route to Market </li></ul><ul><li>Competitive Edge </li></ul><ul><li>Profitability & Growth </li></ul>
    14. 14. 7. Debt Finance - >$500k Company Life Line Venture Capital Debt Financing <ul><li>Established trading record </li></ul><ul><li>Stable and predictable revenues </li></ul><ul><li>Assets as security </li></ul><ul><li>Cash to service interest & loan repayment </li></ul><ul><li>Keep control of business </li></ul><ul><li>Obligated to repay principal </li></ul>Angel Investors Seed Capital Secondary Capital Raisings Initial Public Offering Development Finance
    15. 15. 8. Case Study - G o o g l e TM <ul><li>Company Funding Timeline </li></ul><ul><ul><li>Mar 1995: Co-Founders Sergey Brin and Larry Page meet </li></ul></ul><ul><ul><li>Jan 1996: Create precursor to Google search engine </li></ul></ul><ul><ul><li>Sep 1998: Raise US$1 million from Friends, Family and “Angels” </li></ul></ul><ul><ul><li>- Andy Bechtolsheim (Co-Founder, Sun Microsystems) </li></ul></ul><ul><ul><li>- Jeff Bezos (Founder, Amazon.com) </li></ul></ul><ul><ul><li>Jun 1999: Raise US$25 million from two VC firms </li></ul></ul><ul><ul><li>- Kliener Perkins Caufield & Byers </li></ul></ul><ul><ul><li>- Sequoia Capital </li></ul></ul><ul><ul><li>Aug 2004: Raise US$2.7 billion in IPO </li></ul></ul>
    16. 16. 8. Case Study - G o o g l e TM <ul><li>What Did it Cost Google Founders? </li></ul><ul><ul><li>Sep 1998: Raise US$1 million </li></ul></ul><ul><ul><li>- 17% of Google’s share capital </li></ul></ul><ul><ul><li>- One board seat (of three) </li></ul></ul><ul><ul><li>- Company valued at US$5.5 million </li></ul></ul><ul><ul><li>Jun 1999: Raise US$25 million from two VC firms </li></ul></ul><ul><ul><li>- 34% of Google’s share capital </li></ul></ul><ul><ul><li>- Two board seats (of five) </li></ul></ul><ul><ul><li>- Company valued at US$70.5 million </li></ul></ul><ul><ul><li>Aug 2004: Raise US$2.7 billion in IPO </li></ul></ul><ul><ul><li>- 12% of Google’s share capital </li></ul></ul><ul><ul><li>- Three board seats (of nine) </li></ul></ul><ul><ul><li>- Company valued at up to US$24 billion </li></ul></ul>
    17. 17. 8. Case Study - G o o g l e TM <ul><li>How Much could the Investors make? </li></ul><ul><ul><li>Sep 1998: Friends, Family and “Angels” </li></ul></ul><ul><ul><li>- Paid US$1 million </li></ul></ul><ul><ul><li>- After IPO will hold 6% of Google </li></ul></ul><ul><ul><li>- Worth US$1.4 billion 150,000% return </li></ul></ul><ul><ul><li>Jun 1999: Two Venture Capital firms </li></ul></ul><ul><ul><li>- Paid US$25 million </li></ul></ul><ul><ul><li>- After IPO will hold 20% of Google </li></ul></ul><ul><ul><li>- Worth US$4.5 billion 8,000% return </li></ul></ul>

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