Funding MBAX 6100 MBAX 6100 Entrepreneurship & Small Entrepreneurship & Small Business Business Funding Funding Frank Moyes Frank Moyes Leeds School of Business Leeds School of Business University of Colorado University of Colorado Boulder, Colorado Boulder, Colorado
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Funding
MBAX 6100MBAX 6100
Entrepreneurship & Small BusinessEntrepreneurship & Small Business
FundingFunding
MBAX 6100MBAX 6100
Entrepreneurship & Small BusinessEntrepreneurship & Small Business
FundingFunding
Frank MoyesFrank MoyesLeeds School of BusinessLeeds School of BusinessUniversity of ColoradoUniversity of ColoradoBoulder, ColoradoBoulder, Colorado
Funding
Funding Your New VentureFunding Your New VentureNext 3 WeeksNext 3 Weeks
This week: Equity & Venture CapitalThis week: Equity & Venture CapitalNext week Other forms of fundingNext week Other forms of fundingFollowing week: Negotiating Term SheetsFollowing week: Negotiating Term Sheets
Funding
Today’s AgendaToday’s Agenda
Equity fundingEquity funding Venture CapitalVenture Capital
Tim Connor, Sequel Venture PartnersTim Connor, Sequel Venture Partners Steven Bruny, Aztek NetworksSteven Bruny, Aztek Networks Rob Balgley, SkyetekRob Balgley, Skyetek
Due: Mid-term & entrepreneurship papersDue: Mid-term & entrepreneurship papers Value PropositionValue Proposition
Funding
How Are Going to Fund How Are Going to Fund Your New Venture?Your New Venture?
Personal ResourcesPersonal ResourcesFriends & familyFriends & familyDebtDebtEquityEquityIPOIPONon-traditional & grantsNon-traditional & grants
Funding
Stages of DevelopmentStages of Development
Seed (proof of concept)Seed (proof of concept) PersonalPersonal
Start-up (set-up production & sales)Start-up (set-up production & sales) AngelsAngels PPOPPO
Early stage (full-scale operations & mkt)Early stage (full-scale operations & mkt) VCVC GovernmentGovernment
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Stages of DevelopmentStages of Development
Second & third stages (expansion)Second & third stages (expansion) VCVC Financial institutionsFinancial institutions DebtDebt ReinvestmentReinvestment
Exit (harvest)Exit (harvest) BridgeBridge IPOIPO
Funding
EquityEquitySourcesSources
F & FF & F AngelsAngels Private PlacementPrivate Placement Venture CapitalVenture Capital Corporate venture subsidiariesCorporate venture subsidiaries IPO (Initial Public Offering)IPO (Initial Public Offering)
AdvantageAdvantage Permanent capitalPermanent capital
DisadvantagesDisadvantages Give up piece of company (dilution)Give up piece of company (dilution) Responsibilities to investorResponsibilities to investor Exit for investor – achieve a returnExit for investor – achieve a return
Funding
Venture CapitalVenture Capital
Funding
Venture CapitalVenture Capital
Pool of capital invested in rapidly growing companiesPool of capital invested in rapidly growing companies $21.7 billion in 2005 in 2,939 investments$21.7 billion in 2005 in 2,939 investments Down from $104 billion & 7,832 deals in 2000Down from $104 billion & 7,832 deals in 2000 Private PartnershipsPrivate Partnerships
General partners – manageGeneral partners – manage Limited partners – provide fundsLimited partners – provide funds
Funding
What Are the Advantages to What Are the Advantages to Venture Capital?Venture Capital?
Can provide lots of moneyCan provide lots of money Greatest value-added money - consulting, mentoring, Greatest value-added money - consulting, mentoring,
networknetwork Help build management teamHelp build management team Kick down the door “rolodex”Kick down the door “rolodex” Good VC’s know there will be problemsGood VC’s know there will be problems
Validation of your conceptValidation of your concept Know how to exitKnow how to exit
Funding
What Are Disadvantages of What Are Disadvantages of Venture Capital?Venture Capital?
Loss of equity, likely controlLoss of equity, likely control But, achieve your dreamBut, achieve your dream
High maintenanceHigh maintenance Long due diligence processLong due diligence process Expensive: attorneys, accountants, consultantsExpensive: attorneys, accountants, consultants Valuation decision can be very stressfulValuation decision can be very stressful
Majority of investments failMajority of investments fail Founder often “leaves”Founder often “leaves” Must have common objectivesMust have common objectives
Exit strategyExit strategy
Funding
VC Decision MakingVC Decision Making
Deal flowDeal flow Less then 2% of deals are fundedLess then 2% of deals are funded 1 to 2 new deals per year per partner1 to 2 new deals per year per partner
Due diligence – in-depth investigation of the venture & Due diligence – in-depth investigation of the venture & youyou
SyndicationSyndication Time frame to do a deal: 3 to 12 monthsTime frame to do a deal: 3 to 12 months Entrepreneur decision makingEntrepreneur decision making
Due diligenceDue diligence Chemistry is keyChemistry is key
Funding
Managing VC Portfolio CompaniesManaging VC Portfolio Companies
Objective: invest large amounts of money in high Objective: invest large amounts of money in high growth, potentially large companiesgrowth, potentially large companies
Specialize in certain industriesSpecialize in certain industries A, B, C, & D Rounds of preferred stockA, B, C, & D Rounds of preferred stock
Dry powderDry powder Each round is often staged with milestonesEach round is often staged with milestones
Board of DirectorsBoard of Directors Hands-on vs. portfolio approachHands-on vs. portfolio approach
Funding
What Do VC’s Look For?What Do VC’s Look For?
MANAGEMENT TEAMMANAGEMENT TEAM ExperienceExperience Expertise in industryExpertise in industry PassionPassion Commitment of CEOCommitment of CEO
Market potential - very large & high growthMarket potential - very large & high growth Growth stage of development - VC money has the Growth stage of development - VC money has the
greatest impactgreatest impact Proprietary product or serviceProprietary product or service
Funding
Control: Why do VC’s Often Wind-up Control: Why do VC’s Often Wind-up Owning > 50% of a Venture?Owning > 50% of a Venture?
Not because want to run company or Not because want to run company or distrust the managementdistrust the management
To achieve a satisfactory returnTo achieve a satisfactory return Ref: BZ-Exhibits 6.1 & 6.2 Ref: BZ-Exhibits 6.1 & 6.2
ValuationValuation
Funding
VC Required Return on InvestmentVC Required Return on Investment
SeedSeed 20x 20x Start-UpStart-Up 10x 10x Early Stage 8xEarly Stage 8x Second Stage 5xSecond Stage 5x Third StageThird Stage 4x 4x BridgeBridge 3x 3x
Return DCFCash on Cash
80% 80% 60%60% 50%50% 40%40% 30%30% 25%25%
Bygraves & Zacharakis
Funding
What Are the Implications to the What Are the Implications to the Entrepreneur of VC Returns?Entrepreneur of VC Returns?
The later the stage, the better the deal The later the stage, the better the deal The better the management, the better the deal The better the management, the better the deal The quicker the exit, the better the deal The quicker the exit, the better the deal
Funding
Why people want to be VC’s?Why people want to be VC’s?
PartnershipPartnership General partnersGeneral partners Limited partnersLimited partners
Management fees 2%Management fees 2% Specialize in an industrySpecialize in an industry Carried interest – 80/20Carried interest – 80/20 Series of fundsSeries of funds
Funding
Value Proposition -Value Proposition - 3 Elements3 Elements
What are the features?What are the features? Who is the target market?Who is the target market? What are the benefits?What are the benefits?
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Value PropositionValue Proposition
“XYZ is a_______[describe] company. By its _______[feature(s)], it provides ______ [unique benefit(s)] to ______[target market]”
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Simple Value PropositionSimple Value PropositionSST CorporationSST 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”
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Simple Value PropositionSimple Value PropositionDell ComputerDell 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.”
Funding
Simple Value PropositionSimple Value PropositionVic’s CoffeeVic’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.”
Funding
AttributesAttributes
PerformancePerformance: durability, quality of materials, defect levels, tolerances, : durability, quality of materials, defect levels, tolerances, construction, dependability, functional performance (acceleration, nutrition, construction, dependability, functional performance (acceleration, nutrition, taste), efficiency, safety, styling, packaging, etc.taste), efficiency, safety, styling, packaging, etc.
Cost:Cost: purchase price, quantity discounts, operating costs, repair costs, cost of purchase price, quantity discounts, operating costs, repair costs, cost of extras or options, cost of installation, trade in allowance, likely resale value, extras or options, cost of installation, trade in allowance, likely resale value, etc.etc.
Availability:Availability: carried by local stores, credit terms, quality of service available carried by local stores, credit terms, quality of service available from local dealer, delivery time, credit card, on-line transactions, etc.from local dealer, delivery time, credit card, on-line transactions, etc.
Service:Service: hours, warrant, guarantee, return/replacement policy, upgrades, hours, warrant, guarantee, return/replacement policy, upgrades, maintenance, training, installation, repair service, spare parts, customer maintenance, training, installation, repair service, spare parts, customer support, tech support, training, product design, make to order, level of support, tech support, training, product design, make to order, level of inventory, quotation response time, lead time, quality certification, employee inventory, quotation response time, lead time, quality certification, employee capabilities, etc.capabilities, etc.
Environment:Environment: location, atmosphere, layout, fixtures, aesthetics, style, sound, location, atmosphere, layout, fixtures, aesthetics, style, sound, lighting, color, etc.lighting, color, etc.
Funding
BenefitsBenefits Emotional:Emotional: ambition, power, independence, achievement, ambition, ambition, power, independence, achievement, ambition,
pride of ownership, comfort, love, friendship, security, style, self pride of ownership, comfort, love, friendship, security, style, self Improvement, etc.Improvement, etc.
Social:Social: status, image, popularity with friends or family members, status, image, popularity with friends or family members, reputation of brand, personal relationships, style, fashionable, etc.reputation of brand, personal relationships, style, fashionable, etc.
Health:Health: stress, fitness, mental capacity, strength, sex life, quality of life, stress, fitness, mental capacity, strength, sex life, quality of life, muse, etc.muse, etc.
Financial:Financial: revenue, costs, savings, productivity, pricing, profitability, revenue, costs, savings, productivity, pricing, profitability, market share, save time, productivity, etc.market share, save time, productivity, etc.
ConvenienceConvenience? ? Objective is distinguish between benefits and features, not put into Objective is distinguish between benefits and features, not put into
categoriescategories