E145/STS173 Workshop C Staged Venture Financing E145/STS173 Workshop C Staged Venture Financing Professor Tom Byers Stanford University Special Thanks.
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The Venture Financing GameThe Venture Financing Game
Kaplan’s StartupGame:
A race against time to create value and
reduce risk
(1) Founding:An entrepreneur begins with a vision and shares of stock in the new venture.
Entrepreneur trades stock for ideas, money, and people
(2) Seed Stage:•Venture capitalists provide money in return for stock
•Employees join via friends & associates in return for cash salary and stock options
•Ideas become intellectual property which represents the initial value in the company
Further growth is delayed until milestones are
reached and risk of failure is reduced
(3) Growth Stage:More money, ideas, and people are
obtained, but for much less stock than in the earlier stage due to lower risk
Company balances earning cash, taking investment, and spending cash to create value
(4) Exit Stage:•Company files for IPO•Entrepreneur, investors, and employees can cash in stock for money •A viable public company has been created•Each party continues to build the company, retires, or starts the game again
Value has been successfully created.
Reference: Start-Up by Jerry Kaplan
The Exploding PieThe Exploding Pie
• The smaller slice of the bigger pie– Goal: Trade shares to grow the pie– Is more fun and rewarding for most entrepreneurs– Is worth more than the whole pie that never grows– Requires high growth rates– Is not easy to achieve, even with lots of financing– Requires a good relationship between entrepreneur and investors
A Real Life Example: Chemdex*A Real Life Example: Chemdex*
• How much money do the founders need?
• How long until significant revenue?
• How long until profitability?
• What’s the going rate for 1st round deals?
Valuation is an art, not a science.
*Chemdex is now called NexPrise (NXPS)
Chemdex in 1997: Series AChemdex in 1997: Series A
1. How much does the company need to raise?
Series ASeries A
2. Negotiate a pre-money valuationpost $ = pre $ + amount raised = $2.7 M + $1.9 M
% of company sold = amount raised / post $ valuation = $1.9 M / $4.6 M
Series ASeries A
3. Determine share price and total number of shares
In Round A, share price is set so total shares = 5-10 million
Total Shares = post $ / share price = $4.6 M / $0.54 = 8.5 M shares
Series BSeries B
1. How much does the company need to raise?
Series BSeries B2. Negotiate a pre-money valuation
post $ = pre $ + amount raised = $11 M + $13 M
% of company sold = amount raised / post $ valuation = $13 M / $24 M