Lecture 1 An Overview of New Venture Financing Copyright¸ 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond.

Lecture 1

An Overview of New Venture Financing

Copyright¸ 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Instructors may make copies of the PowerPoint Presentations contained herein for classroom distribution only. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Learning Objectives• Learn new venture financing terminology.• Understand the value of tying financing to

performance milestones• Recognize the distinguishing characteristics of the

various stages of new venture development• Identify the financing sources available to a new

venture and the factors favoring one over another• Learn the basic structures and availability of various

financing sources• Identify the key elements of deal structure and the

functions they serve

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

Some Milestones for New Venture Planning

• Completion of concept and product testing• Completion of prototype• First financing• Completion of initial plant tests• Market testing• Production start-up• First competitive action• First redesign or redirection• First significant price change

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

Block and Macmillan (1992)

Stages of New Venture Development

• Design model – Nascency– Customer Discovery– Customer Validation– Customer Creation– Company Building• Organizational Stage Model– Development stage Start-up– Early growth– Rapid growth– Exit

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

Figure 2-2

Stages of New Venture Development

Sequence of New Venture Financing

• Bootstrapping• Seed financing• R&D financing• Start-up financing• First-stage financing• Second-stage financing• Third-stage financing• Mezzanine financing• Bridge financing• LBO, MBO, IPO

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

Sources of Debt Financing

The principal SOURCES OF BORROWED CAPITAL include:

•Trade credit

•Commercial bank financing

•Line of credit loans

•Time-sales finance

•Term loans

•Chattel mortgages and equipment loans

•Conditional sales contracts

•Plant improvement loans

•Commercial finance companies

•Factoring

•Leasing companies

Sources of New Venture Financing

• Self, friends, and family• Business angels• Venture capital investors• Small business investment companies (SBICs)• Trade credit and factoring• Asset-based lending• Mezzanine capital• Private placements of equity (relational investors)• IPOs• Public debt

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter2

Sources of New Venture Financing

Figure 2-3

Source: National Venture Capital Association

Angel Investments by Industry Q2 2013

2011 Angel Group Valuation Survey Pre-money Valuation of Pre-revenue Companies

Organization Location Current Average Valuation (in millions) Trend

Boise Angel Alliance Boise $0.8 up slightly

Fargo/Morehead Angels Fargo, ND $0.8 flat Maple Leaf Angels Toronto, ON $1.0 flat New Mexico Angels Albuquerque $1.3 up pressure

Desert Angels Tucson $1.5 flat Hawaii Angels Honolulu $1.5 flat RAIN Funds St. Paul, MN $1.5 sl lower Tech Coast Angels San Diego $1.5 flat to down

Valley Angels Grand Forks, ND $1.5 flat

Vancouver Angels Vancouver, BC $1.5 decreasing Angel Forum Vancouver, BC $1.6 decreasing

Atlanta Tech Angels Atlanta $1.6 sl down Ohio TechAngels Columbus $1.8 flat Queen City Angels Cincinnati $1.8 flat SeedStep Angels OKC $1.9 flat to up Mid-Atlantic Angel Group Philadelphia $2.0 unchanged

Pasadena Angels Pasadena $2.0 increasing

DC Dinner Clubs DC/Viriginia $2.0 up slightly Sierra Angels Incline Vilage, NV $2.0 flat

St. Lous Arch Angels St. Louis $0.2 unchanged

Wilmington Investor Network Wilmington, NC $2.0 down 10%

Launchpad Angels Boston $2.1 unchanged

Golden Angels Milwaukee $2.3 up slightly

Alliance of Angels Seattle $2.5 flat Hub Angels Boston $2.5 up pressure

Sand Hill Angels Silicon Valley $2.5 up ~20%/yr

Virginia Active Angels Charlottesville, VA $2.5 declining

Golden Seeds NYC $3.0 down 10%

Central Texas Angel Network Austin $3.0 up CommonAngels Boston $3.0 unchanged

NY Angels NYC $3.0 rising S. Valley Angel Fund ND $3.1 flat

Life Science Angels Silicon Valley $3.3 flat Blue Tree Angels Pittsburgh $3.3 increasing

Band of Angels Silicon Valley $3.4 up AVERAGE $2.1 Bill Payne October 2011

Venture Backed IPOs

Capital Under Management by State 1985-2012

Venture Capital Invested by State 2012

Number of Companies Receiving Investments by State in 2012

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

How Changes in the Stock Market Relate to New Equity Capital

RaisingFigure 2-7

Deal Structures• “The deal”• Term sheet• Pre-money valuation• Post-money valuation• Investment agreement

– Representations and warranties– Covenants and undertakings– Affirmative covenants– Negative covenants– Registration rights– Preemptive rights– Ratchets or anti-dilution provisions

©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2