Raising Capital
Raising Capital
Agenda1) Background
2) Define Capital
3) New Venture Cyclei. Stages in Cycle
ii. Cash Flow Forecast
iii. Business Opportunity
4) Capital Ladder Puzzle
5) Top 10 traps to avoid
1) Backgroundi. Finance / Capital Markets
ii. Intrapreneur 25 Years
iii. B.S. Finance / MBA Rotman
iv. Argentari Groupa) Buy Side advisor opportunity assessment
b) Manage investment early stage ventures
c) Independent financial valuations
d) Angel Investor
e) Chairperson Ryerson Angel Network
NOT SELLING OR BUYING
2) What is Capital?
What is Capital
The Value of Contractual Financial and Human Assets Invested by the Founder(s) and Others in a business.
FUNCTIONAL DEFINITION
Capital AssetsFinancial Human
VALUATION
PAYMENT
AssetsFinancial
VALUATION
PAYMENTCashHard Assets
External Market
Capital Assets
Expertise
Idea
Financial Human
External Market
VALUATION
CashHard Assets
PAYMENT
Internal Assessment
Contractual Capital
Debt Equity• I borrowed $50,000 from my Dad and promised to re pay
him.
• My Uncle Jim let me use his basement he usually rents for $2,000 a year for free.
• I have an equal partner who I work with.
• I promised to compensate Joe, a programmer who wrote the software. It usually costs $10,000.
• I have a grant from the government for $8,000.
• Sally contributed a tractor a worth $23,000 that we use in the business.
• The lawyer gave me 6 months to pay my bills.
Capital InvestingDebt Capital Business Plan
Profit0
Time
DEBT
DEBT
Capital InvestingEquity Capital Business Plan
Profit
Time
EQUITY
EQUITY
Profit0
Equity Value as seen by FounderCapital
Business Plan
Time
Profit0
Equity Value as seen by Others
Capital Business Plan
Time
Profit0
What is Capital
The Value of Contractual Financial and Human Assets Invested by the Founder(s) and Others in a business.
FUNCTIONAL DEFINITION
3i) New Venture Business Cycle
Tried to copy a Graph
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3i) StagesStage 1: Mind to Money
A. The first Aha moment
B. Research
C. Business Plan
D. The Real Aha Moment
E. Real Business Plan
F. In Depth Research
G. Detailed Plan / Budget
3i) Business CycleStage2: Proof of Concept
A. Detailed Budget
B. Prototype Specs
C. Prototype Built
D. External Hurdles Overcome
E. Start of First Cycle
F. One Cycle Completed
3i) Business CycleStage3: Sell, Adapt
A. Detailed Marketing Plan
B. Sales Tracking
C. CMO
D. Stumble
E. Fall
F. Get up
3i) Business CycleStage 4: Sell, Profit, EXIT
A. CFO
B. Cost control
C. Leadership
D. Business acumen
E. Management ability
F. Shareholder relations
3ii) Cash Flow
Stage 1:
Mind to MoneyStage2:
Proof of Concept
Stage3:
Sell, AdaptCASH
FLOW
Stage 4:
Profit, EXIT
3ii) Cash Flow
Stage 1:
Mind to MoneyStage2:
Proof of Concept
Stage3:
Sell, AdaptCASH
FLOW
Stage 4:
Profit, EXIT
3ii) Cash Flow
Stage 1:
Mind to MoneyStage2:
Proof of Concept
Stage3:
Sell, AdaptCASH
FLOW
Stage 4:
Profit, EXIT
3iii) Classify Opportunity
A. Also ran
B. New and Improved
C. Marriage Play
D. Medium Change
E. Industry Transplant
F. Category / Segment Killer
G. Technology leap
H. Model Disruption
R&D, Proof of Concept, Sales
4) Capital Ladder
4) Capital Ladder
Raising External Capital boils down to
THE ASK
3ii) Cost of Capital
Stage 1:
Mind to MoneyStage2:
Proof of Concept
Stage3:
Sell, AdaptCASH
FLOW
Stage 4:
Profit, EXIT
VENTURE
RISK
Hi Cost Capital
Lo Cost Capital
3ii) Cost of Capital
Stage 1:
Mind to MoneyStage2:
Proof of Concept
Stage3:
Sell, AdaptCASH
FLOW
Stage 4:
Profit, EXIT
Hi Cost Capital
Lo Cost Capital
VENTURE
RISK
Capital Puzzle
Grants
V.C.
Angels
3 F’s
I.P.O.
Investor SegmentsSize of
Investment
Sweat to Hard
Equity
Dilution Concern
Expected Return
Founder Autonom
y
Three F’sGrants
Accelerator
Angels
CPC
Venture
IPO
Buyout
N / A
Perceived Value:
Support
Validation
Idea Generation
True Value:
First Round Real Money
NEGATIVE NET RETURN
Segment Breakdown:
Comfort: 35%
Cynics: 55%
Cash: 5%
Critics: 5%
3 F’s Overview
Tips• Use debt not equity
• Silent Partners
• Financial s of F = your risk
• The third F is Fools
Perceived Value:
Free Money
Validation of Business
Public Credibility
True Value:
Program Funded
Best kind of Capital
Segment Breakdown:
Ineligible: 85%
Resources: 10%
Cash: 5%
Grants
Tips• Knowledge of the system
• Time is not a factor
• Avoid Agents / Never pay for the service
• Read fine print
Holder of I.P.
Equity Stake
Debt
•SR& ED, IRAP, MaRS, EDC, = Grant
• A loan is a loan
Perceived Value:
Like Equity
Leverage
Doesn’t Effect Equity
True Value:
NOT EQUITY
Great place for 3 F’s
Drains Cashflow / Equity
Shareholders Prefer
Segment Breakdown: Personal Gty: 95% Collateral: 4.8% Company: .2%
LoansTips
• Convertible debt is at the option of the Lender, not the founder
• Personal Guarantee usually required
• Partners joint and severed
• Collateral haircut required on all Assets
• Signing for a loan is a loan
• Lenders want to be all equal
• Commitment for life
• Vendor financing = Payment Terms
• Community based loans are available
• Schedule A’s not interested
• Red Light Syndrome
Perceived Value:
Quasi Equity Investment
Chosen Few
Quick step to Cash
True Value:
Group Environment
Mentorship / Reputation
Facilities / Rolodex
Segment Breakdown: Real: ?% Bogus: ?% Advisory Boards ?% Landlords ?% Govt ?%
AcceleratorsTips
• Read Agreement carefully
• Facilities have market value (REGUS)
• Number of successes
• Industry Expertise (Tech)
• Agent for Capital
• People are the asset
• # of ventures per cycle
• Credibility / Term
• Conversion Terms / Timing / Cost
Only Cash is as good as Cash
Perceived Value:
Real Equity Investors
Unlimited Cash
War Hero’s
True Value:
Financial Oversight
Real World Mentorship
Operating Cash
Primer: Investor Relations
Segment Breakdown: Cynics: 30% Critics: 40% Consualtants:20% Capitalists: 10%
AngelsTips
• Dragons Den is a TV Show
• Due Diligence / Legal Agreement
• Number of groups / organisations
• Idea + Business Acumen+ Showman
• Jockeys not horses (execute fair idea)
• Plenty of ponies
• Know your #’s
• Max 15 % of individual portfolio
• High Risk Return and Involvement
• Exit Key with limited dilution
• Limited Funding Capability (80’s dead)
VALUATION
Perceived Value:
Big Time Equity
Source all future capital
Advisors
True Value:
Validation
Capital
Driver to an Exit
Segment Breakdown: Small : $250 - $2Mil Medium: $ 2 - $5 Large: $5 - $15
Private Equity/CPC/Venture CapitalTips
• Investment bankers / Advisors / Brokers
• Detailed Due Diligence
• Extensive Legal Agreement
• Source of Capital / Return Criteria
• Many Industry Specific
• Canada = California
• Last sector to recover
• # of investments
• Exit / Exit / Exit
Value today Discounted Cash Flow
Risk Premium 50% Comparatives
U.S. Vs Canada Other Investors
Real Money Credibility of Lead
Valuation Agents Questionable Value
External Factors Speed Terms
Value founder time/money/effort Expected return Operating vs. financial control
Assets Salaries Collateral
Valuation 101Stage 1:
Stage2: Stage3:
Value Cash Flow
Stage 4:
Investor SegmentsSize of
Investment
Sweat to Hard
Equity
Dilution Concern
Expected Return
Founder Autonom
y
Three F’sGrants
Accelerator
Angels
CPC
Venture
IPO
Buyout
EXIT
Golden Rule: The one with the gold, makes all the
rules
5) Top TEN Traps to Avoid1. Unrealistic Valuation
Require $500,000
Want to keep 80% equity
Pre money Valuation = $2Mil
Top TEN Traps to Avoid1. Unrealistic Valuation
2. Confuse Market Potential with Sales potential: 2% of $2 Billion market U.S. Cousin
Top TEN Traps to Avoid1. Unrealistic Valuation
2. Overstate Market Potential
3. Assume a Quick Linear Progression
Reality is Curved
Demonstrates Inexperience
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon
3 F’s will love you no matter what Fairly value start-up services
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long
80% of nothing vs. 15% of something
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital
Evil preventing my dream from coming true Shareholders share my vision and passion
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game
Level of commitment Value of Personal Capital
1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping
1. Largest source of Capital2. Normal course of business
Top TEN Traps to Avoid
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities
Overvalues Equity
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities
10.Gain all education through Experience vs. Academics
Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities10.Gain all education through Experience vs. Academics