Timmons Ch 14 PPT
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Transcript Timmons Ch 14 PPT
Obtaining Venture &
Growth Capital
Venture Planning
Chapter 14
Dowling
Fall 2005
Obtaining Venture & Growth Capital
Cover your equity
Balance the need for
startup and growth capital
with preservation of equity
The earlier the capital
enters, regardless of the source, the more costly it is
Creative bootstrapping strategies can be great preservers of
equity
Obtaining Venture & Growth Capital
Considerations
Does the venture need outside equity capital?
Do the founders want outside equity capital?
Who should invest?
An equity investment requires that the management
team firmly believe that investors can and will add
value to the venture.
Obtaining Venture & Growth Capital
Timing
It is unwise for a startup to delay looking for capital
since it is likely to take six months or more to raise
money.
Obtaining Venture & Growth Capital
Angels and informal investors
Who they are
Typical informal investor will invest from $10,000 to
$50,000 in any one venture. They’re appropriate for:
Ventures with capital requirements from $50K-$500K
Ventures with sale potential from $2-$20 million in 5-10 years.
Small, established, privately held ventures with sales and profit
growth of 10 to 20 percent per year
Special situations
Obtaining Venture & Growth Capital
Evaluation process
An informal investor will want to review a business
plan, meet the full management team, see any
product prototype or design that may exist, etc.
The decision
Agreement with informal investors will most often
include a “put,” whereby the investor has the right to
require the venture to repurchase his or her stock
after a specified number of years at a specified price.
Obtaining Venture & Growth Capital
Venture capital
Key is to seek investors who will truly add value to
the venture, beyond the money
Carefully screen potential investors to determine
how specifically they might fill in some gaps in the
founders’ know-how and networks
The right investors can open doors to new
customers, vendors, and additional investors
Obtaining Venture & Growth Capital
Venture capital: What is it?
“The venture capital industry supplies capital and
other resources to entrepreneurs in businesses with
high growth potential in hopes of achieving a high
rate of return on invested funds.”
Most credit Ralph Flanders, then president of
Federal Reserve Bank of Boston, with the idea.
VC investors commonly expect returns of 5 to 10
times initial investment in 5 to 10 years.
Obtaining Venture & Growth Capital
Venture capital
No more than 2 to 4 percent of ventures seeking VC
actually receive financing from them
An entrepreneur may give up 25 to 75 percent of
his or her equity for seed/startup financing
Most VC investors are limited partnerships, with
fund managers serving as general partners and
investors as limited partners
Obtaining Venture & Growth Capital
Sources and guides
A good place to start is Pratt’s Guide to Venture
Capital Sources
What to look for
Entrepreneurs are well advised to screen prospective
investors to determine the appetites of such
investors for the stage, industry, technology and
capital requirements proposed
Obtaining Venture & Growth Capital
Early-stage entrepreneurs need investors who:
Are considering new financing proposals and can provide the
required level of capital
Are interested in companies at the particular growth stage
Understand and have a preference for investments in the
particular industry
Can provide good business advice, moral support
Are reputable and ethical and with whom founder can get
along
Have successful track records of 10 years or more advising
and building smaller companies
Obtaining Venture & Growth Capital
What to look out for
Attitude
Over-commitment
Inexperience
Unfavorable reputation
Obtaining Venture & Growth Capital
Dealing with venture capitalists
If possible, obtain a personal introduction from
someone the investors know well
Identify several prospects; create a market for your
idea by marketing it
Do not stop selling until the money is in the bank.
Let the facts speak for themselves. Be able to deliver
on the claims.
Obtaining Venture & Growth Capital
Due Diligence: A two-way street
DD can take several weeks or months at startup
Involves a painstaking investigation for investors
Obtaining Venture & Growth Capital
Other equity sources
SBA 7(a) Guaranteed Business Loan Program
Small business investment companies
Licensed and loan-funded by SBA
Limited to taking minority shareholder positions
Can invest only 20% of equity capital in any one firm
Common options include long-term loans with stock
options, convertible debentures, straight loans, and
preferred stock
Obtaining Venture & Growth Capital
Other equity sources
Mezzanine capital
Capital that is between senior debt financing and common
stock
Most often, it’s subordinated debt carrying an equity
kicker consisting of warrants or a conversion feature into
common stock
Generally unsecured, with maturity in 5 to 10 years
Can be burdensome in its claims on cash
Subordinated debt often contains covenants relating to
net worth, debt and dividends
Obtaining Venture & Growth Capital
Other equity sources
Private placement investors. Could include:
Dealers, franchisors or wholesalers
Professional investors always on the lookout for a good,
small company in its formative years
Others seek opportunities to buy shares of smaller
growth firms in the expectation that the firms will soon
go public
Attractive to venture capitalists wwho hope to benefit
when the company goes public or when the company is
sold
Obtaining Venture & Growth Capital
Other equity sources
Initial public stock offerings (IPO)
Raises capital through federally registered and
underwritten sales of the company’s shares
More mature companies get better terms at IPO
Obtaining Venture & Growth Capital
Advantages of going public
Raise more capital with less dilution
Improve balance sheet or reduce/eliminate debt
Obtain cash for pursuing other opportunties
Access other capital suppliers and increase
bargaining power
Improve credibility
Achieve liquidity for owners and investors
Create equity incentives for new and existing staff
Obtaining Venture & Growth Capital
Disadvantages of going public
Legal, accounting and administrative costs
Management time, effort and expense is required to
comply with SEC rules and reporting requirements.
Management can become more interested in
maintaining the price of the company’s stock than in
running the company
Liquidity of company stock achieved through a
public offering may be more apparent than real
Obtaining Venture & Growth Capital
Private placement after going public
Can “tide you over” in the event the public turns
sour
SEC Regulation D
Employee stock option plans (ESOPs)
Used by firms with high confidence in the stability
of their future earnings and cash flow. An ESOP is a
program in which the employees become investors
in the company. Tax-qualified benefit plans.