Chapter 10 Raising Money for Starting and Growing Businesses

Ways of raising money Turning to family and friends Approaching business angels Going Public Looking for Venture Capital Being Acquired

Four basic ways of evaluating a business Earning-capitalization valuation Present value of future cash flows Market-comparable valuation Asset-based valuation

Earnings Capitalization Method: Company value = Net Income/ Capitalization Rate Present Value of Future Cash Flows: PV = PV of the future free CF + the residual (terminal) value of the firm Market-comparable Valuation (Multiple of earnings): Total Equity Valuation = NI x P/E

Asset-based Valuation Modified (adjusted) book value Replacement value Liquidation value

External Financing

Finding business angels Formal angel groups Pros: Easy to find Cons: May charge you for presentation or even business plan submission; Few in number (several thousand) 2. Individual angels Pros: Several hundred thousand Cons: Hard to find and approach – the best way is through your network

Types of Business Angels Can be invaluable advisors and mentors Entrepreneurial Angels Corporate angels Professional Angels Enthusiast Angels Micromanagement Angels Can take over or ruin your company Silent partners Passive investors Intervene in the business

Top 6 factors according to VCs Fragmented, accessible, and growing rapidly VCs may help you hire a Team Competent written business plan Better and protected No dominance, distribution channels are open 7X return in 5 years

Assessing a VC Value added Patience Board of directors Deep pockets Accessibility Board of directors

Harvesting (exiting) investments Initial Public Offering (IPO) An acquisition A buyback of the investor’s stock Very Unlikely

Pros and Cons of an IPO Upsides Downsides Financing High Expenses Follow-On Financing Public Fish Bowl Realizing Prior Investments Short-Term Time Horizon Prestige and Visibility Post-IPO Compliance Costs Compensation for Employees Management’s Time Acquiring Other Companies Takeover Target Employee Disenchantment

Advantages and disadvantages of an acquisition for the seller Management Founder and CEO Company Investors Converting stock Employment Agreement Culture Expenses and Commissions Managers can stay focused on building the company Selling a “baby” can be traumatic The buyer usually has big pockets Investors easily exit their investments If it is a cash transaction, the entrepreneurs and employees get cash immediately Key employees sign non-competing agreement There is a risk there will be a clash of cultures The expenses are lower for an acquisition than for an IPO