Entrepreneurship Canadian Edition William D Entrepreneurship Canadian Edition William D. Bygrave, Andrew Zacharakis, Sean Wise

FINANCIAL ENTREPRENEURIAL VENTURES WORLDWIDE Chapter 10

Learning Objectives Entrepreneurial Financing for the World’s Poorest Learning Objective 10.1 Describe the financing available for entrepreneurs in underdeveloped countries. Entrepreneurs and Informal Investors Learning Objective 10.2 Describe the relationship between entrepreneurs and informal investors. Venture Capital Learning Objective 10.3 Explain what venture capital is and how it is used by entrepreneurs. Factors Affecting Availability of Financing Learning Objective 10.4 Identify the factors affecting the availability of financing.

Today’s Key Concepts Entrepreneurs and Informal Investors Stages of Finance Calculating Valuation Microfinance Crowdfunding Accelerators vs. Incubators 4Fs Angel vs Venture Capitalists

Why is it cheaper than ever to launch a digital startup? Falling cost of tech entrepreneurs launching products Users  Infrastructure  COGs  COCA 

Startup Financing Cycle

Stages of Finance

Match Stage to Source

Valuation? PostMV = PreMV + Cash Invested Investor Equity = Cash Invested / PostMV Founder Equity = PreMV / PostMV But how do you set PreMV? Value is in the eye of the buyer (not seller) Always ask: We need $X, to hire Y and do Z, which will result in an increase of A and a doubling of B over the next 1X months

Valuation in Action John offers the Dragons 10% of his Startup but wants $250,000. How much is it worth (according to John) before an investment? Dragon 1 wants to invest $100,000 into John’s Startup, but she wants 20%. If the founders agree, what will their PostMV be? Dragon 2 offers John $250,000 on a $2 million PostMV. Is that a better deal?

Informal Investors: 4Fs Four Fs: founders, family, friends, and foolhardy investors.

Angel Investors An angel Investor (a type of informal investor) is an experienced and well-educated professional who invests their own funds in a business or startup. Angel investors often form angel groups or angel networks to share research and pool their capital, as well as to provide advice to their portfolio companies Examples: National Angel Capital Organization, Network of Angel Organizations Ontario, Maple Leaf Angels, Ryerson Angel Network

Informal Investors: Microfinancing Growth in the implementation of microcredit, 1997-2010 Year Number of Institutions Reporting Total Number of Clients Reached Number of 'poorest' clients reported 12/31/97 618 13,478,797 7,600,000 12/31/98 925 20,938,899 12,221,918 12/31/99 1,065 23,555,689 13,779,872 12/31/00 1,567 30,681,107 19,327,451 12/31/01 2,186 54,932,235 26,878,332 12/31/02 2,572 67,606,080 41,594,778 12/31/03 2,931 80,868,343 54,785,433 12/31/04 3,164 92,270,289 66,614,871 12/31/05 3,133 113,261,390 81,949,036 12/31/06 3,316 133,030,913 92,922,574 12/31/07 3,552 154,825,825 106,584,679 12/31/09 3,589 190,135,080 126,220,051 12/31/10 3,652 205,314,502 137,547,441 Source: Maes, J.P. and Reed, L.R. State of the Microcredit Summit Campaign Report 2012. Microcredit Summit Campaign. 2013. p.35. Microfinancing by region, 2010 (in millions) Asia Africa/ Middle East Latin America/ Caribbean Eastern Europe & Central Asia Number of Poorest Families 182.4 79.8 9 3.4 Number Reached by Microfinance 125.5 8.9 2.9 0.13 Percent Coverage 69% 11% 32% 4% Source: Maes, J.P. and Reed, L.R.. State of the Microcredit Summit Campaign Report 2012. Microcredit Summit Campaign, 2012. Page 39.

Informal Investors: Crowdfunding Crowdfunding: a source of financing created to help bring creative projects to life, e.g., Kickstarter Individuals showcase their ideas, prototypes, or concepts online to the entire world in hopes of receiving a donation in return for future benefits from the company These donations eventually add up to the startup capital needed The recipients must meet a set amount of funding within a certain time frame Equity is not given in exchange for donations—donors might receive special discounts or the opportunity for first purchase once the project has come to fruition.

Financial Returns on Informal Investing

Informal Investment vs. Venture Capital

Financing Entrepreneurial Ventures

Economic Benefits of Venture Capital-Backed Companies The economic benefits of venture capital-backed companies—including companies such as Facebook, Google, Microsoft, FedEx, BlackBerry, Tesla Motors, hootsuite—is significant 2000 2010 2000-2010 Annual Growth Jobs 8.7 Million 11.9 Million 2.9% Sales $1.5 Trillion $3.08 Trillion 6.8%

Flow of Venture Capital Figure 10.15

Venture Capital 2.0: Accelerators Incubators typically provide a space for companies to set up a base in. It includes office space, sometimes with co-working facilities. Incubators provide a variety of services, which potentially could include low-cost labour or office space, mentoring and networking opportunities, and access to investors and pre-screened service providers. An incubator is a place where ideas and businesses can develop. E.g., Ryerson University Digital Media Zone An accelerator takes small equity in externally developed ideas in return for small amounts of capital and mentorship. They’re generally truncated into a three to four month program at the end of which the start-ups ‘graduate and present at a DEMO Day. E.g., Ryerson Futures

Venture Capital 2.0: Accelerators 500 Startups AngelPad Capital Factory Founder Institute FounderFuel HighLine LaunchPad LA

What Goes On @ An Accelerator Example: FounderFuel, www.founderfuel.com Location: Montreal Pitch: an accelerator that helps early stage Web, mobile, and SaaS startups raise seed capital Focus: Web, mobile, and SaaS Value Proposition: Provides selected applicants with a $50,000 investment in exchange of 9% equity; the Canada Media Fund will provide an additional non-refundable contribution of $30,000 to the selected applicants, free of equity; selected applicants can be eligible to a $150,000 convertible note from the BDC Program format: Selected applicants participate in a 12-week intensive program involving mentors and experts coaching, networking, and a Demo Day Best Fit Candidate: Startups with big ambitions who want to refine their business, scale it fast, and raise follow-on capital Requirements: Open to teams of two or more people, with at least one co-founder with technical skills.

How Do I Get Into An Accelerator? Canada’s top accelerators receive hundreds of applications, shortlist 10– 5% on average, conduct in-depth interviews and then select 5–10 startups for each cohort Resources: Luke Deering, Matt Cartagena, Chris Dowdeswell, Accelerate: Founder Insights into Accelerator Programs

Where To Go For First Funds? 4Fs Business Plan competitions Crowdfunding Friends and Family Futurepreneur Loan Government Grants Accelerator Program

Case: DayOne What more can the members of the DayOne team do to build credibility and improve their chances of securing the capital they need to implement the business plan? What other options might be considered for raising the funds needed to move the company ahead? Imagine Andrew has approached you as a potential investor. Has DayOne proven the model yet? What are your concerns? Would you invest?

Recap Match the stage with the source Valuation is in the eye of the beholder (buyer) PostMV = PreMV + Cash Invested A small piece of a big pie is greater than a large piece of a small pie Crowdfunding is a viable alternative to Seed VC Accelerators are VC 2.0 and similar to Incubators The cost to launch has dropped 90% since 1999

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