Startup Financing Greg Adolphe-Nazaire Dalhousie University

Why Startups? Despite what is commonly thought, large corporations are not the main job providers in many countries but rather small and medium enterprises (SMEs)

small and medium-sized enterprises There are 28.8M SMEs in the US They represent : 99.9% of total businesses 97.7% of exporting firms($440 billion in exports) 63% of net new jobs created. 48% of the private sector employees 99.7 % of firms with paid employees 98.5 % of employers in high-tech industries SMEs created 2.4 Million jobs two years following the great recession while large corporations were squandering Source: SBA, Forbes

small and medium-sized enterprises There are 1.1 million SMEs in Canada They represent: 99.9% of total businesses 90% of exporting firms 63% of net new jobs. 69.7% of the private sector employees Source: BDC, Innovation, Science and Economic Development Canada

Startups ( Some hard facts) In both Canada and the US the average startup has a 50% chance of surviving beyond 5 years. Why? Costs of capital Heavy regulatory environment Tax Labour costs Unattractiveness to highly skilled talents Lack of Liquidity

Costs of Capital: The long road to financing In average one third of startups start with less than $10,000 while 88% start with a maximum of $250,000. Although, the amount is not considerable, finding financing constitutes one of the biggest hurdles to entrepreneurs. They tend to rely on friends, family, and …fools (3 Fs). Why?

Costs of Capital: The long road to financing Although, traditional banking institutions provide 70 % of businesses credit, they won’t go near a startup because of the uncertainty.

Costs of Capital: The long road to financing From a banking standpoint a business has to qualify for the 5 Cs Character Capacity Capital Collateral Conditions

Financing Ecosystem Different Types of Primary Financial Intermediaries Commercial banks (loans, trade finance) Credit Unions (Term loan) Investments banks( Equity, Bonds) Business development agencies(Equity and Term loan) Venture Capital(Equity and Convertible Notes or Bonds)

Financing Ecosystem Venture Capital Like any financial institutions VCs mobilize funds from savers to entrepreneurs but focus on emerging companies and cater to investors with low aversion to risk . They target projects seeking substantial funds for the first time but don’t qualify for standard credit criteria such as IT, life Science, IoT or renwable technologies. Whether the fund focuses on early or late stage, VC firms go where no conventional banking institutions would. VCs fill the uncertainty gap and attenuate the asymmetric information that is prevalent with startups.

Venture funds can be classified as follows: Financing Ecosystem Venture funds can be classified as follows: Private independent venture funds Captive funds (GV or MV) Government agencies or Crown Corporations; Business angels networks

What is the value proposition? Financing Ecosystem What are they looking for? Highly innovative concepts What is the market? What is the size? How do you access the market? And how fast? Competitive positioning Scalability Flexibility Great management team Proactivity What is the business model? What is the value proposition?

Financing Ecosystem Why is the process different from a traditional bank? Information highly asymmetric and risk much higher than usual

The process Exit Sourcing First Contact Screening process   First Contact Sourcing Screening process Due Diligence Deal Structuring Monitor/ Mentor Value Exit

Equity and personally guaranteed loans Series C and Mezzanine debts VC Funding Cycle Equity and personally guaranteed loans Series A or Frist round Late Stage Funding Series C and Mezzanine debts 3Fs, Grant, Gov Agencies Early Stage Later stage IPO, M&A, Integration Break even Growth/ Profit/ Loss Valley of Death Expansion Exit Series B

The Exit Venture Capital have a multitude exit options : IPO Buyback Mergers and Acquisitions Sale to other strategic investor for synergy

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