RAISING MONEY FOR STARTING AND GROWING BUSINESSES CHAPTER 10 Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, ©

Progression of Raising Money Turning to friends & family Approaching business angels Raising VC funding Going public Being acquired

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Basic Ways of Evaluating a Business  Earning-capitalization valuation  Present value of future cash flows  Market-comparable valuation  Asset-based valuation Valuation is not an exact science. Each of the above methods may get to vastly different monetary values of a company.

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © 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 Income-based Valuation Methods

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Asset-based Valuation Methods Fair market value of assets Liquidation Value Adjusted book value Replacement value

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © External Financing Vendor financing Reduced rent Customer financing Leased equipment Federal programs Reduced- rate services

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Finding Business Angels 1.F ORMAL ANGEL GROUPS Pros: Easy to find Cons: May charge for the privilege to present or submit a business plan; Limited number (several thousand) 2. I NDIVIDUAL ANGELS Pros: Several hundred thousand available Cons: Hard to find and approach; must to indentify prospects and present

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Types of Business Angels Entrepreneurial Angels May be valuable advisors Corporate Angels May take over or ruin company Professional Angels Silent partners Enthusiast Angels Passive investors Micromanagement Angels Intervene in the business

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Top 6 Investment Factors For VCs Management team Target market Product/ser vice Competitive positioning Financial return Business plan VCs may help you hire a Team Fragmented, accessible, and growing Better and protected Open distribution channels 7X return in 5 years Competent written business plan

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © How to Assess a VC Value added Patience Deep pockets Accessibility Board of directors Board of Directors Patience Availability Deep Pockets Added Value

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Harvesting (exiting) Investments  Initial Public Offering (IPO)  An acquisition  A buyback of the investor’s stock Very Unlikely

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Pros and Cons of an IPO UpsidesDownsides FinancingsHigh expenses Follow-on financingPublic fishbowl Realizing prior investmentsShort-term horizon Prestige and visibilityPost-IPO compliance costs Compensation for employeesManagement’s time Acquiring other companiesTakeover target Employee disenchantment

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Advantages/Disadvantages of an Acquisition (part 1) Founder & CEO Selling a “baby” can be traumatic Management Executives can stay focused on growing the company Company The buyer usually has deep pockets Investors Investors easily exit their investment

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Advantages/Disadvantages of an Acquisition (part 2) Converting Stock Entrepreneur & employees get cash right away Culture Could be a clash of cultures Employment Agreement Key employees may need to sign a non- compete Costs Expenses are lower than an IPO

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, © Recap  Sophisticated investment money requires a future harvest time (return on investment)  Harvest can be acquisitions or public offerings  Investors want to know entrepreneur will remain on with the company after harvest