Entrepreneurship I Class #3 Financing the Venture

9/19/012 Cash is king Cash flow is queen

9/19/013 Timing When do you look for cash? –More cash vs. less cash –Cash sooner vs. later –Less risky cash vs. more risky At least 6 months to raise capital Balance between cash needs and dilution

9/19/014

5 Types of Financing Debt Equity Variations – convertible debt Advances on product sales Technical development (partner)

9/19/016 First Step Credit cards Family loans/investment Partnerships –customers –suppliers –joint venture –corporate

9/19/017 Stages Startup capital Seed funding – often angels (individuals) Early stage financing (VC): –First round – series A –Development stage – second round, series B –Expansion stage – third round, series C –Growth stage – Series D, mezzanine financing Private placements Public offerings – IPO

9/19/018 Stock classes Common stock Preferred stock Convertible debenture Loan with warrants

9/19/019 Venture Capital 5-10x return 1 out of 10 are hits Invest at least $2mm Change the world, disruptive technologies Industry focus Physical location is important Hard to get Business plan and presentation Founder/management is key Large = $500mm

9/19/0110 VC funds Cash pooled by pension & endowment funds and wealthy individuals Expect returns of 50-60% on high risk investments About 7% of these investments account for 60% of the profits One third results in partial or total loss Each project must represent a home run

9/19/0111 VC continued Large markets > $100 mm Companies worth $1b in sales Dominated by popular industry (software, internet, bio) Arthur Rock limits his investments to those that can “change the world” VC dollars have quintupled from $.5b in 1990 to $12b in 1997 to $100b in 2000 $8.2b invested in 2 nd qtr 2001 (669 companies)

9/19/0112 More than 30% decline from lass year Silicon Valley is #1 in number of deals and dollars –The single greatest creation of legal wealth, says John Doerr New England, then the Southeast, Texas, then DC area Communications & networking = #1, then software, consumer and business services, information services, biopharmaceuticals… Decline in early stage financings and increase in later stage financings (more money in fewer deals)

9/19/0113 Pittsburgh VC Local firms include: Adams Capital, Birchmere, Hillman, Mellon, PNC, and Redleaf Birchmere and Adams are second funds Local investments plus out of town

9/19/0114 Challenges with VC Funding VC money is hard to get Early stage money is even harder Must have an introduction Importance is founders not the idea Good business plan Solid strategy for entering the market and growth Not usually seed capital Investments of ~ $2m

9/19/0115 Remember... Value added The earlier you get VC funding, the more you give away –Management team experience –Risk –Reward

9/19/0116 Angels Private offering is viable alternative 30-40% of companies end up getting private equity funding $5-10b invested annually in 20-30K companies $20-50K is typical Many are entrepreneurs who want to help and invest in other entrepreneurs

9/19/0117 More on Angels Individuals and syndicates –Private investors group –Band of angels May take considerable equity May try to dominate venture Don’t like it if you miss profit/sales goals

9/19/0118 Remember... Finding angels can be hard Tremendous value added –knowledge of markets and technologies –contacts –strategies Fees of investment bankers & attorneys may need to be paid regardless of success

9/19/0119 Mind set Operational Breakeven Hi value Crack team Check growth Cash vs profits Credit Bootstrapping

9/19/0120 Bootstrapping Different mind set –resource utilization Get operational quickly Quick breakeven, cash generating projects Short term focus vs. long term growth Offer high value products or services

9/19/0121 Bootstrapping continued Forget about the crack team Keep growth in check Focus on cash, not on profits, market share Cultivate banks (line of credit)

9/19/0122 Exit Strategies Sale or merger IPO Transfer of ownership

9/19/0123 So, There’s a lot of good ideas There’s a lot of money There’s more money than good ideas There’s only a few great opportunities Those get financed