Funding MBAX 6100 Entrepreneurship & Small Business Funding Frank Moyes Leeds School of Business University of Colorado Boulder, Colorado

Funding Funding Your New Venture Next 3 Weeks  This week: Equity & Venture Capital  Next week Other forms of funding  Following week: Negotiating Term Sheets

Funding Today’s Agenda  Equity funding  Venture Capital  Tim Connor, Sequel Venture Partners  Steven Bruny, Aztek Networks  Rob Balgley, Skyetek  Due: Mid-term & entrepreneurship papers  Value Proposition

Funding How Are Going to Fund Your New Venture?  Personal Resources  Friends & family  Debt  Equity  IPO  Non-traditional & grants

Funding Stages of Development  Seed (proof of concept)  Personal  Start-up (set-up production & sales)  Angels  PPO  Early stage (full-scale operations & mkt)  VC  Government

Funding Stages of Development  Second & third stages (expansion)  VC  Financial institutions  Debt  Reinvestment  Exit (harvest)  Bridge  IPO

Funding Equity  Sources  F & F  Angels  Private Placement  Venture Capital  Corporate venture subsidiaries  IPO (Initial Public Offering)  Advantage  Permanent capital  Disadvantages  Give up piece of company (dilution)  Responsibilities to investor  Exit for investor – achieve a return

Funding Venture Capital

Funding Venture Capital  Pool of capital invested in rapidly growing companies  $21.7 billion in 2005 in 2,939 investments  Down from $104 billion & 7,832 deals in 2000  Private Partnerships  General partners – manage  Limited partners – provide funds

Funding What Are the Advantages to Venture Capital?  Can provide lots of money  Greatest value-added money - consulting, mentoring, network  Help build management team  Kick down the door “rolodex”  Good VC’s know there will be problems  Validation of your concept  Know how to exit

Funding What Are Disadvantages of Venture Capital?  Loss of equity, likely control  But, achieve your dream  High maintenance  Long due diligence process  Expensive: attorneys, accountants, consultants  Valuation decision can be very stressful  Majority of investments fail  Founder often “leaves”  Must have common objectives  Exit strategy

Funding VC Decision Making  Deal flow  Less then 2% of deals are funded  1 to 2 new deals per year per partner  Due diligence – in-depth investigation of the venture & you  Syndication  Time frame to do a deal: 3 to 12 months  Entrepreneur decision making  Due diligence  Chemistry is key

Funding Managing VC Portfolio Companies  Objective: invest large amounts of money in high growth, potentially large companies  Specialize in certain industries  A, B, C, & D Rounds of preferred stock  Dry powder  Each round is often staged with milestones  Board of Directors  Hands-on vs. portfolio approach

Funding What Do VC’s Look For?  MANAGEMENT TEAM  Experience  Expertise in industry  Passion  Commitment of CEO  Market potential - very large & high growth  Growth stage of development - VC money has the greatest impact  Proprietary product or service

Funding Control: Why do VC’s Often Wind-up Owning > 50% of a Venture?  Not because want to run company or distrust the management  To achieve a satisfactory return  Ref: BZ-Exhibits 6.1 & 6.2  Valuation

Funding VC Required Return on Investment  Seed 20x  Start-Up 10x  Early Stage 8x  Second Stage 5x  Third Stage 4x  Bridge 3x Return DCF Cash on Cash  80%  60%  50%  40%  30%  25% Bygraves & Zacharakis

Funding What Are the Implications to the Entrepreneur of VC Returns?  The later the stage, the better the deal  The better the management, the better the deal  The quicker the exit, the better the deal

Funding Why people want to be VC’s?  Partnership  General partners  Limited partners  Management fees 2%  Specialize in an industry  Carried interest – 80/20  Series of funds

Funding Value Proposition - 3 Elements  What are the features?  Who is the target market?  What are the benefits?

Funding Value Proposition “XYZ is a_______[describe] company. By its _______[feature(s)], it provides ______ [unique benefit(s)] to ______[target market]”

Funding Simple Value Proposition SST Corporation “SST is a stainless steel toothbrush company. By its one bristle brush made of high tensile stainless steel, it provides an exhilarating tooth cleaning experience to thrill-seeking X-gen consumers”

Funding Simple Value Proposition Dell Computer “Dell Computer sells personal computers to consumers. Our build-to-order manufacturing and customer-direct sales enable us to offer custom built computers at very competitive prices. Our customers get the computer that they have always imagined and save money.”

Funding Simple Value Proposition Vic’s Coffee “Vic’s Coffee is a Boulder based coffee house. Its gourmet coffee, convenient and fast service, provide a welcoming environment for people who want to meet with their friends or a stimulating morning coffee for on-the-go business people.”

Funding Attributes  Performance: durability, quality of materials, defect levels, tolerances, construction, dependability, functional performance (acceleration, nutrition, taste), efficiency, safety, styling, packaging, etc.  Cost: purchase price, quantity discounts, operating costs, repair costs, cost of extras or options, cost of installation, trade in allowance, likely resale value, etc.  Availability: carried by local stores, credit terms, quality of service available from local dealer, delivery time, credit card, on-line transactions, etc.  Service: hours, warrant, guarantee, return/replacement policy, upgrades, maintenance, training, installation, repair service, spare parts, customer support, tech support, training, product design, make to order, level of inventory, quotation response time, lead time, quality certification, employee capabilities, etc.  Environment: location, atmosphere, layout, fixtures, aesthetics, style, sound, lighting, color, etc.

Funding Benefits  Emotional: ambition, power, independence, achievement, ambition, pride of ownership, comfort, love, friendship, security, style, self Improvement, etc.  Social: status, image, popularity with friends or family members, reputation of brand, personal relationships, style, fashionable, etc.  Health: stress, fitness, mental capacity, strength, sex life, quality of life, muse, etc.  Financial: revenue, costs, savings, productivity, pricing, profitability, market share, save time, productivity, etc.  Convenience?  Objective is distinguish between benefits and features, not put into categories