Chapter 2: The Internet 1 Raising Capital New businesses  Five year success rate  Banks  Sources of funding Structure? Security law violations?

Chapter 2: The Internet 2 Raising Capital “Crowd” funding: Companies can raise up to $ 1 million  Investors: Invest up to < $10,000; 10% of income  No need to register securities with SEC/state

Chapter 2: The Internet 3 Private offerings 35 or fewer investors and accredited investors  Accredited investors Assets > $ 1 million (not home) or income > $200,000  35 other investors: must be able to judge merits No registration statement with the SEC needs to be filed

Chapter 2: The Internet 4 Venture capital: financing for new businesses Financing provided in stages Initial financing includes goals  Fail to meet goals, financing ends  Goals met, additional financing provided May be provided by another vc firm

Chapter 2: The Internet 5 Venture capital: financing for new businesses Financing not cheap  Will get large equity position in the company  Often preferred stock Not long-term money. “Exit strategy”  Hope to sell in IPO or when founders are able to get financing to buy them out.

Chapter 2: The Internet 6 Venture capitalists Hope 1 in 10 will be a home run Introductions to “sell” concept Some "hands on"; others provide guidance when they are asked

Chapter 2: The Internet 7 Public offerings Seasoned offering  Reaction of market Why not debt? Signal regarding stock price?

Chapter 2: The Internet 8 Public offerings IPO Must file registration statement  contains financial statements, summary of business and use of financing  Similar to Form 10-K  SEC has 20 days to review the registration statement Doesn't judge merit of offering Only makes sure required disclosure is made Shelf registration: sell during next two years if requirements met

Chapter 2: The Internet 9 Public offerings Prospectus issued to potential investors during registration period Management will do "road shows" for potential institutional investors such as Fidelity After the review period ends, securities can be offered to the public

Chapter 2: The Internet 10 Underpricing IPOs Occurs most often when markets strong Annies IPO at $19, raising $95 million Stock closed first day at $34.65  Company left $15 per share or $75+ million on the table  Recent study: underpricing not a concern Existing owners getting rich, don't mind millions left on the table

Chapter 2: The Internet 11 IPOs: investor’s perspective Difficult for most investors to get their hands on IPO issues  Large investors  Execs of other companies  Politicians Small investors  Able to get shares, IPO that does not do well  Winners curse

Chapter 2: The Internet 12 Underpricing IPOs Google: auction to set IPO price for shares  Then accept offers at that price ($85)  Allow small investors to participate

Chapter 2: The Internet 13 Public offerings Lockup period: stock can not be sold for a period of time  Typically six months (Ferraris > Linked In) Underwriters: syndicate of investment firms shares risk of selling the issue  Discourage flipping  Lead underwriter will price issue Too high, issue may be forced to be withdrawn Too low, company/existing shareholders leaving money on table

Chapter 2: The Internet 14 Costs of raising capital As percent, much higher for small issues Higher for IPOs vs. seasoned equity Higher for equity versus bonds Higher for junk bonds versus investment grade bonds

Chapter 2: The Internet 15 Issuing bonds Often in private placements  Life insurance companies, pension plans and mutual funds