1 Andy Guo New Ventures Financing

2 Andy Guo Sources of Financing Own Money/Customers/Suppliers – “ bootstrapping ” l Friends and family “ Angels ” and sophisticated angels l Early Stage / Seed VC l Traditional VC l Debt Financing / Banks l Corporate partners or strategic investors l Public Capital Markets

3 Andy Guo Matching Need with Type of Capital l Key is the duration the capital will be required and the risk associated with it  The longer the term and the riskier, the closer to equity  The shorter term and less risk, the closer to debt

4 Andy Guo Some Alternative Sources of Financing

5 Andy Guo Pluses and Minuses 5

6 Andy Guo Questions to Ask What are the venture ’ s MONTHLY cash flows? How much cash is required in total – how deep is the trough? l What size bites do we want it in? l What are the particular risks and rewards and who has an appetite for them? l How can the Reward / Risk ratio be managed? l What returns will investors expect?

7 Andy Guo More Questions l What terms matter other than price, and am I willing to live with these terms ? l What alternatives do I have? l What do I need other than $$, and what do they bring other than $$? l Likely exit routes / liquidity path? l What will the returns look like for me after I give up what will be required?

8 Andy Guo Bootstrapping vs. Taking Other People’s Money l Imposes a significant legal and moral burden upon the entrepreneur Imposes the requirement for some kind of “ exit ” or “ liquidity ” event Much simpler / easier / better if the business can be started w/ the entrepreneur ’ s own $$ and grown w/ internally generated funds l But, often not possible for high potential ventures

9 Andy Guo F&F & Angels l Individual investors often invest for some reason other than pure cash return What are their reasons: a + or – for you l Managing info flows is key

10 Andy Guo Venture Capital Require probability of exceptional returns – swinging for the fences l Need to put large amounts of capital to work High stakes – majority of founders do not make it

11 Andy Guo Corporate Partners l Often want something other than a pure financial return This can be a + or – depending upon whether their objectives line up w/ entrepreneur ’ s / venture ’ s l Even if they appear to be aligned at the start, can easily change

12 Andy Guo Banks l Will always look to cash flow first l Then to corporation assets l Then to personal assets, guarantees You can reach a point where it is in their interests to pull the plug – their last chance to get out whole – will not be in the equity holders ’ best interests

13 Andy Guo LBO Value Creation Value of the firm (EBITDA Multiple) Value of Debt $ Time Value of the Equity

14 Andy Guo Cumulative Cash Flow in $ Time The Cash Flow Cycle for a Venture Burn Rate Date of First Cash Flow Positive Maximum Financing Needs Date of Cash Breakeven

15 Andy Guo Risk/Reward Management Probability of Occurrence Expected Value -100%+25%+100% Return on Investment Probability of Losing 100% Goal 1 Goal 2

16 Andy Guo Free Cash Flow and The Choice of Burn Rates

17 Andy Guo Staged Capital Commitment, Risk and Marketplace Information CASH FLOW TIME SeedStage 1Stage 2Stage 3 IPO/Partial Sale/Recap Seed. Intense Customer Interviews ……Segmentation/ Value Stage 1. Construction of Prototype or Simulation……Verification Stage 2. Beta Site Selection & Installation……Influence Gathering Stage 3. Broad Customer Interviews & Targeting…..Niche v. Mass Market Then Accumulation of Target Segment Reference Account... References that matter to the type of Customers and Partners you need…the Recurring Requirements are Interviewing (Discovery)….and Qualification (Product Capability v. Customer Need)..and Selling What You Have

18 Andy Guo Reduced Uncertainty Over Time CASH FLOW TIME Access to Debt Capital Staged Capital Commitment

19 Andy Guo Impact of Leverage on Equity Risk Returns Probability of outcome Distribution of Total Value (Debt and Equity) Distribution of Total Equity Value