1. Chapter 10 Raising Money for Starting and Growing Businesses

2. Ways of raising money Turning to family and friends Approaching
business angels
Going Public
Looking for
Venture Capital
Being Acquired

3. Four basic ways of evaluating a business
Earning-capitalization valuation
Present value of future cash flows
Market-comparable valuation
Asset-based valuation

4. 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

5. Asset-based Valuation
Modified (adjusted) book value
Replacement value
Liquidation value

6. External Financing

7. Finding business angels
Formal angel groups
Pros: Easy to find
Cons: May charge you for presentation or even business plan submission;
Few in number (several thousand)
2. Individual angels
Pros: Several hundred thousand
Cons: Hard to find and approach – the best way is through your network

8. Types of Business Angels
Can be invaluable
advisors and mentors
Entrepreneurial Angels
Corporate angels
Professional Angels
Enthusiast Angels
Micromanagement Angels
Can take over or ruin your
company
Silent partners
Passive investors
Intervene in the business

9. Top 6 factors according to VCs
Fragmented,
accessible, and
growing rapidly
VCs may help
you hire a Team
Competent written
business plan
Better and
protected
No dominance, distribution channels are open
7X return in 5 years

10. Assessing a VC Value added Patience Board of directors
Deep pockets Accessibility
Board of
directors

11. Harvesting (exiting) investments
Initial Public Offering (IPO)
An acquisition
A buyback of the investor’s stock
Very Unlikely

12. Pros and Cons of an IPO Upsides Downsides Financing High Expenses
Follow-On Financing
Public Fish Bowl
Realizing Prior Investments
Short-Term Time Horizon
Prestige and Visibility
Post-IPO Compliance Costs
Compensation for Employees
Management’s Time
Acquiring Other Companies
Takeover Target
Employee Disenchantment

13. Advantages and disadvantages of an acquisition for the seller
Management
Founder
and CEO
Company
Investors
Converting
stock
Employment
Agreement
Culture
Expenses and
Commissions
Managers can
stay focused on
building the
company
Selling a “baby”
can be
traumatic
The buyer
usually has
big pockets
Investors easily
exit their
investments
If it is a cash
transaction, the
entrepreneurs
and employees
get cash
immediately
Key employees
sign
non-competing
agreement
There is a risk
there will be a
clash of cultures
The expenses are
lower for an acquisition
than for an IPO