1. Entrepreneurship Canadian Edition William D
Entrepreneurship Canadian Edition William D. Bygrave, Andrew Zacharakis, Sean Wise

2. RAISING MONEY FOR STARTING AND GROWING BUSINESSES
Chapter 11

3. Learning Objectives Bootstrapping New Ventures
Learning Objective 11.1 Explain how entrepreneurs may bootstrap a new venture.
Valuation
Learning Objective 11.2 Describe the methods of valuing a company.
Financing a New Venture
Learning Objective 11.3 Describe ways to finance a new venture.
Harvesting Investments
Learning Objective 11.4 Describe how investors can harvest or recoup their investment in a venture.

4. Today’s Key Concepts Progression of finance
Subjective nature of valuation
Calculating valuation
Six things investors look for
Spectrum of finance
The venture capital cycle
Three ways to harvest an investment
IPO vs. M&A vs. buyback
Inflection points
10 magic slides

5. Progression of Raising Money
Turning to friends & family
Approaching business angels
Raising VC funding
Going public
Being acquired

6. How Much To Raise? Each round of investment will dilute you 20-40%
Ask for enough capital to get you to the next inflection point (e.g. finding MVP, first sales, scaling up, break even, etc.)

7. Inflection Points Obtaining IP rights First pilot Multiple pilots
Getting your first paying customer
Standardizing your offering
Having enough cash flow to start paying yourself
When your recurring revenue equals your monthly fixed expenses
Entering a new territory with current product
Entering a new product into a the current territory

8. The Investor Slidedeck
The same list that appears in the business plan, the lean startup canvas and the business model canvas

9. The 10/20/30 Rule
Guy Kawasaki 10/20/30 Rule of Presentations:
10 slides
20 minutes
30 point font

10. What Investors Listen For:
Reasons to say ‘no’
Anything that shows this isn’t a good investment, e.g.,
Unsophisticated founders
Unrealistic objectives
Lack of traction

11. Value Is in The Eye of the Beholder
ROLEX: Gentleman’s stainless steel Rolex Oyster Perpetual Datejust Chronometer bracelet watch, circa 1987
Limited Edition
Worn by Michael Douglas for his role in the movie Wall Street

12. Valuation is Art not Science
Depends on:
Company factors
Investor factors
Market Factors
Is subjective not objective
Is not the key to investment (the other terms matter too!)

13. Basic Ways of Evaluating a Business
Earning-capitalization valuation
Present value of future cash flows
Market-comparable valuation
Asset-based valuation
Valuation is not an exact science. Each of the above methods may get to vastly different monetary values of a company.

14. Valuation? PostMV = PreMV + Cash Invested
Investor Equity = Cash Invested / PostMV
Founder Equity = PreMV / PostMV
But how do you set PreMV?
Value is in the eye of the buyer (not seller)
Always ask:
We need $X, to hire Y and do Z, which will result in an increase of A and a doubling of B over the next 1X months

15. Valuation in Action
John offers the Dragons 10% of his Startup but wants $250,000. How much is it worth (according to John) before an investment?
Dragon 1 wants to invest $100,000 into John’s Startup, but she wants 20%. If the founders agree, what will their PostMV be?
Dragon 2 offers John $250,000 on a $2 million PostMV, is that a better deal?

16. Income-Based Valuation Methods
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

17. Asset-Based Valuation Methods
Fair market value of assets
Liquidation Value
Adjusted book value
Replacement value

18. Reduced-rate services
External Financing
External Financing
Vendor financing
Reduced rent
Customer financing
Leased equipment
Federal programs
Reduced-rate services

19. Finding Business Angels
Formal angel groups
Pros: Easy to find
Cons: May charge for the privilege to present or submit a business plan;
Limited number (several thousand)
2. Individual angels
Pros: Several hundred
thousand available
Cons: Hard to find and
approach; must identify prospects and present

20. Types of Business Angels
Entrepreneurial Angels
May be valuable advisors
Corporate Angels
May take over or ruin company
Professional Angels
Silent partners
Enthusiast Angels
Passive investors
Micromanagement Angels
Intervene in the business

21. Top 6 Investment Factors For VCs
Management team
Target market
Product/ service
Competitive positioning
Financial return
Business plan
VCs may help
you hire a Team
Fragmented,
accessible, and growing
Competently written
business plan
7X return in 5 years
Better and
protected
Open distribution channels

22. Why All VC Investments Must Be Stars On Day One?
Venture capitalist’s job is to generate returns for their investors
Use a Portfolio Approach
So the best must make up for the worse
Outcomes
ROI
Percentage of Portfolio
Stars
5-10 x
10-15%
Zombies
1-2 x
50%
Dogs
35-40%

23. VC The VC Firm Cycle Raise Fund Harvest Vest Fund Returns Grow
Ventures
Harvest
Returns

24. How to Assess a VC Value added Patience Board of directors
Availability
Deep Pockets
Added Value
Value added Patience
Deep pockets Accessibility
Board of
directors

25. Harvesting (Exiting) Investments
Initial Public Offering (IPO)
An acquisition
A buyback of the investor’s stock
Very Unlikely

26. Ideal Candidates for Venture Capital
Founder has significant management and entrepreneurial experience with demonstrated ability to manage a rapidly growing company in a fast-paced industry segment.
There are no dominant competitors.
The company has satisfied customers.
The company projects sales of $50 million in five years.
Founders is recognized as a star in the industry Vice
The gross income margin is expected to be better than 60%, with a net income margin better than 10%.
Members of the top management team have worked together before.
The amount of capital needed in total is between $5 million and $10 million.
The product/service is 10x better than those of its competitors.
The company has the potential to go public in five years.
Intellectual capital such as patents and copyrights is protected.
Potential return of 7x or higher.
The market segment is fragmented, growing rapidly, and expected to be big.
IRR of 60% or higher.

27. Upsides Downsides Pros and Cons of an IPO Financing High expenses
Follow-on financing
Public fishbowl
Realizing prior investments
Short-term horizon
Prestige and visibility
Post-IPO compliance costs
Compensation for employees
Management’s time
Acquiring other companies
Takeover target
Employee disenchantment

28. Advantages/Disadvantages of an Acquisition (part 1)
Founder & CEO
Selling a “baby” can be traumatic
Management
Executives can stay focused on growing the company
Company
The buyer usually has deep pockets
Investors
Investors easily exit their investment

29. Advantages/Disadvantages of an Acquisition (part 2)
Converting Stock
Entrepreneur & employees get cash right away
Employment Agreement
Key employees may need to sign a non-compete
Culture
Could be a clash of cultures
Costs
Expenses are lower than an IPO

30. Case: Red Flag Deals
Compare Derek’s two options, raising external funding or exit and sell:
What were the key points to consider?
How would you decide which option to take?
If you were in Derek’s position, would you have taken venture capital? Why? Why not?
If you were in Derek’s position, would you have made the decision to sell, knowing that there was potential to grow with third party assistance?
Post sale, would you have stayed on with Yellow Pages Group to continue working on Red Flag Deals?

31. Recap
Sophisticated investment money requires a future harvest time (return on investment)
Harvest can be acquisitions or public offerings
Investors want to know entrepreneur will remain on with the company after harvest
You can only raise the next round after hitting the milestones set out in the last raise
You can only raise enroute to an inflection point

32. COPYRIGHT
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