1. Funding a Rapidly Growing Venture
Chapter 17
Funding a Rapidly Growing Venture

2. Learning Objectives Explain the role of the venture capital market
Describe the process associated with the initial public offering
Discuss how to grow with strategic alliances
Explain ways to value a business

3. The Cost and Process of Raising Capital
Raising money takes time
It takes twice as long as expected for money to reach the bank
The chosen financial source many not complete the deal
Entrepreneurs always need backup investors
Second round investors often buy out first round funding sources
“It takes money to make money”

4. The Venture Capital Market
A pool of money managed by professionals
The ability to secure funding depends upon
The status of the venture capital industry
What the entrepreneur brings to the table

5. Figure 17.1: Total U.S. Investment in Billions

6. Figure 17.2: Venture Capital Investment by Industry for 2006

7. Sequence of Events - Securing Venture Capital
Understand the goals/motivations of the venture capitalists
VCs are fundamentally risk averse
Three major stages during which entrepreneurs receive funding
Idea and proof of concept stage
Early growth and transition
Rapid growth

8. Figure 17.3: Funding Stages and Risk

9. Funding Stages and Risk
Venture capitalists scrutinize new opportunities by evaluating:
The market
Management
Technology
Venture capitalists also look at potential for significant growth, risk of failure and the quality of the business plan
Perform due diligence on the venture activity
Venture capitalists invest in growing businesses through the use of debt and equity instruments to achieve long-term appreciation on the investment in years

10. Getting to a Term Sheet Does not guarantee a “done deal”
Lays out the amount of investment the VC firm is willing to consider and the conditions under which it is willing to consider the funding
Entrepreneur not required to accept the term sheet as is

11. Capital Structure Components of an investment deal
Amount of money to be invested
Time and use of the investment monies
Return on investment to investors
Level of risk involved
Provisions of the deal
Equity and debt positions
Anti-dilution provision
Forfeiture provision

12. The Initial Public Offering-IPO
Advantages-disadvantages of going public
Advantages
A big source of interest-free capital
Future option of additional stock offerings
More prestige and marketplace clout
Restricted stock and stock options can be used to attract new employees and reward existing employees
Easier for founders to harvest rewards

13. The Initial Public Offering-IPO (continued)
Disadvantages
Dramatic decline in pre-IPO issuer’s financial condition and significant rise in failure rate post-IPO
Public offering process is expensive
Going public is very time-consuming
All company proceedings become public
Stringent disclosure rules under Sarbanes-Oxley Act
Intense pressure post IPO to perform in the short term

14. Figure 17.4: The IPO Process Simplified

15. Growing Via Strategic Alliances
Collaborative relationship between two or more firms
Intent is to accomplish mutually compatible goals that would be difficult for each to accomplish alone
Advantages of alliances with big companies:
Excellent course of growth capital
Better financial deal for a growing company
Cautions:
Investigate the potential partner carefully
Investigate best business practices
Ensure that benefits will flow in both directions

16. Valuing The Business Financial yardsticks Fair market value
Intrinsic value
Investment value
Going-concern value
Liquidation value
Book value

17. Calculating the Value of a Business (continued)
Non financial yardsticks
The experience level of the management team
Firm’s distribution channels level of innovation
Nature of the company’s relationships in the industry and with customers
Company’s ability to be fast and flexible
Amount/kind of the company’s intellectual property

18. Methods for Valuing a Business
Financial measures
Multiple earnings
Discounting cash flows
Real options model
Venture capital model $