1. Lecture 8 $$$$$ Raising Money $$$$$$ Debt and Equity for a New Company Ken Pickar Lecture Feb 1, 2011

2. HW for today What is the value you provide your customers? How will you capture that value (Business Model)? Name at least 2. How will you price your product(s)? How will your value capture be sustainable for 5 years?

3. Thoughts Feb 24 Fast Pitch LA we go there instead of class? Midterm Feb 10 Coaching Steve Streit lunch this Thursday Tech Coast Angels Feb 18th

4. February 24, 2011 UCLA Anderson School of Management - Korn Hall 2:00-3:00Registration 3:00-3:45 Getting Funded In Today's Market Venture capital and angel investors will discuss the current funding environment for start up companies.Jim Andelman – Rincon Venture Partners William Quigley – Clearstone Venture Partners Eric Manlunas – Frontera Group Scott Sangster – President, Tech Coast Angels - Los Angeles 3:45-4:30 2011 Start Up Business Climate TCA porfolio CEOs will discuss the early stage business climate in 2011. Companies include LaughStub, YouMail, HitFix, CosNet and Others. 4:30-5:00 Break 5:00-5:30 Fireside chat with Mike Jones, CEO, 5:30-7:00 Fast Pitch Competition CEOs of 8-10 of Southern California’s most promising startups will have 90 seconds to pitch their companies to a panel of seasoned judges. Pitches will be evaluated for fundability and presentation quality. The winners will be invited to present at a Tech Coast Angels screening session and be considered for funding. 7:00-9:00 Light Dinner and Networking Network with hundreds of investors, entrepreneurs and other industry experts over a light dinner, wine and assorted beverages. Meet Tech Coast Angels, other angel investors and venture capitalists.

5. Midterm Next week, Thursday, February 10 Submit presentation 5 pages (pdf) and 10 minute presentation (pdf of PPT) Continue Market interviews!! You should have made significant progress by next week! Contents 1.Updated Market Analysis. (50%) Show references 1.Who is your customer? How big is he? How fast is he growing? What intense pain is this customer experiencing? Be as precise as possible in identifying customer. 2.How big is the market segment? How fast is it growing? Be as precise as possible 2. Business model (20%) How will you make money? 3. What was the biggest surprise(s) you encountered in your research so far (10%) 4. Key issues to be resolved for the Final (20%) e.g., untested hypotheses. List as many major uncertainties as you can and some thoughts on how you will address them.

6. 6 What other product issues drive companies besides profits?

7. For a new company Some financial principles Cash flow is typically a negative quantity Monthly Negative Cash Flow= Burn Rate Central riveting thought Cash in Bank/Burn Rate = number of months until you are out of business

8. For a new company Some financial principles Cash flow is typically a negative quantity Monthly Negative Cash Flow= Born Rate Central riveting thought Cash in Bank/Burn Rate = number of months until you are out of business The horror!

9. Cash Profile Time (months) +$ Initial investment Cash BurnSecond investment Product takes off “Hockey stick” Start here

10. For a new company Some financial principles “Cash is King” – Think cheap Need to lower burn rate? – No office space – Smallest team you can use – Outsourcing – Ebay – Buy/make?? – Smaller protoypes – Low inventory – Lower salary – Zero salary

11. For a new company Some financial principles “Cash is King” – Think cheap Need to lower burn rate? – Lease rather than buy – Sell stuff – Fire people or hire less – Keep your day job – Barter for space, services – Pay in stock

12. Questions When do you raise new money? Debt vs Equity – What’s the difference?

13. Founder’s financing concern for a new company Keep Control Need $ Issues Degree of Desperation Need for advice, contacts and mentoring Valuation Reserve for the future

14. Existential Questions What is your reason for going into business? Do you need outside financing? Are you a business with a potential “liquidity event” or are you a “lifestyle business”? How important is control to you? What is your minimum burn rate How long until you are “cash flow neutral”?

15. Start-up Rule CEO looks for financing all the time

16. Where can you get money?

17. Summary Categories of places to get money 1.Need Operating funding prior to product sales 2.Debt 3.Equity

18. Plus and Minus of Debt or Equity Debt + More control No sharing of success Fixed interest rate (predictable) Big motivator Tax advantage Debt – Affects cash flow Reduces profits Have to pay good times or bad Equity + Easier To begin with Helpful (?) partner Motivator Validates model Equity - Share upside Loss of control

19. 1. Operating funding SBIRs (Small Business Innovation Research) Research Contracts – Feds – State – Corporate partner – Customer – Supplier Barter – Rent – Professional services – What else? “Sweat” Equity Free services Part-time consulting

20. 2. Debt- Sources of Funds Short term loans Securing a succession of small loans can help you cover expenses while building revenues Personal Credit They're not just for car loans and home mortgages. Now credit unions are making business loans. Credit Cards Home Equity Assuming you have any P urchase orders as entry-level collateral SBA Loans Private Loan Guarantees Find an investor to guarantee your loan.

21. Debt (continued) Asset-Based Loans Use your assets—like accounts receivable and inventory—to help you land funding. Equipment Leasing. Inventory-based lines of credit Royalty Financing Get advance against future sales.

22. Debt Sources Credit Unions Community Development organizations Home Equity Subordinated Debt Warrants

23. 3. Equity Sources Self Funded Corporation Outside Capital Sources – Seed (10-100K) Friends, Family and Fools –Angel (250K- 1M) –VC (2-10M) –Mezzanine (50M) –Liquidity event (500M- ? ) IPO Acquisition

24. How do you trade-off ownership for capitalization? Before funding, you owe 100% of the company Assume you would like to raise money. How do you calculate who owns what after the money is raised? Ownership before Ownership after Pre-money2M100%67% Angel Investment 1.0M33% Post Money3.0M100%

25. A round Pre-money2M (how is this determined?) Angel invest1M (Why this amount?) Total3M (Valuation after A Round) Congratulations (?) 1. You have lost 1/3 of your company. 2. You have added strangers to your Board. 3. Well, at least you have majority ownership 4. Your company is worth 3M of which your share is 2M. This is the best measure of a companies worth. What are others?

26. How to determine Pre money valuation Some Factors –IP protection –Market addressed (Validated?) –Management Team –Net present value of future profits –Return on investment –What else?

27. How to determine Pre money valuation Some Factors –IP protection –Market addressed (Validated?) –Management Team –Net present value of future profits –Return on investment –What else? Market for start-ups!

28. How much do I need? Usually more than you think –Time=money –Excessive optimism Market development Hire people Murphy’s Law –Leverage all sources –Never stop –Allow 6 + months to raise money

29. I need more money to grow (or to survive) B Round Pre-money10M (how is this determined?) VC invest5M (Why this amount?) Total15M (Valuation after B Round) Congratulations (?) 1. Your company is now worth 15m 2. You have added new strangers to your Board. 3. How much do you own?

30. Ownership after B round You own (66%) (10M) (66%)= 44% Angels own(33%) (10M) (66%)= 22% VC owns(33%) 15M= 33% Bad news: You’ve lost control! Good news: Your investment is now (44%)(15M) =6.6M (Up round. What is the alternative?) Bad News: This investment is illiquid, i.e. there is no market to convert to cash

31. And so it goes... Until –Walking wounded –RIP –Life style company –Acquisition –IPO

32. Projections In Business Plan, need to project income and cash flow statements ~ 5 years We will discuss this in a future lecture

33. Conclusion Financing Decision determines what kind of company you will build