1. 18 Summary Sources of Capital
Capital is to the progress of society what gas is to a car.
James Truslow Adams
Summary
What are the sources of capital that a new venture can use to finance the start and growth of its company?
Entrepreneurs can estimate the capital required for their new business by reviewing the financial projections they prepare using the methods detailed in Chapter 17. Typically, several stages of investment will be required over the life of the business.
Chapter 18: Summary
Technology Ventures: From Idea to Enterprise

2. 18 Sources of Capital Idealized cash flow diagram for a new enterprise
*Burn rate of $100K per month for the first 20 month.
Chapter 18: Figure 18.1
Technology Ventures: From Idea to Enterprise

3. Sources of Capital 18
Professional investors of the think of an opportunity as OPTIONS.
OPTIONS may be defined as rights but not obligations to take some actions in the future.
Mathematical model of venture investment.
Real Option: the right to invest in (or purchase) a real asset (a new start-up firm) at a future date.
V = IV + OV
IV = Intrinsic Value (Economic Capital)
OV = Option Value (Strategic Capital)
Chapter 18: Real Option
Technology Ventures: From Idea to Enterprise

4. The Value of A Real Option Based on Four Factors
Sources of Capital 18
The Value of A Real Option Based on Four Factors
Increases with the level of uncertainty measured by the standard deviation σ.
Increases with the length of time, T, the person holding the option has to decide whether or not to exercise it.
Increases with the ratio of the current stock price, P, to the exercise price, X. The ratio is P/X.
Increases with the discount rate, r.
Chapter 18: Table 18.2 – value of a real option
Technology Ventures: From Idea to Enterprise

5. 18 Sources of Capital Sources of Capital Founders Family Friends
Small Business Investment Companies (SBIC)
Small Business Innovation Research (SBIR)
Professional Investors — Angels
Venture Capitalists
Banks
Leasing Companies
Established Companies
Public Stock Offering
Government Grants and Credits
Customer Prepayments
Pension Funds
Insurance Companies
Chapter 18: Table 18.3 – Sources of capital
Technology Ventures: From Idea to Enterprise

6. Sources of Capital 18
Comparison of major selected sources of growth capital
Chapter 18: Table 18.4 – sources of growth capital
Technology Ventures: From Idea to Enterprise

7. Sources of Capital 18
Four financial steps in building a successful firm.
Chapter 18: Figure 18.2
Technology Ventures: From Idea to Enterprise

8. Sources of Capital 18
Bootstrap Financing: to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family, and friends.
Chapter 18: Bootstrap Financing
Technology Ventures: From Idea to Enterprise

9. Sources of Capital 18
Advantages and disadvantages of bootstrap financing
Advantages
Disadvantages
Low pressure on valuation
Easy terms on ownership
Control by founders
Little time spent on finding investors
Unable to fund growth phase
Lack of funding commitment for future
Loss of advice from professional investors
Chapter 18: Table 18.4
Technology Ventures: From Idea to Enterprise

10. Sources of Capital 18
Grants from such organizations as SBIR and STTR can be used to support small businesses, especially in industries in which the technical challenge is the primary risk.
Chapter 18: Bootstrap Financing
Technology Ventures: From Idea to Enterprise

11. Sources of Capital 18
Angels are wealthy individuals, usually experienced entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures.
Chapter 18: Angels
Technology Ventures: From Idea to Enterprise

12. 18 Sources of Capital Criteria for Angel Investments
The New Venture is/has:
Within the industry that the angel has experience.
Located within a few hours driving distance
Recommended by trusted business associates
Entrepreneurs with attractive personal characteristics such as integrity and coach-ability.
Good market and growth potential for the opportunity.
Seeking an investment of $100,000 to $1 million and offers minority ownership, less than 40%
Chapter 18: Table 18.5
Technology Ventures: From Idea to Enterprise

13. Sources of Capital 18
Venture capital is a source of funds for new ventures that is managed by investment professionals on behalf of the investors in the venture capital fund.
Chapter 18: Venture Capital
Technology Ventures: From Idea to Enterprise

14. The Risk and Reward Profile for Various Investments
Sources of Capital 18
The Risk and Reward Profile for Various Investments
Chapter 18: Figure 18.3
Technology Ventures: From Idea to Enterprise

15. Sources of Capital 18
Characteristics of An Attractive Venture Capital Investment
Potential to Become a Leading Firm in a High Growth Industry with few competitors.
Highly Competent and Committed Management Team and High Human Capital (Talent).
Strong competitive Abilities and a Sustainable Competitive Advantage.
Viable Exit or Harvest Strategy.
Reasonable Valuation of the New Venture.
Outstanding Opportunity.
Founders Capital Invested in the Venture.
Recognizes Competitors and Has a Solid Competitive Strategy.
A sound business plan showing how cash flow turns positive within a few years.
Demonstrated progress on the product design and good sales potential.
Chapter 18: Table 18.9
Technology Ventures: From Idea to Enterprise

16. Sources of Capital 18
The valuation rule is the algorithm by which an investor such as an angel or venture capitalist assigns a monetary value to a new venture.
Capital Return after N years:
CR = M x I
Market Value in Year N:
MV = PE x EN or PS x SN
I = investment
EN = earnings in year N
G = expected annual return
Chapter 18:Valuation Rule
Technology Ventures: From Idea to Enterprise

17. 18 Sources of Capital Chapter 18: Table 18.15
Technology Ventures: From Idea to Enterprise

18. Sources of Capital 18
Initial Public Offering: the first public equity issue of stock made by a company.
Chapter 18: IPO
Technology Ventures: From Idea to Enterprise

19. 18 Sources of Capital Chapter 18: Table 18.17
Technology Ventures: From Idea to Enterprise

20. Sources of Capital 18
Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully.
Chapter 18: Principle
Technology Ventures: From Idea to Enterprise

21. Sources of Capital 18
A new firm intends to sell specialized integrated circuits for wireless applications. Its projections show:
Year
Sales ($ millions)
Profit ($ millions) Use the valuation rule to determine PO required when investors provide $5 million and expect a return of at least 55% per year. Assume the investors use PE = 14 and PS =4.
Chapter 18: Exercise
Technology Ventures: From Idea to Enterprise

22. VENTURE CHALLENGE 18 What sources of capital will you use?
Why did you select these sources?
How much capital is needed now and for what purpose?
What percentage of your venture do you plan to offer to outside investors?
Chapter 18: Venture Challenge
Technology Ventures: From Idea to Enterprise

23. DVD Videos 18 “Venture Capital versus Customer Funding”
Sources of Capital 18
DVD Videos
“Venture Capital versus Customer Funding”
Vic Verma (Savi Technology)
“The Benefit of Picking the Right Venture Capitalist”
Marc Fleury (Jboss)
Chapter 18: DVD Videos
Technology Ventures: From Idea to Enterprise