1. Lecture 1 An Overview of New Venture Financing Copyright¸ 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Instructors may make copies of the PowerPoint Presentations contained herein for classroom distribution only. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

2. Learning Objectives Learn new venture financing terminology. Understand the value of tying financing to performance milestones Recognize the distinguishing characteristics of the various stages of new venture development Identify the financing sources available to a new venture and the factors favoring one over another Learn the basic structures and availability of various financing sources Identify the key elements of deal structure and the functions they serve ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

3. Some Milestones for New Venture Planning Completion of concept and product testing Completion of prototype First financing Completion of initial plant tests Market testing Production start-up First competitive action First redesign or redirection First significant price change ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2 Block and Macmillan (1992)

4. Stages of New Venture Development Design model – Nascency –Customer Discovery –Customer Validation –Customer Creation –Company Building Organizational Stage Model –Development stage Start-up –Early growth –Rapid growth –Exit ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

5. ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2 Figure 2-2 Stages of New Venture Development

6. Sequence of New Venture Financing Bootstrapping Seed financing R&D financing Start-up financing First-stage financing Second-stage financing Third-stage financing Mezzanine financing Bridge financing LBO, MBO, IPO ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

7. Sources of Debt Financing The principal SOURCES OF BORROWED CAPITAL include: Trade credit Commercial bank financing Line of credit loans Time-sales finance Term loans Chattel mortgages and equipment loans Conditional sales contracts Plant improvement loans Commercial finance companies Factoring Leasing companies

8. Sources of New Venture Financing Self, friends, and family Business angels Venture capital investors Small business investment companies (SBICs) Trade credit and factoring Asset-based lending Mezzanine capital Private placements of equity (relational investors) IPOs Public debt ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2

9. ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter2 Sources of New Venture Financing Figure 2-3

10. Source: National Venture Capital Association

16. Angel Investments by Industry Q2 2013

17. 2011 Angel Group Valuation Survey Pre-money Valuation of Pre-revenue Companies OrganizationLocationCurrent Average Valuation (in millions)Trend Boise Angel AllianceBoise$0.8up slightly Fargo/Morehead AngelsFargo, ND$0.8flat Maple Leaf AngelsToronto, ON$1.0flat New Mexico AngelsAlbuquerque$1.3up pressure Desert AngelsTucson$1.5flat Hawaii AngelsHonolulu$1.5flat RAIN FundsSt. Paul, MN$1.5sl lower Tech Coast AngelsSan Diego$1.5flat to down Valley AngelsGrand Forks, ND$1.5flat Vancouver AngelsVancouver, BC$1.5decreasing Angel ForumVancouver, BC$1.6decreasing Atlanta Tech AngelsAtlanta$1.6sl down Ohio TechAngelsColumbus$1.8flat Queen City AngelsCincinnati$1.8flat SeedStep AngelsOKC$1.9flat to up Mid-Atlantic Angel GroupPhiladelphia$2.0unchanged Pasadena AngelsPasadena$2.0increasing DC Dinner ClubsDC/Viriginia$2.0up slightly Sierra AngelsIncline Vilage, NV$2.0flat St. Lous Arch AngelsSt. Louis$0.2unchanged Wilmington Investor NetworkWilmington, NC$2.0down 10% Launchpad AngelsBoston$2.1unchanged Golden AngelsMilwaukee$2.3up slightly Alliance of AngelsSeattle$2.5flat Hub AngelsBoston$2.5up pressure Sand Hill AngelsSilicon Valley$2.5up ~20%/yr Virginia Active AngelsCharlottesville, VA$2.5declining Golden SeedsNYC$3.0down 10% Central Texas Angel NetworkAustin$3.0up CommonAngelsBoston$3.0unchanged NY AngelsNYC$3.0rising S. Valley Angel FundND$3.1flat Life Science AngelsSilicon Valley$3.3flat Blue Tree AngelsPittsburgh$3.3increasing Band of AngelsSilicon Valley$3.4up AVERAGE$2.1 Bill Payne October 2011

19. Venture Backed IPOs

21. Capital Under Management by State 1985-2012

22. Venture Capital Invested by State 2012

23. Number of Companies Receiving Investments by State in 2012

27. ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2 How Changes in the Stock Market Relate to New Equity Capital Raising Figure 2-7

28. Deal Structures “The deal” Term sheet Pre-money valuation Post-money valuation Investment agreement –Representations and warranties –Covenants and undertakings –Affirmative covenants –Negative covenants –Registration rights –Preemptive rights –Ratchets or anti-dilution provisions ©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 2