Entrepreneurship I

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Entrepreneurship I

• Class 3
• Financing the Venture

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• Cash is king
• Cash flow is queen

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Timing

• When do you look for cash?
• more cash vs. less cash
• cash sooner vs. later
• less risky cash vs. more risky
• At least 6 months to raise capital
• Balance between cash needs and dilution

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Types of financing

• Debt
• Equity
• Variations convertible debt
• Advances on product sales
• Technical development (partner)

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First step

• Credit cards
• Family loans/investment
• Partnerships
• customers
• suppliers
• joint venture
• corporate

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Stages

• Start-up capital
• Seed funding
• angels, etc.
• private placements
• Early stage financing (VC)
• first round series A
• development stage second round, series B
• expansion stage third round, series C
• growth stage series D, mezzanine financing
• Public offerings IPO

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Stock classes

• Common stock
• Preferred stock
• Convertible debenture
• Loan with warrants

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Venture capital
Physical location is important
5-10x return
Hard to get
Change the world, disruptive technologies
Large 500mm
Invest at least 2mm
1 out of 10 are hits
Industry focus
Business plan and presentation
Founder/management is key
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VC funds

• Cash pooled by pension endowment funds and
  wealthy individuals
• Expect returns of 50-60 on high risk investments
• About 7 of these investments account for 60 of
  the profits
• One third results in partial or total loss
• Each project must represent a home run

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VC continued

• Large markets gt 100 mm
• Companies worth 1b in sales
• Dominated by popular industry (software,
  internet, bio)
• Arthur Rock limits his investments to those that
  can change the world.

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Changing the World

• A record number of companies seemed to be doing
  just that throughout the 2000 bubble.
  Investments increased six-fold.
• As of 2002, sums invested returned to pre-bubble
  levels.
• 6.8B invested in 1st qtr. 1999
• Jump to 29B invested in 1st qtr. 2000
• Back to 6.4B invested in 1st qtr. 2002
• (PricewaterhouseCoopers and National Venture
  Capital Association MoneyTree)

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New Trends

• Growth in mergers and acquisitions vs. decline in
  start-up investments. (PricewaterhouseCoopers
  2002).
• Only 25 of VCs believe economy will improve in
  next 6 months. (DeLoitte Touche, LLP 2002).
• Hot investment areas biotech, health care,
  semi-conductors, followed by Internet security.
• Traditional hot spots such as software,
  communications networking and service sectors
  are down.
• Wired.COM announced 46 venture hot spots.
• Silicon Valley top on the list with perfect
  score. Domestic runners up include Albuquerque,
  NM Boston, MA Chicago, IL and New York City,
  NY.

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Pittsburgh VC

• Local firms include Adams Capital, Birchmere,
  Hillman, Mellon, PNC, and Redleaf
• Birchmere and Adams are at least second funds
• Local investments plus out of town

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Challenges with VC Funding

• VC money is hard to get
• Early stage money is even harder
• Must have an introduction
• Importance is founders not the idea
• Good business plan
• Solid strategy for entering the market and growth
• Not usually seed capital
• Investments of 2m

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Remember...

• Value added
• The earlier you get VC funding, the more you give
  away
• management team experience
• risk
• reward

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Angels

• Private offering is viable alternative
• 30-40 of companies end up getting private equity
  funding
• 5-10b invested annually in 20-30K companies
• 20-50K is typical
• Many are entrepreneurs who want to help and
  invest in other entrepreneurs

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More on Angels

• Individuals and syndicates
• private investors group
• band of angels
• May take considerable equity
• May try to dominate venture
• Dont like it if you miss profit/sales goals

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Remember...

• Finding angels can be hard
• Tremendous value added
• knowledge of markets and technologies
• contacts
• strategies
• Fees of investment bankers attorneys may need
  to be paid regardless of success

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Bootstrapping
Hi value
Mind set
Crack team
Operational
Check growth
Breakeven
Cash vs profits
Credit
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Bootstrapping

• Different mind set
• resource utilization
• Get operational quickly
• Quick breakeven, cash generating projects
• Short term focus vs. long term growth
• Offer high value products or services

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Bootstrapping continued

• Forget about the crack team
• Keep growth in check
• Focus on cash, not on profits, market share
• Cultivate banks (line of credit)

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Exit Strategies
Sale or merger
IPO
Transfer of ownership
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So,

• Theres a lot of good ideas
• Theres a lot of money
• Theres more money than good ideas
• Theres only a few great opportunities
• Those get financed