E140A: ABCs of Financing

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E140A ABCs of Financing
A. Amount of cash needed and purpose
C. Deal Structure and Terms
B. Sources of Capital
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A. Amount of Cash Two Key Questions

• 1 How much money is needed for this round of
  financing?

Typical Financing Stages (or Rounds) Seed ?
Early ? Mezzanine ? Late (e.g., IPO)
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2 Which risks are to be reduced with this money
in this round?
Team Risk
Technology Risk
Capital Risk
Market Risk
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B. Raise Money From Where?Sources of Capital
for High-Technology Entrepreneurs
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U.S. Venture Capital Investment
Number of US VC Investments
In 2003, VCs invested 18 billion in U.S. and
angels invested about 16 billion. (Sources
Venture Economics, NVCA and Center for Venture
Research)
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C. Key Questions Regarding the Deal

• What percentage of the company do the investors
  receive for their cash?
• What special terms and conditions are necessary
  to compensate them for the risk?

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A Simple Venture Finance Example

• Romas hot startup requires 10 million in order
  to form its business. She expects to earn 10
  million in its fifth year.
• Randys VC firm has reviewed the company's
  business plan and believes that he is entitled to
  a 50 return on his investment. (Hint how many
  times must his money grow in 5 years?)
• Publicly traded companies in this category and
  industry trade at approximately 15 times earnings
  (PE ratio). There is no material difference
  between these companies and the startup.
• What portion of the company should Randys VC
  firm receive today? (Hint what is future value
  of that investment?)

1. Value of VC Investment in Year 5 10
m(150)5 76m 2. StartUps Value in Year 5
10 m(P/E of 15) 150m 3. VC Firms
Share Today    Step 1/Step 2
                     76 m/150m
50 4. Post-Money Value Today 10 m / .50
20 mm
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A Multi-Stage Venture Finance Example
Time
I
II
III
IV
V
Note not to scale
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A Multi-Stage Venture Finance Example
Time
I
II
III
IV
V
V
1mm shares for each founder ?3mm shares _at_ 0.001
ea. Value3k
1mm shares each for CEO employees ? 5mm
shares _at_ 0.01 each Value50k
5mm shares for first VC firm ?10mm shares _at_
1.00 each Value10mm Use of RD
Note not to scale