Obtaining Venture

1
Obtaining Venture Growth Capital

• Venture Planning
• Chapter 14
• Dowling
• Fall 2005

2
Obtaining Venture Growth Capital

• Cover your equity
• Balance the need for
• startup and growth capital
• with preservation of equity
• The earlier the capital
• enters, regardless of the source, the more costly
  it is
• Creative bootstrapping strategies can be great
  preservers of equity

3
Obtaining Venture Growth Capital

• Considerations
• Does the venture need outside equity capital?
• Do the founders want outside equity capital?
• Who should invest?
• An equity investment requires that the management
  team firmly believe that investors can and will
  add value to the venture.

4
Obtaining Venture Growth Capital

• Timing
• It is unwise for a startup to delay looking for
  capital since it is likely to take six months or
  more to raise money.

5
Obtaining Venture Growth Capital

• Angels and informal investors
• Who they are
• Typical informal investor will invest from
  10,000 to 50,000 in any one venture. Theyre
  appropriate for
• Ventures with capital requirements from
  50K-500K
• Ventures with sale potential from 2-20 million
  in 5-10 years.
• Small, established, privately held ventures with
  sales and profit growth of 10 to 20 percent per
  year
• Special situations

6
Obtaining Venture Growth Capital

• Evaluation process
• An informal investor will want to review a
  business plan, meet the full management team, see
  any product prototype or design that may exist,
  etc.
• The decision
• Agreement with informal investors will most often
  include a put, whereby the investor has the
  right to require the venture to repurchase his or
  her stock after a specified number of years at a
  specified price.

7
Obtaining Venture Growth Capital

• Venture capital
• Key is to seek investors who will truly add value
  to the venture, beyond the money
• Carefully screen potential investors to determine
  how specifically they might fill in some gaps in
  the founders know-how and networks
• The right investors can open doors to new
  customers, vendors, and additional investors

8
Obtaining Venture Growth Capital

• Venture capital What is it?
• The venture capital industry supplies capital
  and other resources to entrepreneurs in
  businesses with high growth potential in hopes of
  achieving a high rate of return on invested
  funds.
• Most credit Ralph Flanders, then president of
  Federal Reserve Bank of Boston, with the idea.
• VC investors commonly expect returns of 5 to 10
  times initial investment in 5 to 10 years.

9
Obtaining Venture Growth Capital

• Venture capital
• No more than 2 to 4 percent of ventures seeking
  VC actually receive financing from them
• An entrepreneur may give up 25 to 75 percent of
  his or her equity for seed/startup financing
• Most VC investors are limited partnerships, with
  fund managers serving as general partners and
  investors as limited partners

10
Obtaining Venture Growth Capital

• Sources and guides
• A good place to start is Pratts Guide to Venture
  Capital Sources
• What to look for
• Entrepreneurs are well advised to screen
  prospective investors to determine the appetites
  of such investors for the stage, industry,
  technology and capital requirements proposed

11
Obtaining Venture Growth Capital

• Early-stage entrepreneurs need investors who
• Are considering new financing proposals and can
  provide the required level of capital
• Are interested in companies at the particular
  growth stage
• Understand and have a preference for investments
  in the particular industry
• Can provide good business advice, moral support
• Are reputable and ethical and with whom founder
  can get along
• Have successful track records of 10 years or more
  advising and building smaller companies

12
Obtaining Venture Growth Capital

• What to look out for
• Attitude
• Over-commitment
• Inexperience
• Unfavorable reputation

13
Obtaining Venture Growth Capital

• Dealing with venture capitalists
• If possible, obtain a personal introduction from
  someone the investors know well
• Identify several prospects create a market for
  your idea by marketing it
• Do not stop selling until the money is in the
  bank. Let the facts speak for themselves. Be able
  to deliver on the claims.

14
Obtaining Venture Growth Capital

• Due Diligence A two-way street
• DD can take several weeks or months at startup
• Involves a painstaking investigation for
  investors

15
Obtaining Venture Growth Capital

• Other equity sources
• SBA 7(a) Guaranteed Business Loan Program
• Small business investment companies
• Licensed and loan-funded by SBA
• Limited to taking minority shareholder positions
• Can invest only 20 of equity capital in any one
  firm
• Common options include long-term loans with stock
  options, convertible debentures, straight loans,
  and preferred stock

16
Obtaining Venture Growth Capital

• Other equity sources
• Mezzanine capital
• Capital that is between senior debt financing and
  common stock
• Most often, its subordinated debt carrying an
  equity kicker consisting of warrants or a
  conversion feature into common stock
• Generally unsecured, with maturity in 5 to 10
  years
• Can be burdensome in its claims on cash
• Subordinated debt often contains covenants
  relating to net worth, debt and dividends

17
Obtaining Venture Growth Capital

• Other equity sources
• Private placement investors. Could include
• Dealers, franchisors or wholesalers
• Professional investors always on the lookout for
  a good, small company in its formative years
• Others seek opportunities to buy shares of
  smaller growth firms in the expectation that the
  firms will soon go public
• Attractive to venture capitalists wwho hope to
  benefit when the company goes public or when the
  company is sold

18
Obtaining Venture Growth Capital

• Other equity sources
• Initial public stock offerings (IPO)
• Raises capital through federally registered and
  underwritten sales of the companys shares
• More mature companies get better terms at IPO

19
Obtaining Venture Growth Capital

• Advantages of going public
• Raise more capital with less dilution
• Improve balance sheet or reduce/eliminate debt
• Obtain cash for pursuing other opportunties
• Access other capital suppliers and increase
  bargaining power
• Improve credibility
• Achieve liquidity for owners and investors
• Create equity incentives for new and existing
  staff

20
Obtaining Venture Growth Capital

• Disadvantages of going public
• Legal, accounting and administrative costs
• Management time, effort and expense is required
  to comply with SEC rules and reporting
  requirements.
• Management can become more interested in
  maintaining the price of the companys stock than
  in running the company
• Liquidity of company stock achieved through a
  public offering may be more apparent than real

21
Obtaining Venture Growth Capital

• Private placement after going public
• Can tide you over in the event the public turns
  sour
• SEC Regulation D
• Employee stock option plans (ESOPs)
• Used by firms with high confidence in the
  stability of their future earnings and cash flow.
  An ESOP is a program in which the employees
  become investors in the company. Tax-qualified
  benefit plans.