part 4: Global entrepreneurship class

Global Entrepreneurship
Developing Global Mindset for
Entrepreneurs

Brian David Butler

Teaching:
Brian Butler is currently a professor with Forum-Nexus,
which is co-sponsored by the IQS Business School of the
Ramon Llull University in Barcelona, and the
Catholic University of Milan. He teaches classes on
International Finance and Global Entrepreneurship in
brian.butler@forum-nexus.com Europe every July and January.
briandbutler@gmail.com
LinkedIn/briandbutler
Skype: briandbutler In Miami, Brian has taught Finance, Economics and Global
Trade at Thunderbird’s Global MBA program in Miami.

He previously worked as a research analyst at the
Columbia University Business School in New York
City.

Brian David Butler

International:
A global citizen, Brian was born in Canada, raised in
Switzerland (where he attended international British
school), educated through university in the U.S., started his
career with a Japanese company, moved to New York to
work as an analyst, married a Brazilian, and has traveled
brian.butler@forum-nexus.com extensively in Latin America, Asia, Europe and North
LinkedIn/briandbutler America.
Skype: briandbutler
Brian currently lives in Recife, Brazil where he is teaching
classes on ―Global Entrepreneurship‖ at the university
―Faculdade Boa Viagem‖.

KookyPlan – wiki for Entrepreneurs

Global Entrepreneurship:
developing the global mindset for
entrepreneurs

Class #4
Saturday April 17th, 2010

Schedule for today
1. First ½ - Finance

2. After break
▫ Discussion about Group Projects
▫ Presentation of homework – transferrable ideas

3. Continue - Finance of startups (part A)

Group Project - proposals
• Group 1 • Group 2 • Group 3
• Roberta • Pedro
• Luiza • Diogo
• Rodrigo
• Arthur • Carol
• Augusto
• Italo • Ana Maria • Juliana
• Emanuel
• Transferrable Idea:
Clube de Estrelinha • Transferrable Idea:
• Transferrable Idea: assigned: TIVO
• Countries: assigned: NET FLIX
▫ Brazil to USA • Countries:
▫ USA to Brazil
• Countries:
▫ Clube ▫ USA to Brazil
Estrelinha ▫ Tivo
▫ Other ideas? ▫ shopping cart,
▫ Or others?

Group Project
• First step – • Second step:
▫ you need to get my approval
for which project you wish to • MARKET RESEARCH:
submit ▫ Divide up your team to conduct
▫ I need to SEE example of thorough market research –
working in other country – ▫ Including full analysis of what
photos, website, reviews by makes the business work in
magazines, news articles, etc foreign country, with estimates
▫ Send me by email of cost, profits, business model
▫ Including PEST analysis
comparing factors between
countries
▫ Including full analysis of
competition in new country
and full cost/ profit analysis of
market potential

Group Project – Step 1
• Getting approval for your project

• If you do not have a project of your own
approved, or one in mind… you might consider
one of the following (pre-approved) projects….

• TIVO, or NETFLIX
• Localization to Brazil…

• NET FLIX • TIVO

• http://en.wikipedia.org/wiki/Netflix • http://en.wikipedia.org/wiki/Tivo

• Netflix (NASDAQ: NFLX) is a
service offering online flat rate DVD • TiVo is a brand and model of digital
and Blu-ray disc rental-by-mail and video recorder (DVR). TiVo was
video streaming in the United introduced in the United States and
States. is now available in New Zealand,
Canada, Mexico, Australia, Taiwan,
and the UK. TiVo DVRs provide an
electronic television programming
schedule, whose features include
Season Pass recordings which
record every episode of a series, and
WishList searches which allow the
user to find and record shows that
match their interests by title, actor,
director, category, or keyword.

Group Project – know your audience
• Assume the reader of your report will be an
investor that might invest in your project.

• Assume that you might want to do this project
yourself (at the end of this semester).

• The Group Project should result in a
professional-looking document that you could
take to present to investors (assuming you
needed to raise money to follow your business
plan)

Group Project – know your audience
▫ Assume that you would really consider doing this
project, and assume that I am a Finance
professional with money to potentially invest in
your project. Your job is to convince me to invest
in your project.
▫ Create a viable marketing and business plan for
this market-entry project into the USA. Careful
analysis needs to be made to see if it would work
before I would be willing to invest in your idea.
▫ Make sure to read CH 4 from the book
(digital sent by email)

Opportunity Analysis Plan
• First step (before you make a full-fledged
business plan)

1. Describe the idea and its competition,
2. Market analysis: Assess the domestic and
international market for the idea, including
profit and cost estimates
3. Team analysis: An assessment of the
entrepreneur and the team, and
4. Next-step analysis: A discussion of the steps
needed to make the idea the basis for a viable
business venture.
Textbook: ―International Entrepreneurship‖, Hisrich, Ch4

Group Project Assignment – for next
week
• #1. Form Group

• Please divide up the project among your team,
▫ and email me back (by next WEDNESDAY) outlining
who is going to work on which part of this project
(who is going to research what?)

▫ Note: you don’t have to do the actual research all
by next class, but you MUST have met with your
group, discussed the case, and divided the task of who
will research what…

Individual presentations

• Each student is to present their ―transferrable
idea‖ to the class

Individual presentations

• Before we begin…
• One comment:

▫ Use PEST analysis to look for why a business
might NOT work when transferred from ONE
country to ANOTHER

Transferrable idea - P.E.S.T analysis
(or PESTLE)
• use this framework to look for reasons that the
"transferable" idea might not work here:

▫ i.e. what is Economically, or socially,
or technologically different about Brazil that
might make the idea NOT transfer well....

• The PEST analysis tool is a framework for
critically analyzing quickly whether or not
a foreign market entry will have a chance or
not.

(or PESTLE)

• Political factors,
▫ What is different in the new country that might make
the business NOT work?
▫ Different laws? Different regulations? Different
taxes? tax policy, labour law, environmental law,trade
restrictions, tariffs, and political stability. Political
factors may also include goods and services which the
government wants to provide or be provided (merit
goods) and those that the government does not want
to be provided (demerit goods or merit bads).
Furthermore, governments have great influence on
the health, education, and infrastructure of a nation.

(or PESTLE)
political
• ecological/environmental issues
• current legislation home market
• future legislation
• international legislation
• regulatory bodies and processes
• government policies
• government term and change
• trading policies
• funding, grants and initiatives
• home market lobbying/pressure groups
• international pressure groups
• wars and conflicts

(or PESTLE)

• Economic factors
▫ Do consumers have less spending money? Is currency
weaker? What is different? Consider economic
growth, interest rates, exchange rates and the inflation
rate. These factors have major impacts on how
businesses operate and make decisions. For example,
interest rates affect a firm's cost of capital and
therefore to what extent a business grows and
expands. Exchange rates affect the costs of exporting
goods and the supply and price of imported goods in
an economy

(or PESTLE)
economic
• home economy situation
• home economy trends
• overseas economies and trends
• general taxation issues
• taxation specific to product/services
• seasonality/weather issues
• market and trade cycles
• specific industry factors
• market routes and distribution trends
• customer/end-user drivers
• interest and exchange rates
• international trade/monetary issues

(or PESTLE)

• Social factors
▫ What social values are different? What cultural habits
are different? Include the cultural aspects and include
health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety.
Trends in social factors affect the demand for a
company's products and how that company operates.
For example, an aging population may imply a smaller
and less-willing workforce (thus increasing the cost of
labor). Furthermore, companies may change various
management strategies to adapt to these social trends
(such as recruiting older workers).

(or PESTLE)
social
• lifestyle trends
• demographics
• consumer attitudes and opinions
• media views
• law changes affecting social factors
• brand, company, technology image
• consumer buying patterns
• fashion and role models
• major events and influences
• buying access and trends
• ethnic/religious factors
• advertising and publicity
• ethical issues

(or PESTLE)

• Technological factors
▫ What level of technology are people in the new country
familiar with? What standards to they use? Include
aspects, such as R&D activity, automation, technology
incentives and the rate of technological change. They
can determine barriers to entry, minimum efficient
production level and influence outsourcing decisions.
Furthermore, technological shifts can affect costs,
quality, and lead to innovation.

(or PESTLE)
technological
• competing technology development
• research funding
• associated/dependent technologies
• replacement technology/solutions
• maturity of technology
• manufacturing maturity and capacity
• information and communications
• consumer buying mechanisms/technology
• technology legislation
• innovation potential
• technology access, licencing, patents
• intellectual property issues
• global communications
•

(or PESTLE)

• You may also want to consider…

• Legal factors include discrimination law, consumer
law, antitrust law, employment law, and health and
safety law. These factors can affect how a company
operates, its costs, and the demand for its products.

• Environmental factors include weather, climate,
and climate change, which may especially affect
industries such as tourism, farming, and insurance.
Furthermore, growing awareness to climate change is
affecting how companies operate and the products they
offer--it is both creating new markets and diminishing or
destroying existing ones.

Homework for this week
• One group assignment – cancelled. Will re-assign
this task next week

• 2 individual assignments

• Due Dates:
▫ If you want feedback PRIOR to next class… you must
email me the homework before WEDNESDAY at
midnight (before next class)
▫ Otherwise, all homework is due at the start of our next
class, Saturday

Homework #1
• Find company abroad that has raised money
▫ What problem are they addressing? How solving?
▫ What trend are they getting in front of?
▫ If you were to localize that business to Brazil, would the same
problem exist? Same solution be appropriate? Are the same
trends important in Brazil? (Include a PEST analysis.)
• Plan on taking that business model to Brazil (creating a
similar business in Brazil)
▫ You will need to raise money (either in Brazil or from foreign
sources of capital)
▫ I will be the VC (venture capitalist)
▫ Your job; convince me to invest – in 5 minutes

To turn in:
▫ Maximum 1 page – word document – submit by email to :
briandbutler@gmail.com Be prepared to present your analysis
in Class (with class review)
To present in class:
▫ 5 minutes to convince class to invest in your project

Homework #2
• Dream Company:

• What would you do if you won the lottery? But, you
could only spend the money on creating a business…
what business would you create?

▫ Tell me 1-3 ideas

▫ What if I told you the $$ would only be available to ―high
growth‖ business, but if you had an idea with big enough
growth potential, then UNLIMITED money was available

To turn in:
▫ Maximum 1 page – word document – submit by email to :

Remember our discussion of the 3
types of entrepreneurs?

1. Local for local
2. High growth
3. Global

Question – why do ―high growth‖ companies
attract the Venture Capital?

Angel investor: Risks:
• Chances of success:

• approximately 30%:

• Rule of thumb for VC investments: of 10 deals....
4 will die....3 will do ok..... and only 3 will be a
success
• And only 1 will be a BIG success (BIG payout
….paying for other failures)
http://kookyplan.pbworks.com/

If you won the lottery?

• What would you do with the money?

• Note: money IS available!!

• Next: case study of company raising money for
their venture in China….

Finance:

Case study to
introduce the topic

Funding a new business – case study
• Fion Lin and C. A. Lin are unlikely entrepreneurs. The
pair—who share the same surname but are not related—
gave up well-paying careers in the venture capital
industry to launch a chain of what they call wellness
cafes in a part of the world where junk food seems to
reign supreme.

• ―We strongly believe that wellness is going to be the
next big thing,‖ Mr. Lin said. (Trend, get ahead of it!)

• ―If we position ourselves right, we can take advantage
of the inevitable boom in the wellness industry as baby
boomers get older and Generation X becomes more
aware of what they eat and drink.‖

• After 2 years of market research and
feasibility studies, Mr. Lin, who is chief
executive, and Ms. Lin, who is president and
chief operating officer, discovered a market for
healthy food that could be served quickly,
consumed in comfortable surroundings, and
sold at affordable prices.


• They set up Kosmo, testing the waters with an
outlet in Shenzhen. This was followed by a two-
story location at a busy street corner in Lan Kwai
Fong, where a series of businesses had failed in
recent years.
• Two years later, there are three outlets of Kosmo
in Beijing, four in Hong Kong, and five in
southern China. The company opened 40 outlets
(restaurants) between 2007 and 2008 and will
move into overseas markets in the next 5 years.


• ―Our short-term target is to become the number
one wellness lifestyle brand in China,‖ Ms. Lin
said. ―In the longer term, we want to become the
leading wellness lifestyle brand globally.‖

▫ Note: they are dreaming BIG (not just local)



• Mr. Lin said raising cash to fund the
venture had never been a problem. ―It
wasn’t that difficult to raise money for Kosmo,‖
he said. ―There is money out there, but you
have to be different and not a copycat, and you
have got to identify a market gap and then fill it.‖


• How did they raise the money?
▫ started by holding talks with people they had met
to find out whether anyone shared their values.
▫ Then put together a business plan with
revenue models and projections of how
those models could support sustainable
business growth.
▫ They made formal presentations to the people
they had identified as having the most potential,
and 90% came on board.


• Types of investors available:

• Banks
▫ When it comes to financing start-ups, banks in Hong Kong
are reluctant to lend money to entrepreneurs without a
good track record.
▫ So, Banks were NOT a great source of capital for their
startup

• Self funding
▫ Apart from putting their own money into a venture, new
business owners can consider borrowing money from
family and friends, which is known as bootstrapping.
▫ Good potential source of initial funding, but limited, and
has trouble of being too close to family


• Types of investors available:

• Angel investors
▫ They can also look for angel investors—successful
businessmen willing to invest in a new enterprise.
▫ Great source of startup capital for MANY
entrepreneurs

• Venture capitalists—
▫ companies that fund new enterprises with
considerable growth potential—are another option.
▫ Professional investors in startups, but its difficult to
get their attention due to lots of entrepreneurs
competing for their $$



―Venture capitalists are usually looking for
something to invest in for 3 to 4 years,‖
said Hanson Cheah, managing partner at
AsiaTech Ventures.

―Because of the risk they are taking they
would expect a very large return. They
would want their investment to grow four
times in 4 years.‖


Approaching Venture Capitalists
• Many people approach venture capitalists with
innovative ideas, but they need a viable business
plan if they want to be taken seriously.

• In addition to having a competitive edge in a
growing market, they should have a
management team with the right potential.


Approaching Venture Capitalists
• Most important, there needs to be significant
room for growth and that is what Mr. Lin and
Ms. Lin got right.

“Venture capitalists wouldn’t be interested
in a restaurant, but they would be
interested in a chain of restaurants,” Mr.
Cheah said.

―Unless the business can grow at between 20% and
30% per year, most investors would not be
interested and it is unlikely that a single outlet
could sustain that kind of growth.‖

Finance:

Inspiration: a look
at money available

Finance:

• Intro to the role of finance for
entrepreneurship

• Topics to cover:
▫ Terms and definitions to know, understand
▫ Venture Capital, Angel finance, seed funding,
bootstrap funding
▫ Incubators, Business plan challenges, YCombinator
▫ Lessons for entrepreneurs: what kinds of firms are
attracting global Venture Capital?

Inspiration - raising $$
Gemvara Raises $5.2 Million For Custom Jewelry
Shopping Online
• 07 Apr 2010

▫ Back in July 2008, we wrote about a company called
Paragon Lake that had raised $5.8 million to put kiosks in
jewelery stores to help you design custom jewelry. Earlier
this year, the company got a new name (it’s now called
Gemvara), its CEO departed (it’s now being led by founder
Matt Lauzon), and it has a new business model: it’s now a
consumer facing site that allows users to create their own
custom jewelery from the comfort of their home.
▫ Today, the company is announcing that it has raised
another $5.2 million in Series B funding. The new
round was led by Highland Capital Partners and Canaan
Partners, who both led Gemvara’s Series A round.

• Quirky Raises $6 Million For Social Product Development
Platform
• 07 Apr 2010

▫ Quirky, a social network for product development, has raised $6
million in Series A funding  led by RRE Ventures, with Village
Ventures, Contour Venture Partners, Lowercase Capital and a
small group of angel investors participating in the round.

▫ Prior to the closing of this round, Quirky had raised $1.6 million
in seed capital from friends and family.

▫ As we reported in our initial review of the site, Quirky is a
platform for product ideas that are born on napkin doodles and in
other unorthodox ways. The site then tries to use crowdsourcing
to develop the product, by engaging participants in collaborating
on every aspect of product creation – from ideation, design,
naming, manufacturing, marketing, to sales. It’s like a social
network for product development.

• Quirky Raises $6 Million For Social Product Development Platform

• Founded by serial entrepreneur Ben Kaufman (he created mophie and
kluster), Quirky lets users submit their product idea for $99. Users can also
vote, rate, and influence other people’s product ideas. Every week users can
post ideas on quirky to be rated by the quirky community. After a seven day
evaluation period, the quirky community chooses one product from the
pool of submitted ideas to move forward through the process. Quirky’s
community engages and contributes to every part of the product’s
development, weighing in on everything from naming to logo selection to
packaging.
• Since the site’s launch last summer, the platform and its community have
helped developed 12 different products, including a cord untangler, and a
portable mug spoon. The new funding will be used towards the construction
of a full-scale rapid prototyping shop, the hiring of a global sales force,
greater retail distribution, 24-hour design and engineering capacities, and
added interactive collaboration tools.
• Quirky is similar to one of Kaufman’s previous ventures, NameThis, and
other sites IdeaBlob and Innocentive.

• CrunchBase Information: quirky

Be inspired – see what kinds of
companies are getting $$ funded

Key source of inspiration… Tech Crunch is
awesome!!


VentureBeat.com
Key source of
inspiration… if you
see how much $$ is
being raised each
week!


Sign up for the weekly newsletter email!!

Finding Venture Capitalists
• Don’t just ―find‖ them, ENGAGE them in discussions on twitter:

Twitter: follow VC's and Angels on Twitter:

• Angel Investors
• Atlas Venture
• August Capital
• Baroda Ventures
• Best Buy Capital
• Benchmark Capital
• Betaworks
• Bessemer Venture Partners
• Clearstone Venture Partners
• DFJ Growth Fund
• Emergence Capital Partners

• Full list found here: http://venturemaven.com/venrock


• External Links to Research VC firms

▫ Pratts Guide: the best source available - go to your
local library and look for this book.
▫ Website http://www.crunchbase.com/financial-
organizations (listed alphabetically)
▫ Website: http://punctuative.com/vcdb/ find by
geography, and school background
▫ Peer-review website called TheFunded. But beware,
the reviews are by entrepreneurs (many of which were
told "no"), so know that the information as biased, and
might not reflect happily funded entrepreneurs
experience. That said, the site does give some much
needed insight and reviews of VC's.

• startup incubators
• model: introduce new companies to Venture
Capitalists...offering startups seed funding,
guidance, and connections in exchange for
equity.
▫ DreamIt Ventures’
▫ Y Combinator
▫ TechStars,

• Florida

• see more: Venture Capital in Florida and for
entrepreneurs, see startups in Florida

Finding funding sources
• For social ventures

• List of funding resources - LINKS:

• Latin America
▫ ACCION International
▫ Americas Society
▫ Amigos de las Américas
▫ Institute of the Americas
▫ Intercultural Center for Research and Education
▫ Organization of American States
▫ Pan American Development Foundation
▫ Partners of the Americas
▫ Resource Center for the Americas
•
• More at: http://kookyplan.pbworks.com/Investing-in-
socially-good-projects

Money available: for BIG ideas
(with great teams)

In Brazil…

Private Equity in Brazil
• Blackstone prepares Brazil fund
• Blackstone Group is gearing up for a $675 million
fund set to invest in Brazil, contributing $500
million of its own capital. The fund will invest in
infrastructure, civil construction, food, health and
education. Reuters

• Schwartzman said global market turbulence was not
affecting its Brazilian plans or its ties with local
partner Patria Investimentos, which already has
two funds in Latin America's largest country
http://www.altassets.com/

Recent headlines – of fundraising for
Brazilian Private Equity (PE)
• Brazilian PE fundraising to triple for year
to June 2011
• Category: Brazil | Publishing date: 14 Apr 2010

• Brazil-based private equity funds could raise up
to $15bn from investors by mid-2011, driven by a
growing economy and increased financial risk-
taking, according to Reuters.


“Private Equity” Industry

Angel Venture Private Equity
Investors Capital funds

PE and VC – whats the difference?
• PE (private equity) can refer to the entire Industry
(which includes both PE and VC), or just to Private
Equity fund
• Private Equity = a general term to describe the
industry. PLUS, its also a fund-specific term to
define investments in more mature funds, as
described here:
▫ ―Enquanto o venture capital está relacionado a
empreendimentos em fase inicial, o private equity
está ligado a empresas mais maduras, em fase de
reestruturação, consolidação e/ou expansão de seus
negócios.‖ http://www.abvcap.com.br/UpLoad/Arquivo/S
obre%20o%20setor.pdf

Recent headlines
• Advent raises largest ever Latin America
PE fund with $1.65bn close
• Category: Latin America | Publishing date: 12
Apr 2010
•
Advent International has closed its latest Latin
American fund on $1.65bn, making it the
biggest ever private equity fund to be
raised for the region.

Recent headlines
• Brazilian buy-out funds (PE) sitting on $9bn
in dry powder
• Category: Brazil | Publishing date: 01 Mar 2010
•
Brazilian private equity funds are poised to spend
billions, spurred by what people familiar with the
country say is the strongest investment environment
for 20 years. Brazilian buy-out groups have $9bn in
dry powder to deploy in the country, according to
Bloomberg, who cited representatives of the
country’s private equity and venture capital
association, Abvcap.

Recent headlines
• Carlyle makes first Brazil deal with
$250m buy-out (PE) of holiday package
firm CVC

• Category: Brazil | Publishing date: 08 Jan 2010

• The Carlyle Group has made its maiden private
equity investment in Brazil, acquiring CVC
Brasil, said to be the largest tour operator in
Latin America.

Recent headlines
• Banco Bradesco, Banco Espírito Santo
establish Brazilian private equity firm
2bCapital
• Category: Private Equity News | Publishing date: 17
Sep 2009
•
Banco Bradesco and Banco Espírito Santo have
partnered to create 2bCapital, a new private equity
fund manager targeting Brazil.
2bCapital will be controlled on an equal basis by the
subsidiaries BRAM - Bradesco Asset Management
and Espírito Santo Capital, according to a statement.

Money available…
• “Foreign direct investment will jump 74 percent
this year to $45 billion, matching the record in
2008,
▫ as the country builds houses, subways, railroads,
roads, hotels and stadiums for the soccer and
Olympic games”

▫ Goldman Sachs Group Inc. Chief Economist Jim
O’Neill said at a conference in Rio de Janeiro on
Feb. 22.
http://vc-brazil.com/blog/

Money available…
• “The word is out that there are considerable
amounts of money looking for a home so the
sellers tend to ask for high valuations,”

▫ said Mark Mobius, who manages $34 billion in
emerging market assets at Singapore-based
Templeton Asset Management Ltd.


Money available

• If you have good, original ideas
• With a solid business plan
• Money is surely available…

4. Venture Capital Finance in
Brazil:

A look at the
Brazilian VC
industry

Private Equity Firms in Brazil:

• International Firms with PE operations in
Brazil:
▫ Citi (based in Miami)
▫ Blackstone Group (see news article here) -
partnership with: Patria Investimentos

http://kookyplan.pbworks.com/private+equity+in+Brazil

Funds in Brazil

• Big Players – PE active in Brazil
▫ Rio Bravo Investimentos, run by former central bank
President Gustavo Franco.
▫ Grupo Santander Brasil
▫ Arminio Fraga - the former Brazilian central
banker’s fund company Gavea Investimentos Ltda
▫ San Francisco-based Paul Capital Partners
▫ Axxon Group in Rio de Janeiro
▫ Carlyle Group, the world’s second-largest private
equity firm, plans to invest $1.2 billion in Brazil in
five years
▫ Templeton Asset Management Ltd.

Funds in Brazil

• Startup VC funds
▫ Ideiasnet,
▫ Monashees,
▫ Criatec,
▫ FIR,
▫ Confrapar


Funds in Brazil
• Government Funds
▫ BNDES,
▫ FINEP
▫ Previ, Petros, Funcef e Fapes já tem parte de seus
ativos aplicados em VC/PE.

• ―As primeiras ações realizadas pelo governo para o
desenvolvimento da atividade de venture capital
datam de 1974, por meio de programas do Banco
Nacional de Desenvolvimento Econômico e Social
(BNDES) e, em 1976, pela Financiadora de Estudos
e Projetos (Finep).‖
http://www.abvcap.com.br/UpLoad/Arquivo/Sobre%20o%20se

Helping Entrepreneurs in Brazil
• Instituto Gênesis PUC-Rio
• Sebrae
• http://www.portaltudoemfamilia.com.br

• Local Brazilian Firms
• Axxon Group
• Bradespar
• Companhia Riograndense de Participaçoes (CRP)
• CVC Opportunity Equity Partners
• Decisão Gestão de Fundos (DGF)
• Dynamo Venture Capital
• Eccelera do Brasil
• FIR Capital Partners: new fund 2008: $150 million; high tech
focus: Draper Fisher Jurvetson partner in Brazil
• Forma Inc
• GP Investimentos (see article below): new fund 2008: $2,000
million (is this right? wow!)
• Icatu Equity Partners
• IdeiasNet
• Itamby
• ITC Ventures

• Local Brazilian Firms - continued

• Jardim Botânico Partners (JB Partners)
• Latin Tech Capital Inc.
• Mercatto Venture Partners
• Multicapital
• Pátria Private Equity - partnership with: Blackstone Group (USA)
• Patrimônio Investimentos e Participaçóes Ltda.
• Rio Bravo
• Stratus Investimentos Ltda.
• Sul America Capital Partners
• The Southern Cross Group Brazil
• TK Partners
• TMG Capital Partners
• Trivèlla Investimentos
• Votorantim Ventures


Venture Capital activity in Brazil
• ABVCAP's president, Luiz Eugenio Junqueira
Figueiredo, says that 15-20 venture capital
(VC) groups now exist in Brazil and that
they have raised between 500 million and
a billion reais since the year 2000.

Venture Capital = “capital
empreendedor”

About ABVCAP
(www.abvcap.com.br):
• Brazilian Association for Private Equity & Venture
Capital (ABVCAP)
• The ABVCAP was founded in 2000. It is a nonprofit
institution geared toward the development, stimulus
and dissemination of long-term investments in the
real sector of the Brazilian economy, from
investment and capitalization vehicles for
companies, corporate projects and infrastructure in
Brazil. Therefore, ABVCAP operates like a
representative entity in Brazil for private equity and
venture capital.

About ABVCAP
(www.abvcap.com.br):
• It is ABVCAP's mission to expand and improve the several long-
term investment fronts in Brazil, in tune with the main international
practices on the subject, when applicable to the Brazilian market
and conditions. In this context, ABVCAP's mission stands out due to
its strategic and essential integration with capital markets as a
formulating agent and important driver and recycler of
assets/companies on the stock exchanges.

• For more information:
▫ Monique Azeredo: ABVCAP Press Liaison
▫ 55 (21) 3970-2432 // mazeredo@abvcap.com.br
▫ ABVCAP: Associação Brasileira de Private Equity & Venture Capital
▫ Avenida Rio Branco, 123, sl. 806
▫ CEP.:20040-005 - Rio de Janeiro - RJ - Brasil
▫ Tel: + 55 21 3970 2432
▫ Fax: + 55 21 2292 5607

About LAVCA (Latin American VC
association)
• LAVCA's mission is to promote the growth of the venture
capital and private equity industry in Latin America
through research, education, networking, best practices,
and the advocacy of sound public policy. LAVCA is a not-
for-profit trade association serving a core membership of
venture capital and private equity fund managers.
•
• For more information about LAVCA, please visit
www.lavca.org.
• partnership with
Brazil: http://www.lavca.org/lavca/allpress.nsf/0/22F8
27D6A517B6258625730C006B201C

About ABDI (www.abdi.com.br):
• Brazilian Agency for Industrial Development (ABDI)

• The Agency was founded in December 2004. Its mission is to promote
Brazilian technological and industrial development by increasing
competitiveness and innovation. ABDI's main focus is in the guidelines and
strategies set forth by the Industrial, Technological and Foreign Trade
Policy (PITCE) for which it is the coordinator, articulator and promoter.

• For more information: Marcia Oleskovicz: ABDI Press Liaison
• 55 (61) 3962-8700 // marcia.oleskovicz@abdi.com.br

• road show to attract foreign investors:
• http://www.lavca.org/lavca/allpress.nsf/43119c4ae488f44886256fc80000
5ff2/d267cf8a8a23a6ed8625726800695bbf?OpenDocument

Challenges to VC industry in
Brazil

Challenges – high
“hurdle rate”

Venture Capital is relatively “late”
coming to Brazil…why?

• Traditional high interest rates (fighting
stubbornly high inflation)

• High interest rates has been a BARRIER to the
development of a local Venture Capital
industry… who can explain why?

Venture Capital is relatively “late”
coming to Brazil…why?
• Because…

• Think like an investor… if you could earn 18% in safe
bank deposits, or publicly traded bonds, stocks
(relatively safer than Venture capital, because of the
―liquidity‖… can pull money out quickly)… why would
you take the EXTRA risk and invest in a startup.
• Contrast this with USA… where interest rates are near
zero. Note that PE/VC industry thrives on low-interest
economies (where local investors look for extra yield)

• Local Challenges (high Cost of Capital)

• One of the major difficulties of private investing
in Brazil is the relatively high cost of capital, and
hence the high hurdle rate (see our discussion on
WACC) when analyzing investment
opportunities.


• ―When looking at a private investment, it is important to also
keep one eye on the returns that can be achieved in the stock
market. Equity investors have a choice about where to put
their money. On one hand, they can easily invest in the stock
market, and achieve the expected average return (using an
ETF, they would get the "market return", and would assume
the "market risk"). The benefit of investing in the stock
market is that it is very liquid, transparent, and
efficient. They can take their money out at any time. Also,
because the companies publish all of their financial data
online, it's easy to check their balance sheets, and compare
them vs other companies in the market. This is not true with
private companies.

• With private companies, investors should receive a premium
over what the market is returning because they are assuming
additional risk (less liquidity, less transparency, etc).


Challenges in Brazil
But, in Brazil there is a problem in that ordinary
investors have come to expect 10-11% returns as
normal (average) for assuming very little
risk. With the stock market booming in recent
years (it was the top performer in the past 12
months), there is an environment where local
investors are facing a very large hurdle when
analyzing local private investments. If more
money can be made in the stock market, many
local investors are hence wondering what
incentives they might have to invest in riskier
(and less liquid) assets.


Opportunity for Foreign PE capital
• This creates an opportunity for foreign investors, who
may be more patient, and more willing to finance deals
that Brazilians are not.
• Similar to situation back in the mid 1990's when
Japanese investors had a much lower cost of capital than
US competitors, and were therefore more willing and
able to consider investing in projects that paid back in a
longer time period.
• If the WACC is too high, then local investors are
discouraged from looking at long-term investments
(because the discount rate compounds and makes it
difficult to pay back).
• But, competitors (foreigners) with lower WACC are able
to look at longer-term investments, and be more patient
in their investment analysis.


Limited time only…
• While the VC industry is starting to boom in
Brazil (as a result of recently falling interest
rates)…

• … what do you think will happen to the Venture
Capital industry in Brazil … IF interest rates go
back up?


Finance:

Intro to finance for
entrepreneurship

Learn to think like an investor…
• Most students ask:
▫ ―how can I raise money for my idea from Venture
Capitalists?‖.
▫ It’s a good question, but easier to answer if your
flip it around, and consider the question from a
VC’s point of view:

• Why would a VC invest?
▫ Put yourself in their shoes…

Class discussion
• Cash Flows
• Valuation
▫ How do you value an IDEA (may not even be a
company yet?)
▫ NPV (net present value) of what?
▫ Options
• Risk
• Risk capital
• Expect big payoff (4x money in 4 years?)

Making yourself more attractive to
investors…
• Goal of the entrepreneur (Raising money) should be to
LESSEN the risk for the VC.

• How to (appear to be) less risk?
▫ Have a GREAT TEAM (at least one partner with years of
substantial experience in industry, or recognizable
expertise)
▫ Sustainable competitive advantage
▫ Blue ocean strategy – new market, new product
▫ Original idea
• But, note… VC’s hear ―original ideas‖ and ―blue ocean
strategies‖ all day long! So, how do you really stand out,
and how do you really ―lesson‖ the risk for investors:
▫ Have a great TEAM!!!

Finance:

Sample startup –
creating shares and
getting started:

Issuing Shares – attracting investors
(and partners)
• In order to accommodate equity financing, two
things have to happen:

• 1. You must convince the investor you have a
worthwhile enterprise

• 2. You must have a business entity that can
accommodate investment— that is, you must do the
paperwork with your partnership, limited liability
company, or corporation to officially grant
ownership interests to investors.
http://kookyplan.pbworks.com/issuing-shares

Issuing Shares – attracting investors
(and partners)
• Corporations are the ideal means for making
an investment. Shares can be issued to reflect
ownership interests, and state laws provide for
different level of stock ownership— for example,
nonvoting and voting shares.

• But isn’t forming a corporation a little too
pretentious for an invention? No, it
isn’t. Corporation law facilitates the formation
of very small, liberally regulated corporations

Attraction to investors of investing in a
startup corporation

• ―In general, when it comes to investment, there
is something about owning speculative stock in a
real corporation that appeals to the adventurous
capitalist in most of us.


Dividing the Pie With Strategic
Partners
• Probably the most important question that arises
when granting equity to strategic partners is what
percentage of the shares of the company the
inventor should grant to each partner.

• There is one simple answer to this question:

• As little as possible while still respecting the
profit motive of the investor.

Partners
• If you give up a big chunk of stock to early
partners, you almost certainly won’t be able to
attract the right capital later on.
• Thus, when your product is ready to ―roll out,‖
you will be severely handicapped by not having
sufficient finance, and your enterprise will
remain ―small potatoes,‖ that is, an interesting
little business that could have made it big


Partners
• Carried to its extreme, you might believe that an
offer of one percent of your company is fair.

• Not so.

• An offer of one percent would likely insult the
intelligence of any potential strategic partner
and kill any deal before it got beyond the
exploratory conversation.

Partners
• Ten percent of a startup company is the kind of
minimum talking figure that might attract me if
I were a designer or patent attorney.
• But only if that ten percent were in some
equitable relationship to the amount of stock
you claimed for your own, as the founder, and
for the other partners.


Partners
• The mechanism for ―dividing the pie‖ is that of
issuing stock or shares.
• For example, suppose you start out with a
declaration that your corporation has 100
shares. These shares represent its total value at
the time you incorporate.
• The true value may be nothing or even negative
at this time, but that’s not the point.


Partners
• Now, you take in three equal partners who are
each given 10 shares in exchange for their
contributions. You hold 21 shares. The
remaining 49 shares are held ―in the treasury,‖
which may be only an envelope in your milk-
crate file at this time. This is an example of the
humble beginning of a corporation that at least
has defined who owns how much.


Dividing the (shares) “pie”
Sales

partner 1
partner 2
partner 3
You keep
Keep in Treasury

Finance:

Attracting Angel
investors

Partners
• Some angels will want 51 percent so that they
can control the company and kick out any
partners who are not effective (or even kick out
some who are effective in order to kick in their
own people).
• Other angels will want a substantial chunk, but
not control, preferring that the control, and the
burden of succeeding, remain with the
entrepreneur and his or her strategic partners.


Partners
• Thus, it seems prudent to never yield more than
a total of 49 percent except in the most
desperate circumstances.
• In other words, you and all of your partners
should hold at least 51 percent forever, if
possible. (The more successful you become, the
less likely you’ll be able to hold onto that 51
percent. Not necessarily a bad situation.)


Partners
• How Much Equity Does an Angel Want?
• Angels want a piece of your business— usually
represented by corporate shares.

• angel investors typically receive 21% equity in
the businesses in which they invest. However, of
course, an angel who wants to control the
business will seek a majority stake.


Partners
• The actual amount an angel wants from your
company depends on how much the investor is
placing into the business and how your
invention business
• is valued. Typically, the investment equals a
percentage of the business value. So, if your
invention business is valued at $100,000, an
angel would, as a very general rule, expect to pay
$25,000 for a 25% ownership interest.


Partners
• Obviously, there are a few challenges here.
• One is to determine the appropriate market value
for your invention business— a difficult task
considering the speculative nature of many
inventions, especially inventions that have not yet
been market-tested.
• Another challenge is not only to determine what the
company is worth at the time of investment, but also
to consider its value at the time when the angel
plans to cash in— for example, the value of the
company when it is sold in five years.

Partners
• But keep in mind that the investor is going to be
looking for a return between 20% and 50%
annually.
• So, if an investor puts in $250,000 for a
onequarter interest of a business valued at
$1,000,000 and expects to cash out in five years
with a 40% per year return, your business would
have to be worth $5,400,000 in five years in
order for the angel to receive $1,350,000 (a 40%
return on $250,000 over 5 years).

Partners
• Also, angels may want more than an ownership
interest. They may want management power, a right
for future financing— for example, to buy more
shares at a fixed price or to prevent their ownership
rights from being diluted— and/ or some degree of
control over the venture.
• Making these decisions may be beyond the skill of
an inventor. Seek advice when you are asked to
make concessions such as creating voting
classes, ceding control or power to board
members, or granting management
control, particularly if you intend to keep a majority
interest and control over the board.

International IQ moment

Inspiration from
global travels

Potala Palace, Lhasa (Dalai Lama's
palace)
• Now a Chinese
museum, the Potala
Palace was traditionally
the seat of the Dalai
Lama, Tibetan Buddhists'
spiritual leader. Famous
for its imposing white
walls surrounding the
inner red palace, the
building sits at 3,700
meters or over 12,000
feet. The Potala Palace is
located in Lhasa, the
capital of the Tibetan
Autonomous Region.

International IQ
• Understand sensitivity of ―Tibet-issue‖ to
Chinese politics internationally
• Unrest, politics, riots, Olympics
• Relations with US, Obama, Europe

Mid-term Exam – May 8th, 2010
Note: you should start preparing now…

Exam: May 8th, 2010: -- 830 am-10am
• 1.5 hrs to take exam
• Mixture of
▫ Multiple choice
▫ Short answer (15 words max)
▫ Essay (half page max)

• How to prepare
▫ Study all slides from my lectures

part 4: Global entrepreneurship class

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part 4: Global entrepreneurship class