Más contenido relacionado La actualidad más candente (20) 1. Chapter 2
An Overview of New Venture
Financing
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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
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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
Block and Macmillan (1992)
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 2
4. •
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Stages of New Venture
Development
Development stage
Start-up
Early growth
Rapid growth
Exit
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 2
5. Stages of New Venture
Development
Figure 2-2
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 2
6. •
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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. •
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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
8. Sources of New Venture
Financing
Figure 2-3
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter2
9. International Venture Capital and Business Angel Investment
2000-2001 Averages
$18,000
Millions of US Dollars
$16,000
Venture Capital
$14,000
Informal Investment
Figure 2-3
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
Argentina
Australia
Belgium
Brazil
Canada
Denmark
Finalnd
France
Germany
Hungary
India
Ireland
Israel
Italy
Japan
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Singapore
South Africa
South Korea
Spain
Sweden
United Kingdom
$0
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter2
13. How Changes in the Stock Market
Relate to New Equity Capital
Raising
Figure 2-7
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 2
14. Deal Structures
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“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
16. Question 2-1
Use the Internet to locate some websites of venture capital firms
and angel investors
– Based on your search, what are the characteristics of
investments sought by these two types of investors?
– What are the main differences in investment characteristics
between the two types of investors?
– What differences in investment objectives, if any, do you see
within each type of investor?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
17. Question 2-2
In activities such as education and healthcare, profit and non-profit
enterprises compete with each other
• What do you think it means for an enterprise to be
organized as non-profit?
• Why do you think non-profit enterprises sometimes
compete aggressively for business?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
18. Question 2-3
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What is “limited liability” in terms of total risk and risk allocation?
If equity investors have limited liability and the venture fails, how
does it affect the equity investors, creditors, employees,
suppliers and customers?
Do you think it would matter to other stakeholders whether
equity investors have limited liability? Why or why not?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
19. Question 2-4
The following table contains financial information from the business
plan of a new venture, LaserGolf, Inc, that makes a portable device
that uses Laser technology for measuring distances with great
precision.
(Amounts in thousands of dollars and in intervals of six months)
* Equals cash flow available to investors
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
20. Question 2-4 (Cont’d)
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How would you propose to identify the stages of new venture
development?
How much cash is the venture expected to need in total? Why?
Would your proposal for staging be different if you were advising
the entrepreneur as opposed to a prospective investor?
What would you suggest as useful milestones for evaluating
progress?
What kinds of investors are best suited for investing at various
stages of development?
Suppose, after your group makes an initial investment in the
venture prior to month 18, the venture fails to achieve the next
milestone you had agreed for making the next cash infusion,
what would you do? Why?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
21. Question 2-5
An existing biotechnology venture has a prototype of a device for
using ultrasound to shatter kidney stones. The venture is seeking
an infusion of $5 million to carry it to the next milestone. The $5
million is needed to complete the testing required for FDA
approval. Three alternatives are under consideration:
• Scenario 1: An investor is proposing to provide the capital
in exchange for $2 million shares of common stock
• Scenario 2: The investor will accept 1.8 million shares of
preferred stock, convertible to common on a 1 for 1 basis
• Scenario 3: The investor will accept 1.5 million convertible
preferred shares, along with warrants to acquire an
additional 1.5 million shares for a nominal price. The
warrants can be exercised only if the venture fails to
achieve the revenue level projected by the entrepreneur in
2 years
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
22. Question 2-5 (Cont’d)
• Compute the pre- and post- money valuations for each
scenario.
• If you were the entrepreneur, what factors would you
consider in deciding which offer to accept?
• If you were the investor, how would you interpret the
entrepreneur’s choice?
• In any case, entrepreneur would own 2.5 million shares of
common stock
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
23. Question 2-6
In a previous round of financing for a resort spa, an investor
contributed $2 million in exchange for 1 million shares of common
stock with the entrepreneur retaining 2 million shares.
Due to massive delays and cost overruns, the entrepreneur needs
another $1 million with which he hopes to complete development.
However the existing agreement includes a ratchet provision for
the prior investor. Under the terms of the ratchet, the investor will
receive enough new free shares so that his average cost per share
is same as that of any new investor
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
24. Question 2-6 (Cont’d)
a) Suppose that in the absence of the ratchet provision a new
investor would be willing to accept 1.25 million shares in
exchange for the $1 million of investment. Compute the postmoney valuation
b) Now based on valuation in previous part, giving effect to the
ratchet provision, what price per share would the new investor
seek and how many shares would the existing investor
receive?
c) Suppose the ratchet agreement has a floor that limits the
average cost of the existing investor to a minimum of $1 per
share. How would the limitation affect the price per share for
the new investor and the number of new shares to the new
investor?
d) What fraction of the equity would the entrepreneur end up
retaining under each of three scenarios?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
25. Question 2-7
Define “term sheet” and “investment agreement”. What are the
differences between the two?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
26. Question 2-8
Search the Internet or print media sources to find a prospective
invention that may lead to a marketable product in the future
(Popular Science is a good source, among others,
www.popsci.com).
a) Briefly describe the product.
b) As a potential investor, identify four milestones that you might
want to use as bases for staging investments and evaluating
progress.
c) Referring to Figure 2-2, identify the stage of development.
d) Based on your reading of the chapter, what types of financing
would you select for the product and for which development
stage(s) would you employ each financing type? Explain.
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
27. Question 2-9
Hacker Inc., a software developer, is considering a financing deal
with an investor. They have agreed on a $2 million investment for 2
million shares. Hacker has developed promising gaming software
to use with popular game consoles. But has been stymied by the
closed architecture of the consoles. If the architecture opens up
and interest in the software takes off, Hacker will need
considerably
more money to continue its line of software.
a) Design a ratchet provision, to include in the investment
agreement, which will protect the investor against dilution in
subsequent funding rounds.
b) Why would the entrepreneur agree to the provision?
c) What are the costs, direct and indirect, of such an anti-dilution
provision? Explain.
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
28. Question 2-10
Why do you think convertible preferred stock is so common in
investment deals between entrepreneurs and venture capital
investors? Why not use common stock? Why not use convertible
debt?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
29. Question 2-11
When would you organize as an S Corporation instead of a C
Corporation?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
30. Question 2-12
As an entrepreneur, when would you seek business angel
financing as opposed to venture capital financing?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
31. Question 2-13
Explain the advantages of basing financing on attainment of
milestones. What problems might milestones create?
©2003, Entrepreneurial Finance, Smith and Kiholm Smith
Chapter 1
