Funding MBAX 6100 Entrepreneurship & Small Business Funding Frank Moyes Leeds School of Business University of Colorado Boulder, Colorado

Funding Funding Your New Venture Next 3 Weeks  This week: Venture Capital & private placement  Next week Debt & other forms of funding  Following week: Negotiating Term Sheets

Funding Today’s Agenda  Locomotion presentation  Funding  Venture Capital  Venture Capital  Chris Scroggins of Sequel Venture Partners  Rob Balgley of Skyetek  Private Placement  Doug Collier  Due: Mid-term & entrepreneurship papers

Funding Venture Capital

Funding Venture Capital  $21.7 billion in 2005  2,939 investments  Down from $104 billion & 7,832 deals in 2000  Pool of capital invested in rapidly growing companies  Private Partnerships  General partners – manage  Limited partners – provide funds

Funding What Are the Advantages to Venture Capital?

Funding What Are Disadvantages of Venture Capital?

Funding VC Decision Making  Deal flow  Less then 2% of deals are funded  1 to 2 new deals per year per partner  Due diligence – in-depth investigation of the venture & you  Time frame to do a deal: 3 to 12 months  Entrepreneur decision making  Due diligence  Chemistry is key

Funding Managing VC Portfolio Companies  A, B, C, & D Rounds  Dry powder  Each round is often staged with milestones  Board of Directors  Hands-on vs. portfolio approach

Funding What Do VC’s Look For?

Funding Control: Why do VC’s Often Wind-up Owning > 50% of a Venture?

Funding VC Required Return on Investment  Seed 80%+  Start-Up 60%  Early Stage 50%  Second Stage 40%  Third Stage 30%  Bridge 25% ROI 5 yr. Increase  19x  10x  8x  5x  4x  3x Bygraves & Zacharakis

Funding What Are the Implications to the Entrepreneur of VC ROI?  The later the stage, the better the deal  The better the management, the better the deal  The quicker the exit, the better the deal

Funding Why people want to be VC’s?  Partnership  General partners  Limited partners  Management fees 2%  Specialize in an industry  Carried interest – 80/20  Series of funds

Funding Angels  Sophisticated investor who invests in early stage companies  250,000 + angels in US  Invest $5 bill - $10 Bil, 20K – 30K companies annually  Typical investment = $25K - $250K  High net worth  Usually wants to invest in industry where has experience  Accessing Angels  Not in the Yellow Pages  Networking  ACE-net.org

Funding Angels (cont’d)  Advantages  Early stage resource  Value-added money : network, advice, commitment  Disadvantages  No follow-on funds  Give-up equity  Over-control from angel