Entrepreneurship I Class #3 Financing the Venture

9/11/022 Cash is king Cash flow is queen

9/11/023 Timing When do you look for cash? –more cash vs. less cash –cash sooner vs. later –less risky cash vs. more risky At least 6 months to raise capital Balance between cash needs and dilution

9/11/024

5 Types of financing Debt Equity Variations – convertible debt Advances on product sales Technical development (partner)

9/11/026 First step Credit cards Family loans/investment Partnerships –customers –suppliers –joint venture –corporate

9/11/027 Stages Start-up capital Seed funding – –angels, etc. –private placements Early stage financing (VC): –first round – series A –development stage – second round, series B –expansion stage – third round, series C –growth stage – series D, mezzanine financing Public offerings – IPO

9/11/028 Stock classes Common stock Preferred stock Convertible debenture Loan with warrants

9/11/029 Venture capital 5-10x return 1 out of 10 are hits Invest at least $2mm Change the world, disruptive technologies Industry focus Physical location is important Hard to get Business plan and presentation Founder/management is key Large = $500mm

9/11/0210 VC funds Cash pooled by pension & endowment funds and wealthy individuals Expect returns of 50-60% on high risk investments About 7% of these investments account for 60% of the profits One third results in partial or total loss Each project must represent a home run

9/11/0211 VC continued Large markets > $100 mm Companies worth $1b in sales Dominated by popular industry (software, internet, bio) Arthur Rock limits his investments to those that can “change the world”.

9/11/0212 Changing the World A record number of companies seemed to be doing just that throughout the 2000 bubble. Investments increased six-fold. As of 2002, sums invested returned to pre- bubble levels. $6.8B invested in 1 st qtr Jump to $ 29B invested in 1 st qtr Back to $6.4B invested in 1 st qtr (PricewaterhouseCoopers and National Venture Capital Association MoneyTree)

9/11/0213 New Trends Growth in mergers and acquisitions vs. decline in start-up investments. (PricewaterhouseCoopers 2002). Only 25% of VCs believe economy will improve in next 6 months. (DeLoitte & Touche, LLP 2002). –Hot investment areas: biotech, health care, semi- conductors, followed by Internet security. –Traditional hot spots such as software, communications & networking and service sectors are down. Wired.COM announced 46 venture hot spots. –Silicon Valley top on the list with perfect score. Domestic runners up include Albuquerque, NM; Boston, MA; Chicago, IL; and New York City, NY.

9/11/0214 Pittsburgh VC Local firms include: Adams Capital, Birchmere, Hillman, Mellon, PNC, and Redleaf Birchmere and Adams are at least second funds Local investments plus out of town

9/11/0215 Challenges with VC Funding VC money is hard to get Early stage money is even harder Must have an introduction Importance is founders not the idea Good business plan Solid strategy for entering the market and growth Not usually seed capital Investments of ~ $2m

9/11/0216 Remember... Value added The earlier you get VC funding, the more you give away –management team experience –risk –reward

9/11/0217 Angels Private offering is viable alternative 30-40% of companies end up getting private equity funding $5-10b invested annually in 20-30K companies $20-50K is typical Many are entrepreneurs who want to help and invest in other entrepreneurs

9/11/0218 More on Angels Individuals and syndicates –private investors group –band of angels May take considerable equity May try to dominate venture Don’t like it if you miss profit/sales goals

9/11/0219 Remember... Finding angels can be hard Tremendous value added –knowledge of markets and technologies –contacts –strategies Fees of investment bankers & attorneys may need to be paid regardless of success

9/11/0220 Mind set Operational Breakeven Hi value Crack team Check growth Cash vs profits Credit Bootstrapping

9/11/0221 Bootstrapping Different mind set –resource utilization Get operational quickly Quick breakeven, cash generating projects Short term focus vs. long term growth Offer high value products or services

9/11/0222 Bootstrapping continued Forget about the crack team Keep growth in check Focus on cash, not on profits, market share Cultivate banks (line of credit)

9/11/0223 Exit Strategies Sale or merger IPO Transfer of ownership

9/11/0224 So, There’s a lot of good ideas There’s a lot of money There’s more money than good ideas There’s only a few great opportunities Those get financed