1. 13 - 1 Chapter 13 Obtaining Venture and Growth Capital McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. 13 - 2 Exhibit 13.1

3. 13 - 3 Obtaining Risk Capital Three central issues to be considered Does the venture need outside equity capital? Do the founders want outside equity capital? Who should invest?

4. 13 - 4 Angel Investors Who are angel investors? Most are self-made entrepreneur millionaires Many are in their 40s and 50s Most are well educated Ninety-five percent have college degrees from four-year colleges Fifty-one percent have graduate degrees (Forty-four percent are in a technical field and thirty-percent percent are in business or economics) Ninety-six percent are men

5. 13 - 5 Informal Investors What type of ventures lend themselves to the use of informal investors? Ventures with capital requirements of between $50,000 and $500,000 Ventures with sales potential of between $2 million and $20 million within 5 to 10 years Small, established, privately held ventures with sales and profit growth of 10% to 20% per year

6. 13 - 6 Informal Investors What type of ventures lends themselves to the use of informal investors? Special situations, such as very early financing of high- technology inventors who have not developed a prototype Companies that project high levels of free cash flow within three to five years

7. 13 - 7 Exhibit 13.3

8. 13 - 8 Exhibit 13.6

9. 13 - 9 Exhibit 13.8

10. 13 - 10 Exhibit 13.9

11. 13 - 11 What to Look for in Investors Seek investors who: Are considering new financing proposals and can provide the required level of capital Are interested in companies at the particular stage of growth Understand and have a preference for investments in the particular industry

12. 13 - 12 What to Look for in Investors Seek investors who: Can provide good business advice, moral support, and has contacts in the business and financial community Are reputable, fair, and ethical and with whom the entrepreneur gets along Have successful track records of 10 years or more advising and building smaller companies

13. 13 - 13 What to Look Out for in Investors Attitude Be wary if getting through to a general partner in the investment firm is an ordeal Be wary if the investor thinks he or she can run the business better than the lead entrepreneur or the management team Over commitment Be wary of lead investors who indicate they will be active directors but who also sit on the boards of six to eight other startup and early0stage companies or are in the midst of raising money for a new fund

14. 13 - 14 What to Look Out for in Investors Inexperience Be wary of dealing with venture capitalists who are under 30 years of age and have: An MBA Only worked on Wall Street or as a consultant No operating, hands-on experience in new and growing companies A predominantly financial focus

15. 13 - 15 What to Look Out for in Investors Unfavorable reputation Be wary of funds that have a reputation for early and frequent replacement of the founders Be wary of those where more than one-fourth or the portfolio companies are in trouble or failing to meet projections in their business plans Predatory pricing Be wary of investors who unduly exploit conditions during adverse capital markets by forcing large share price decreases in the new firms and punishing terms on prior investors

16. 13 - 16 Presenting Information to Possible Investors A concise presentation should include the following: What is the market opportunity? Why is it compelling? How will/does the business make money? Why is this the right team at the right time? How does an investor exit the investment?

17. 13 - 17 Chapter 14 The Deal: Valuation, Structure, and Negotiation McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

18. 13 - 18 Exhibit 14.1

19. 13 - 19 Exhibit 14.3

20. 13 - 20 Exhibit 14.5

21. 13 - 21 Valuation Methods The Venture Capital Method Appropriate for investments in a company with negative cash flow at the time of the investment, but which in a number of years is projected to generate significant earnings The Fundamental Method Simply the present value of the future earnings stream

22. 13 - 22 Valuation Methods The First Chicago Method Employs a lower discount rate, but applies it to an expected cash flow Discounted Cash Flow Three time periods are defined (1) Years 1-5, (2) Years 6-10, (3) Year 11 to infinity Operating assumptions include initial sales, growth rates, EBIAT/sales, and (net fixed assets + operating working capital)/sales; also note relationships and trade-offs

23. 13 - 23 What is a Deal in Entrepreneurial Finance? Deals—economic agreements between at least two parties that involves the allocation of cash flow streams (with respect to both amount and timing), the allocation of risk, and hence the allocation of value between different groups

24. 13 - 24 Deal Characteristics Characteristics of successful deals They are simple They are robust They are organic They take into account the incentives of each party to the deal under a variety of circumstances They provide mechanisms for communications and interpretation

25. 13 - 25 Deal Characteristics Characteristics of successful deals They are based primarily on trust rather than on legalese They are not patently unfair They do not make it too difficult to raise additional capital They match the needs of the user of capital with the needs of the supplier They reveal information about each party

26. 13 - 26 Deal Characteristics Characteristics of successful deals They allow for the arrival of new information before financing is required They do not preserve discontinuities They consider the fact that it takes time to raise money They improve the chances of success for the venture

27. 13 - 27 Minimizing Surprises Tips to consider when raising capital: Raise money when you do not need it Learn as much about the process and how to manage it as you can Know your relative bargaining position If all you get is money, you are not getting much Assume the deal will never close Always have a backup source of capital The legal and other experts can blow it -- sweat the details yourself

28. 13 - 28 Negotiation Steps of principled negotiation Separate the people from the problem Focus on interests, not positions Generate a variety of possibilities before deciding what to do Insist that the result be based on some objective standard

29. 13 - 29 Burdensome Issues for Entrepreneurs Co-sale provisions Ratchet anti-dilution protection Washout financing Forced buyout Demand registration rights Piggyback registration rights Key-person insurance

30. 13 - 30 Kawasaki, Chapter 3 The Art of Pitching You have one minute Don’t make it overly autobiographical Answer the unspoken questions from the “little man” by using the “For instance…” statements Not everyone will be shocked, awed or inspired So…

31. 13 - 31 Kawasaki, Chapter 3 The Art of Pitching Decide what is MOST important about: Your idea The business model Most likely questions to be answered You

32. 13 - 32 Kawasaki, Chapter 3 The Art of Pitching Know your audience 10/20/30 or 10 slides, twenty minutes, thirty-point font Excuse me, thirty-point font Slides should contain talking points not text

33. 13 - 33 Kawasaki, Chapter 3 The Art of Pitching Remember, you only want to spark interest, this isn’t the making or closing of a deal

34. 13 - 34 Kawasaki, Chapter 3 The Art of Pitching CEO/Founder should do the talking Team management during presentation (no interrupting)

35. 13 - 35 Kawasaki, Chapter 3 The Art of Pitching Focus on your total addressable market (TAM) Just enough detail…not too much, not too little Take notes