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Technology Ventures: From Idea to OpportunityChapter 18: Figure 18.1
Cumulative Cash Flow ($millions)
-3
+3
+2
+1
20
10 30 40 50 Time (months)
Cash Breakeven
0
-1
-2
Idealized cash flow diagram for a new enterprise
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.3
Sources of Capital•Founders•Family•Friends•Small Business Investment Companies (SBIC)•Small Business Innovation Research (SBIR)•Professional Investors — Angels•Venture Capitalists•Banks•Leasing Companies•Established Companies•Public Stock Offering•Government Grants and Credits•Customer Prepayments•Pension Funds•Insurance Companies
Technology Ventures: From Idea to OpportunityChapter 18: Figure 18.2
1. Founding Stage
The Entrepreneurial Team Begins with a Vision, Business Model and Strategy
2. Seed Stage
Initial Financial Capital
3. Growth Stage
Growth Capital Required
4. Harvest Stage
IPO or Acquisition Provides Return to Investors and Founders
Four financial steps in building a successful firm.
Technology Ventures: From Idea to OpportunityChapter 18: Bootstrap Financing
Bootstrap Financing: to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family, and friends.
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.4
•Advantages •Disadvantages
Low pressure on valuation
Easy terms on ownership
Control by founders
Little time spent on finding investors
Unable to fund growth phase
Lack of funding commitment for future
Loss of advice from professional investors
Advantages and disadvantages of bootstrap financing
Technology Ventures: From Idea to OpportunityChapter 18: Angels
Angels are wealthy individuals, usually experienced entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures.
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.5
Criteria for Angel Investments
The New Venture is/has:
•Within the industry that the angel has experience.
•Located within a few hours driving distance
•Recommended by trusted business associates
•Entrepreneurs with attractive personal characteristics such as integrity and coach-ability.
•Good market and growth potential for the opportunity.
•Seeking an investment of $100,000 to $1 million and offers minority ownership, less than 40%
Technology Ventures: From Idea to OpportunityChapter 18: Venture Capital
Venture capital is a source of funds for new ventures that is managed by investment professionals on behalf of the investors in the venture capital fund.
Technology Ventures: From Idea to OpportunityChapter 18: Figure 18.3
50
40
30
20
10
0
Treasury Bonds
Corporate Bonds
Franchises
Imitations, Improvements
Innovations, Technology
Strong Growth Companies
Acquisitions
Money Market Funds
Risk: Low Medium High
Chance of 0 30% 60% Total Loss
E x p e c t e d
A n n u a l
R e t u r n
(%)
The Risk and Reward Profile for Various Investments
0
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.9
Characteristics of An Attractive Venture Capital Investment
•Potential to Become a Leading Firm in a High Growth Industry with few competitors.
•Highly Competent and Committed Management Team and High Human Capital (Talent).
•Strong competitive Abilities and a Sustainable Competitive Advantage.
•Viable Exit or Harvest Strategy.
•Reasonable Valuation of the New Venture.
•Outstanding Opportunity.
•Founders Capital Invested in the Venture.
•Recognizes Competitors and Has a Solid Competitive Strategy.
•A sound business plan showing how cash flow turns positive within a few years.
•Demonstrated progress on the product design and good sales potential.
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.15
I ssues to be resolved within the Terms of the Deal
Percent Ownership for the Investor Group
Timing of Investment
Control Exerted by Investor
Vesting Periods for Ownership by the Entrepreneur Team
Rights to Require an IPO, Registration Rights
Type of Security
Reservation of Ownership for Employees (Stock Option Pool)
Anti-dilution Provisions
Milestones of Achievement, if there are multiple tranches (steps) to the investment
Stock Option Plans
Technology Ventures: From Idea to OpportunityChapter 18: IPO
Initial Public Offering: the first public equity issue of stock made by a company.
Technology Ventures: From Idea to OpportunityChapter 18: Table 18.16
Advantages and Disadvantages of I ssuing on IPO
Advantages
Raising new capital with the possibility of later, additional offerings
Liquidity — Ability to convert ownership to cash, potential of harvest for investors and founders
Visibility — Build brand and reputation
Disadvantages
Offering costs and effort required
Disclosure requirements and scrutiny of operations
Perceived pressures on achieving short-term results
Possible loss of control to a majority shareholder