MBAX 6100 Entrepreneurship Small Business Funding Frank

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 ØThis week: Equity & Venture Capital ØNext week Other forms of funding ØFollowing week: Negotiating Term Sheets Funding 2

Today’s Agenda Ø Equity funding Ø Venture Capital 4 Tim Connor, Sequel Venture Partners 4 Steven Bruny, Aztek Networks 4 Rob Balgley, Skyetek Ø Due: Mid-term & entrepreneurship papers Ø Value Proposition Funding 3

How Are Going to Fund Your New Venture? ØPersonal Resources ØFriends & family ØDebt ØEquity ØIPO ØNon-traditional & grants Funding 4

Stages of Development Ø Seed (proof of concept) 4 Personal Ø Start-up (set-up production & sales) 4 Angels 4 PPO Ø Early stage (full-scale operations & mkt) 4 VC 4 Government Funding 5

Stages of Development Ø Second & third stages (expansion) 4 VC 4 Financial institutions 4 Debt 4 Reinvestment Ø Exit (harvest) 4 Bridge 4 IPO Funding 6

Equity ØSources 4 F & F 4 Angels 4 Private Placement 4 Venture Capital 4 Corporate venture subsidiaries 4 IPO (Initial Public Offering) ØAdvantage 4 Permanent capital ØDisadvantages 4 Give up piece of company (dilution) 4 Responsibilities to investor 4 Exit Funding for investor – achieve a return 7

Venture Capital Funding 8

Venture Capital Ø Pool of capital invested in rapidly growing companies Ø $21. 7 billion in 2005 in 2, 939 investments Ø Down from $104 billion & 7, 832 deals in 2000 Ø Private Partnerships 4 General partners – manage 4 Limited partners – provide funds Funding 9

What Are the Advantages to Venture Capital? Ø Can provide lots of money Ø Greatest value-added money - consulting, mentoring, network 4 Help build management team 4 Kick down the door “rolodex” 4 Good VC’s know there will be problems Ø Validation of your concept Ø Know how to exit Funding 10

What Are Disadvantages of Venture Capital? Ø Loss of equity, likely control 4 But, achieve your dream Ø High maintenance 4 Long due diligence process 4 Expensive: attorneys, accountants, consultants 4 Valuation decision can be very stressful Ø Majority of investments fail Ø Founder often “leaves” Ø Must have common objectives 4 Exit strategy Funding 11

VC Decision Making Ø Deal flow 4 Less then 2% of deals are funded 41 to 2 new deals per year per partner Ø Due diligence – in-depth investigation of the venture & you Ø Syndication Ø Time frame to do a deal: 3 to 12 months Ø Entrepreneur decision making 4 Due diligence 4 Chemistry is key Funding 12

Managing VC Portfolio Companies Ø Objective: invest large amounts of money in high growth, potentially large companies Ø Specialize in certain industries Ø A, B, C, & D Rounds of preferred stock 4 Dry powder 4 Each round is often staged with milestones Ø Board of Directors Ø Hands-on vs. portfolio approach Funding 13

What Do VC’s Look For? Ø MANAGEMENT TEAM 4 Experience 4 Expertise in industry 4 Passion 4 Commitment of CEO Ø Market potential - very large & high growth Ø Growth stage of development - VC money has the greatest impact Ø Proprietary product or service Funding 14

Control: Why do VC’s Often Wind -up Owning > 50% of a Venture? ØNot because want to run company or distrust the management Ø To achieve a satisfactory return 4 Ref: BZ-Exhibits 6. 1 & 6. 2 Ø Valuation Funding 15

VC Required Return on Investment DCF Return Cash on Cash Ø Seed Ø Start-Up Ø Early Stage Ø Second Stage Ø Third Stage 4 x Ø Bridge 20 x 10 x 8 x 5 x Ø 80% Ø 60% Ø 50% Ø 40% Ø 30% Ø 25% 3 x Bygraves & Zacharakis Funding 16

What Are the Implications to the Entrepreneur of VC Returns? Ø The later the stage, the better the deal Ø The better the management, the better the deal Ø The quicker the exit, the better the deal Funding 17

Why people want to be VC’s? Ø Partnership 4 General partners 4 Limited partners Ø Management fees 2% Ø Specialize in an industry Ø Carried interest – 80/20 Ø Series of funds Funding 18

Value Proposition - 3 Elements Ø What are the features? Ø Who is the target market? Ø What are the benefits? Funding 19

Value Proposition “XYZ is a_______[describe] company. By its _______[feature(s)], it provides ______ [unique benefit(s)] to ______[target market]” Funding 20

Simple Value Proposition SST Corporation “SST is a stainless steel toothbrush company. By its one bristle brush made of high tensile stainless steel, it provides an exhilarating tooth cleaning experience to thrill-seeking X-gen consumers” Funding 21

Simple Value Proposition Dell Computer “Dell Computer sells personal computers to consumers. Our build-to-order manufacturing and customer-direct sales enable us to offer custom built computers at very competitive prices. Our customers get the computer that they have always imagined and save money. ” Funding 22

Simple Value Proposition Vic’s Coffee “Vic’s Coffee is a Boulder based coffee house. Its gourmet coffee, convenient and fast service, provide a welcoming environment for people who want to meet with their friends or a stimulating morning coffee for on-the-go business people. ” Funding 23

Attributes Ø Performance: durability, quality of materials, defect levels, tolerances, construction, dependability, functional performance (acceleration, nutrition, taste), efficiency, safety, styling, packaging, etc. Ø Cost: purchase price, quantity discounts, operating costs, repair costs, cost of extras or options, cost of installation, trade in allowance, likely resale value, etc. Ø Availability: carried by local stores, credit terms, quality of service available from local dealer, delivery time, credit card, online transactions, etc. Ø Service: hours, warrant, guarantee, return/replacement policy, upgrades, maintenance, training, installation, repair service, spare parts, customer support, tech support, training, product design, make to order, level of inventory, quotation response time, lead time, quality certification, employee capabilities, etc. Ø Environment: location, atmosphere, layout, fixtures, aesthetics, style, sound, lighting, color, etc. Funding 24

Benefits Ø Emotional: ambition, power, independence, achievement, ambition, pride of ownership, comfort, love, friendship, security, style, self Improvement, etc. Ø Social: status, image, popularity with friends or family members, reputation of brand, personal relationships, style, fashionable, etc. Ø Health: stress, fitness, mental capacity, strength, sex life, quality of life, muse, etc. Ø Financial: revenue, costs, savings, productivity, pricing, profitability, market share, save time, productivity, etc. Ø Convenience? Ø Objective is distinguish between benefits and Funding features, not put into categories 25