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New Ventures Financing

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Sources of Financing

Own Money/Customers/Suppliers – “bootstrapping” Friends and family “Angels” and sophisticated angels Early Stage / Seed VC Traditional VC Debt Financing / Banks Corporate partners or strategic investors Public Capital Markets

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Matching Need with Type of Capital

Key is the duration the capital will be required and the risk associated with it

The longer the term and the riskier, the closer to equity The shorter term and less risk, the closer to debt

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Some Alternative Sources of Financing

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Pluses and Minuses

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Source + - Own money/Customers/ Suppliers

Relatively Easy Helps assure future success Retains control with minimum

oversight

Requires well-established network Requires some personal wealth Requires positive cash flow

Friends & Family Easily Accessible Good Terms Little Due Diligence

Thanksgiving Dinner Lack of sophistication

Angels & Sellers Eager/Knowledgeable “Good” Terms

Idiosyncratic More or Less sophisticated

Early Stage VC Expertise Legitimacy

Managerial control Scarcity of Early Stage VC firms

Traditional VC Expertise Legitimacy

Deal Terms It’s about the money

Asset Lenders Leverage Benefits No/Little Equity dilution

Covenants Bankruptcy Exposure

Corporations Extensive Resources Provide Credibility Exit Strategy

Slow Decision Making Process Foreclosing Exit Options

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Questions to Ask

What are the venture’s MONTHLY cash flows? How much cash is required in total – how deep is the trough? What size bites do we want it in? What are the particular risks and rewards and who has an appetite

for them? How can the Reward / Risk ratio be managed? What returns will investors expect?

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More Questions

What terms matter other than price, and am I willing to live with these terms ?

What alternatives do I have? What do I need other than $$, and what do they bring other than $$? Likely exit routes / liquidity path? What will the returns look like for me after I give up what will be

required?

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Bootstrapping vs. Taking Other People’s Money

Imposes a significant legal and moral burden upon the entrepreneur

Imposes the requirement for some kind of “exit” or “liquidity” event

Much simpler / easier / better if the business can be started w/ the entrepreneur’s own $$ and grown w/ internally generated funds

But, often not possible for high potential ventures

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F&F & Angels

Individual investors often invest for some reason other than pure cash return

What are their reasons: a + or – for you Managing info flows is key

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Venture Capital

Require probability of exceptional returns – swinging for the fences

Need to put large amounts of capital to work High stakes – majority of founders do not make it

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Corporate Partners

Often want something other than a pure financial return This can be a + or – depending upon whether their

objectives line up w/ entrepreneur’s / venture’s Even if they appear to be aligned at the start, can easily

change

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Banks

Will always look to cash flow first Then to corporation assets Then to personal assets, guarantees You can reach a point where it is in their interests to pull the plug

– their last chance to get out whole – will not be in the equity holders’ best interests

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LBO Value Creation

Value of the firm

(EBITDA Multiple)

Value of Debt

$

Time

Value of the Equity

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Cumulative Cash Flow in $

Time

The Cash Flow Cycle for a Venture

Burn Rate

Date of First Cash Flow Positive

Maximum Financing Needs

Date of Cash Breakeven

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Risk/Reward Management

Probability of

Occurrence Expected Value

-100% +25% +100% Return on Investment

Probability ofLosing 100%

Goal 1

Goal 2

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Free Cash Flow and the Choiceof Burn Rates

TIME

CASHFLOW

0

+

-

Step on the gas

Moderatespending rate

Conserve fuel

Free Cash Flow and The Choice of Burn Rates

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Staged Capital Commitment, Risk and Marketplace InformationCASH FLOW

TIMESeed Stage 1 Stage 2 Stage 3

IPO/Partial Sale/Recap

Seed. Intense Customer Interviews ……Segmentation/ Value

Stage 1. Construction of Prototype or Simulation……Verification

Stage 2. Beta Site Selection & Installation……Influence Gathering

Stage 3. Broad Customer Interviews & Targeting…..Niche v. Mass Market

Then Accumulation of Target Segment Reference Account... References that matter to the type of Customers and Partners you need…the Recurring Requirements are Interviewing (Discovery)….and Qualification (Product Capability v. Customer Need)..and Selling What You Have

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Reduced Uncertainty Over Time

CASH FLOW

TIME

Access to Debt Capital

Staged Capital Commitment

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Impact of Leverage on Equity Risk

Returns

Probability of outcome

Distribution of Total Value (Debt and Equity)

Distribution of Total Equity Value