finance intro 2010 final
DESCRIPTION
intro entrepreneurial financeTRANSCRIPT
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ENTREPRENEURIAL FINANCE INTRO
Introduce Basic Finance Concepts and Present Lenders and Investors View on Capital Markets
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Before we start… 3
Venture Capital Fill a Void VC fills a void between banks and markets 12
The Importance Money Cash is everything 7
Venture Capital in DenmarkPublic money plays an important part in the Danish venture capital market
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Workshop Pitch a company that you know… 31
VCs Invest In VCs invest in high-growth industries and A-teams
21
A Venture Capital Deal A VC addresses the risk in the investment process, the contract and active involvement
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Exit Strategies Failure is the most common occurrence – however the most likely attractive exit is a trade sale 40
Summary A quick review 51
The Venture Model The general partners are those we refer to as venture capitalists
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3BEFORE WE START…
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.. I need three volunteers?
BEFORE WE START…
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Tweet key learnings…
BEFORE WE START…
Control10Password:
MCF10
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Assignment for every study group!
Deadline - the lecture on Options Email me a list of the names in your study
group (at the end of this lecture – [email protected])
Every study-group should find 10 tweets that: You find interesting / funny That can serve as a either a summary of the
lectures or that explores an important topic Upload the Powerpoints at Slideshare and tweet
the link in Twitter in MCF10 account Two groups will present – randomly chosen
BEFORE WE START
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7THE IMPORTANCE OF MONEY
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Once upon a time…
THE IMPORTANCE OF MONEY
…CASH WAS KING
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9THE IMPORTANCE OF MONEY
Nowadays…
…CASH IS EVERYTHING
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(Shane) Stating the obvious…
THE IMPORTANCE OF MONEY
Shane, 2003
You are more succesfull if you have the cash to pay you bills. Not having the cash is what kills you....
.....Obviously it is a good thing too have as much capital as possible to begin with for the company to survive
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However…
THE IMPORTANCE OF MONEY
However too much money often results in burning more than neccessary....
.....These days it is a good thing to bootstrap your company and get the cheap financing from your customers
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12VENTURE CAPITAL FILLS A VOID
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The void between banks and the stock market
VENTURE CAPITAL FILLS A VOID
Zider, 1998
Market
Product
Debt
Equity
Existing
Existing
New
New
Debt
Interest is Regulated and the Risk is to High
IPO
The Venture is Too Small for an IPO
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Cost of capital is directly linked to the risk
VENTURE CAPITAL FILLS A VOID
Subordinated debt /Mezzanine financing
Incubators
Risk
Seed-investors(>10x returns)
Venture capital
The Bank(<10% interest)
HighModerate
Loan WarrantySchemes
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…and it is difficult to get financing from your customers
VENTURE CAPITAL FILLS A VOID
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Filling a void in the capital market
HOW VENTURE CAPITAL WORKS
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17VENTURE CAPITAL IN DENMARK
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The Danish Venture Market
VENTURE CAPITAL IN DENMARK
Vækstfonden
Bio
tech
ICT/indust
rial
tech
nolo
gy
Early stage Later stage
Capital under management
$ 50 Million
$ 400 Million
Vækstfonden
BI Life Science
BI New
Energy
Via Ventures
NorthCap
Nordic Biotec
h
LD Equity
Seed Capital Denmar
k
Dansk Kapital anlægNordic
Venture Partners
Northzone
Ventures
InventureCapital
Strong leverage effect from Vækstfonden’s involvement
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The players…
VENTURE CAPITAL IN DENMARK
Vækstfonden
• Incubators (”Innovationsmiljøer”) 7
• Business Angels 200+
• Venture Capital firms 45 (3-5 with money)
• Vækstfonden 1
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Investment activity
VENTURE CAPITAL IN DENMARK
Vækstfonden Kvartalsanalyse Q4 2008
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21VC’S INVEST IN..
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Exponential Growth…
VC’S INVEST IN
Zider, 1998
High growth industries with a big potential and scalable business models
Timing is everything
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VC Classics…
VC’S INVEST IN
• New Technologies• Mobility• Internet
• Increasing Population• Health Problems
• Lack of ressources• Infinite demand
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Opportunities arise…
VC’S INVEST IN
• New Lifestyles• Change in preferences• Increase in wealth
• Increasing aged Pop. • Health Problems
• General Purpose Technologies
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25VC’S INVEST IN
VC’s prefer A-teams with second class ideas than B-teams with first class ideas
It is all about execution
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Management is the most important factor for success
VC’S INVEST IN
Study of key success factors for MIT start-ups. Percentage of cases when this factor was one of the top one or two most influential factors in the success
0 10 20 30 40 50 60 70 80
Financial markets
Technology
Distribution
Valuation
User market
Management
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The Ideal Entrepreneur - Is a team
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The Google Team – Technical and Commercial Masterminds
VC INVEST IN
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However the perfect entrepreneurs don’t always look great
VC’S INVEST IN
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A good business case and plan..
VC’S INVEST IN
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31WORKSHOP
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Pitch a company that you know – Imagine the early beginnings of the company…
WORKSHOP
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Process
You have 30 minutes to prepare 5 minutes to present Maximum of 5 slides 5 minutes questions from VC audience Two teams will present
WORKSHOP
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Be back on timeThe doors will lockDon’t keep VC’s waiting
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35A VENTURE CAPITAL DEAL
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The problems a VC must address
A VENTURE CAPITAL DEAL
Leach & Melicher, 2006
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Two ways of addressing the problems...
A VENTURE CAPITAL DEAL
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The Process
A VENTURE CAPITAL DEAL
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Contractual…
A VENTURE CAPITAL DEAL
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40THE VALUE VCS PROVIDE
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Enabling the venture…
THE VALUE VCS PROVIDE
100% of a small pie
20% of a large pie
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Smart Money
THE VALUE VCS PROVIDE
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Typical Entrepreneur mistakes…
1. Overoptimistic about atttractivenss of idea – don’t research
2. Overestimate how many will buy the solution3. Underestimate entry barriers4. Underestimate capital need, cost and timing of
capital need5. Has no plan B6. Lack of focus7. Hire the wrong people8. Lack of focus on EBITDA9. Seek confirmation rather than the truth10.Complicated vision11.Lacks exit strategy
THE VALUE VCS PROVIDE
SVASE
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44EXIT STRATEGIES
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What is the value of a company…
EXIT STRATEGIES
The value of a company is measured in it’s ability to generate free cash flow, meaning surplus of cash.
...However not all venture exits were known for that ability. Youtube was a good deal. 12 mio. USD => 450 mio. USD windfall to Sequoia Capital, but the company barely creates a free cash flow
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Planning
EXIT STRATEGIES
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Types of Exits
EXIT STRATEGIES
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48THE VENTURE MODEL
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The Venture Model
THE VENTURE MODEL
Limited Partner
• Fund of Funds, Pension Funds • Seek 20% IRR
General Partner – The VC• Partner• 20% of the return (after LP)• 2-3 % of capital pool in Fees
Exit Target (IPO & Trade Sale)
Entrepreneur
Funds10 Y Funds
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Taking a portfolio approach
THE VENTURE MODEL
Individual Event Probability
Company has sufficient capital 80%
Management is capable 80%
Product development follows plan 80%
Production follows plan 80%
Competitors behaves as expected 80%
Customers want product 80%
Pricing fits market 80%
Patents are issued and enforced 80%
Combined probability of success 17%
If probability of one parameter drops to 50% the combined probability drops to 10% and there are more success factors out there
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One slide summary
Cash is everything VCs fill a void between the banks and the
markets VCs invest in high-growth industries, A-teams,
great plans and execution A VC addresses risk problems with the
investment process, the contract and their involvement
The most likely exit in a Danish context is a trade sale
SUMMARY