financing growth alex f. denoble, ph.d. san diego state university meet u.s. program
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Financing Growth
Alex F. DeNoble, Ph.D.San Diego State University
MEET U.S. Program
MEET U.S.
The Fund-raising Challenge:Raising funds is like a chess match. The entrepreneur
must constantly think ahead to the next fundable milestone. This challenge raises 2 fundamental
questions:
• What does my company have to look like at the next fundable milestone?
• What must I do to get the company ready for the next fundable milestone?
MEET U.S.
Growth of a Firm• Firms evolve through lifecycle stages • Each stage is characterized by:
– New strategic challenges and issues
– Evolving managerial skill requirements
– Changing levels & types of risks
– Changing financial requirements
MEET U.S.
COMPANY PHASES
Entrepreneur/Innovator Builder/Driver Corporate Fighter
Seed/DevelopmentPhase
GrowthPhase
MaturePhase
SALES
TIME
MEET U.S.
Sources of Capital by Stage of Development
Seed Stage:
Self-funded
Family, friends, fools (3f’s)
Government grants
Series B: Growth:
Angel syndicates
VC’s
Strategic Partners
Series A:
Angel Investors
Angel Syndicates
Some early-stage VC’s
Rapid-Growth:
VC’s
Strategic Partners
IPO
Corporate Buy-outs
MEET U.S.
Value Drivers by Stage of Development
Seed Stage:•Proof of concept•Initial market validation
Series B Growth:•Referencable customers•Company infrastructure•Strategic alliances•Strategic investors
Series A:•Technology validation•Further Market Validation•Assembling the team
Rapid Growth:•Sales Growth•Profitability
MEET U.S.
Challenges of a Growing Firm
Seed / Development Phase• Defining, refining and
testing products & markets• Gaining credibility
– Customers– Suppliers– Investors
• Attracting critical talent• Establishing logistics &
distribution channels
Growth Phase• Building an organization
– Infrastructure– Policies – Procedures
• Managing people– Recruit – Train– Retain
• Managing Customers & Markets
• Raising Capital
MEET U.S.
Types of Equity Capital
• Savings and other personal assets• Friends, family and fools (the 3 F’s)• Angel Investors• Angel Syndicates• Venture Capital Firms• Strategic Corporate Partners• The Public Markets• Corporate Buyout
MEET U.S.
Venture
Capital Fund
Pension funds
Insurance cos
Individuals
Corporations
Portfolio Cos.
$
$
$
$
$
$
$
$
$
Venture Capital Funds FlowVenture Capital Funds Flow
MEET U.S.
Venture
Capital Fund
Pension funds
Insurance cos
Individuals
Corporations
Portfolio Cos.
Harvesting the Venture FundHarvesting the Venture Fund
Return on Investment
MEET U.S.
Deal Structure Issues:
Objectives of Equity Investors• Maximum Return (IRR; Xreturn)• Large Equity participation• Liquidity
• IPO• Merger or Trade Sale• Put back to the Company
• Hedge Risk
MEET U.S.
How Equity Investors Hedge Risks
• Financial instruments
• Control• Keep founders and
motivate them• Avoid litigation• Voice in
management
• Control over major events
• Protect proprietary information
• Preemptive & first refusal rights
• Antidilution provisions• Covenants (negative &
affirmative)
MEET U.S.
Deal Structure Issues:
Founder’s Objectives• Keep as much equity as possible• Minimize dilution• Keep control of operations• Incentives for founders & key
employees• Quality investors with deep pockets• Keep restrictions to a minimum• Force conversion of preferred to
common as soon as possible
MEET U.S.
Deal Structure Issues:
Company’s Needs• Minimum funds to get to next milestone• Balance Sheet Considerations
• Debt vs equity• Simple capital structure• Availability of conventional financing
• Cash flow & income statement considerations• Future Needs
• Current Investors vs future investors• Other sources of cash
MEET U.S.
Art vs. Science of Equity Investing
Art• Management• Investors• Location• The Story• The Deal
Science• Market• Competition• Technology• Proprietary position• Financial
requirements• Valuation
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Market
• Size/Unmet Need
• Customer requirements
• Customer loyalty
• Sales cycle
• Price sensitivity
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Competition
• Who else is out there?
• What is their edge?
• What is your unfair advantage?
• How long can you sustain this unfair advantage?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Technology• What do other experts think about the
business?
• How many technical things must go right for it to be a success?
• Is it breakthrough or incremental?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Proprietary Position• What is patentable and is it worth
patenting?• Are you free to practice your art?• Can you block others?• What should stay a trade secret?• Is there a cohesive strategy to move the
product to market?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Financial Requirements
• How much money is needed to reach the next financeable milestone?
• Do you believe them?
• What happens when that doesn’t happen?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Science: Valuation
• Who are you selling to?
• What might they be willing to pay?
• Run some numbers as a reality check
• What type of return will justify the risk?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Art: Management
• Do they have the right people?• Can they recruit the right people?• Can you work with them?• Are they bureaucrats?• How do they work up and down the
organization?• Can they tell the right story to the right
audience?• Is the chemistry right?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Art: Investors• How much is the corporation willing to
risk?
• Are other investors interested in the deal?
• Are there investors from previous rounds still investing?
• Do the investors have experience in this industry?
Source: Adapted from Brian Dovey, Partner, Domain Associates
MEET U.S.
Art: Location• Will it be easy to recruit senior
management to your location?
• Will it be easy to recruit new employees when you need them?
• Are there potential acquirers around?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Art: The Story
• Is it compelling?
• Is it understandable?
• Is it differentiable?
• Can it be told in 15 minutes or less?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Art: The Deal• How do you and others value the company?• Is it destined to be public or acquired?• Do you syndicate? With whom?• Who are you competing with for the deal?• Don’t forget the management pool• Is a “staged financing” appropriate?
Source: Brian Dovey, Partner, Domain Associates
MEET U.S.
Value-Added Benefits of VCs• Obtaining additional equity financing• Recruiting and selecting additional member
of the management team• Interfacing with other investors• Monitoring financial performance• Serve as a sounding board to team• Monitor operating performance• Formulating business strategy
Source: Ehrlich, De Noble, Moore & Weaver, 1994
MEET U.S.
Exit StrategySome options include:
• Going public
• Selling the business
• A stock buy-back at the going rate
• Leveraged buy-out
• Second round of investment
Source: Ehrlich, De Noble, Moore & Weaver, 1994
MEET U.S.
Source: Guy Kawasaki
The Top Ten Lies of Entrepreneurs
MEET U.S.
Top Ten Lies of Entrepreneurs
# 10
Entrepreneur
“Our Projections are conservative”
Investor
“Multiply this forecast by .1 and add five years”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#9
Entrepreneur“IDC (or Jupiter or Yankee Group or Gartner
Group) forecasts that our market will be $50 billion by 2003”
Investor“This is the fifth $50 billion market I’ve
heard about today”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#8
Entrepreneur“Amazon will sign our deal next week”
Investor
“Call me when you get Bezos’s signature”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#7
Entrepreneur“Key Employees are set to join us as soon
as we get funded”
Investor
“Give me their phone numbers so I can verify this story”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#6
Entrepreneur“We have no competition”
Investor
“Either there is no market or you don’t know how to use a search engine”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#5
Entrepreneur“We need you to sign a non disclosure
agreement”
Investor
“You’re clueless: no one signs a nondisclosure agreement”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#4
Entrepreneur“Cisco (or Oracle or HP or Sun) is too slow
to be a threat”
Investor
“If arrogance were venture capital, your deal would be oversubscribed”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#3
Entrepreneur“We’re glad the bubble has burst”
Investor
“We are too, because your valuation just dropped 50%”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#2
Entrepreneur“Our patents make our business defensible”
Investor
“Hire more engineers, not patent attorneys”
Source: Guy Kawasaki
MEET U.S.
Top Ten Lies of Entrepreneurs#1
Entrepreneur“All we have to do is get 1% of the market”
Investor
“I want to fund a company that will get 99% of the market”
Source: Guy Kawasaki
MEET U.S.
Thank You
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