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Technology Ventures : From Idea to Enterprise

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  1. 18 Sources of Capital Capital is to the progress of society what gas is to a car. James Truslow Adams Summary What are the sources of capital that a new venture can use to finance the start and growth of its company? Entrepreneurs can estimate the capital required for their new business by reviewing the financial projections they prepare using the methods detailed in Chapter 17. Typically, several stages of investment will be required over the life of the business. Chapter 18: Summary Technology Ventures: From Idea to Enterprise

  2. 18 Sources of Capital Idealized cash flow diagram for a new enterprise *Burn rate of $100K per month for the first 20 month. Chapter 18: Figure 18.1 Technology Ventures: From Idea to Enterprise

  3. 18 Sources of Capital Professional investors of the think of an opportunity as OPTIONS. OPTIONS may be defined as rights but not obligations to take some actions in the future. Mathematical model of venture investment. Real Option: the right to invest in (or purchase) a real asset (a new start-up firm) at a future date. V = IV + OV IV = Intrinsic Value (Economic Capital) OV = Option Value (Strategic Capital) Chapter 18: Real Option Technology Ventures: From Idea to Enterprise

  4. 18 Sources of Capital • The Value of A Real Option Based on Four Factors • Increases with the level of uncertainty measured by the standard deviation σ. • Increases with the length of time, T, the person holding the option has to decide whether or not to exercise it. • Increases with the ratio of the current stock price, P, to the exercise price, X. The ratio is P/X. • Increases with the discount rate, r. Chapter 18: Table 18.2 – value of a real option Technology Ventures: From Idea to Enterprise

  5. 18 Sources of Capital • 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 Chapter 18: Table 18.3 – Sources of capital Technology Ventures: From Idea to Enterprise

  6. 18 Sources of Capital Comparison of major selected sources of growth capital Chapter 18: Table 18.4 – sources of growth capital Technology Ventures: From Idea to Enterprise

  7. 18 Sources of Capital Four financial steps in building a successful firm. Chapter 18: Figure 18.2 Technology Ventures: From Idea to Enterprise

  8. 18 Sources of Capital Bootstrap Financing: to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family, and friends. Chapter 18: Bootstrap Financing Technology Ventures: From Idea to Enterprise

  9. 18 Sources of Capital Advantages and disadvantages of bootstrap financing Chapter 18: Table 18.4 Technology Ventures: From Idea to Enterprise

  10. 18 Sources of Capital Grants from such organizations as SBIR and STTR can be used to support small businesses, especially in industries in which the technical challenge is the primary risk. Chapter 18: Bootstrap Financing Technology Ventures: From Idea to Enterprise

  11. 18 Sources of Capital Angels are wealthy individuals, usually experienced entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures. Chapter 18: Angels Technology Ventures: From Idea to Enterprise

  12. 18 Sources of Capital • 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% Chapter 18: Table 18.5 Technology Ventures: From Idea to Enterprise

  13. 18 Sources of 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. Chapter 18: Venture Capital Technology Ventures: From Idea to Enterprise

  14. 18 Sources of Capital The Risk and Reward Profile for Various Investments 0 Chapter 18: Figure 18.3 Technology Ventures: From Idea to Enterprise

  15. 18 Sources of Capital • 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. Chapter 18: Table 18.9 Technology Ventures: From Idea to Enterprise

  16. 18 Sources of Capital The valuation rule is the algorithm by which an investor such as an angel or venture capitalist assigns a monetary value to a new venture. Capital Return after N years: CR = M x I Market Value in Year N: MV = PE x EN or PS x SN I = investment EN = earnings in year N G = expected annual return Chapter 18:Valuation Rule Technology Ventures: From Idea to Enterprise

  17. 18 Sources of Capital Chapter 18: Table 18.15 Technology Ventures: From Idea to Enterprise

  18. 18 Sources of Capital Initial Public Offering: the first public equity issue of stock made by a company. Chapter 18: IPO Technology Ventures: From Idea to Enterprise

  19. 18 Sources of Capital Chapter 18: Table 18.17 Technology Ventures: From Idea to Enterprise

  20. 18 Sources of Capital Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully. Chapter 18: Principle Technology Ventures: From Idea to Enterprise

  21. 18 Sources of Capital A new firm intends to sell specialized integrated circuits for wireless applications. Its projections show: Year 1 2 3 Sales ($ millions) 3.0 6.2 9.8 Profit ($ millions) -1.0 1.0 3.2 Use the valuation rule to determine PO required when investors provide $5 million and expect a return of at least 55% per year. Assume the investors use PE = 14 and PS =4. Chapter 18: Exercise Technology Ventures: From Idea to Enterprise

  22. 18 Sources of Capital • VENTURE CHALLENGE • What sources of capital will you use? • Why did you select these sources? • How much capital is needed now and for what purpose? • What percentage of your venture do you plan to offer to outside investors? Chapter 18: Venture Challenge Technology Ventures: From Idea to Enterprise

  23. 18 Sources of Capital DVD Videos “Venture Capital versus Customer Funding” Vic Verma (Savi Technology) “The Benefit of Picking the Right Venture Capitalist” Marc Fleury (Jboss) Chapter 18: DVD Videos Technology Ventures: From Idea to Enterprise