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Entrepreneurs can estimate the capital required for their new business by reviewing the financial projections they prepare using the methods detailed in chapter 17. In examining the projections and the cash flow statement, it becomes clear what capital will be needed and when. The entrepreneurs can provide some of the required capital, and friends and family can help by investing in the new business. Most businesses that expect to grow to a significant scale will need outside capital investments from professional investors. Typically, several stages of investment will be required over the life of the business. This chapter addresses the task of attracting investors to a new business and creating an investment offering that will meet the firm’s needs and the investors’ requirements for an attractive return. In this chapter, we describe the funds that may be available from friends and family, individual investors, and professional investors, as well as banks. Several stages of investment may be required, and it must be determined what percentage ownership is offered to the investor. This determination is based on the valuation of the new business at each stage. With the mutual agreement of the investor and the new firms, the terms of the deal will be recorded and the arrangement completed. An alternative to an equity investment is debt financing from a bank or other financial institution. Furthermore, a line of credit can help finance short term cash-flow requirements. Many firms use an initial public offering (IPO) to raise additional growth capital and to offer early investors a means of harvesting the value created in an emerging firm. Preparation for an IPO can be an important task for a firm with solid growth potential.
Resource: US Venture Capital Technology Investments, IPOs and M&A Deals, 1995-2005. |
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Amazon.com: Going Public
Amazon.com, an early pioneer in electronic commerce, prepares its initial public offering in the face of turbulent market conditions. Joy Covey, Amazon.com's CFO and the case protagonist, discusses the risks and opportunities of going public and the nature of electronic commerce business models in comparison to traditional land-based retail models. This case presents an opportunity to discuss the public offering process and the inter-relationship between a young company's financing strategy and business strategy.
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The Band of Angels
Describes the activities of "The Band of Angels," a well-organized but independent group of wealthy entrepreneurs. Details the principles and processes used by the band, as well as offering two perspectives from entrepreneurs who have been financed. Teaching Purpose: To develop an understanding of this important source of start-up financing.
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Hotmail
Describes the efforts of Sabeer Bhatia, co-founder and CEO of Hotmail, to finance and grow this business, which is based on free web-based email. Describes early, successful efforts at raising several rounds of venture capital and presents choices around a next stage of financing. Teaching Purpose: Describes the challenges of financing an early stage Internet business with an unproven business model. |
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John Hirschtick's New Venture
This case follows Jon through his new venture, Solidworks, a computer aided drafting company, Jon must decide whether Solidworks needs all the money upfront in a single round of capital or if the company should take the money in stages in order to obtain more favorable terms from the investors. |
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Yahoo! 1995: First Round Financing
This case examines the challenges that Yahoo! founders Jerry
Yang and David Filo faced in analysing and choosing a first-round financing
option. With the possibility of either selling Yahoo! outright, partnering with
a corporate sponsor or starting an independent business, Jerry and Dave have to
consider not only the established culture and needs of their novel fledging
webportal, but their own personal entrepreneurial goals and vision for Yahoo!.
The pressure is also on them to make a critical decision, as Mike Moritz of
Sequoia Capital offers them deal with a 24 hour deadline. |
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(DVD Section 18.1) Vic Verma: Venture Capital vs. Customer Funding
Vic explains the different situations in which venture capital might be a better funding option, including the desire to scale quickly. He also points out some of the drawbacks as well. |
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(DVD Section 18.6) Marc Fleury: The Benefit of Picking the Right VC
The relationship between VC and entrepreneur is very important. Therefore, it is essential to pick the right VC. Marc offers a few pointers on how to find the VC that is right for you. |
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Heidi Roizen: Raising Venture Capital Today
Have venture capital, but jave it at the right time and use it judiciously. Roizen talks about the Barbell syndrom - you can raise the first and the last round but not the rounds in between. It is very difficult to raise the middel rounds and therefore treat the money like the gold that it is. |
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Elon Musk: What is the Right Time to Sell?
PayyPal had a number of offers but they undervalued the companies and so they went public to get an objective valuation of the company. eBay had made a good offer after the IPO. Another reason to sell to eBay was the long term risk of losing to the eBay payment platform. |
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Frank Levinson: How Does Going Public Change You and Your Company?
Inevitably, when a company goes public, there's an enormous amount of change that takes place. While the IPO may be an indication of financial success, the true measure is within the company, and maintaining a level of normalcy and maintaing the company's original culture.
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Heidi Roizen: VC startup relationship
VC's will not give all the money up front. It is important to set milestones, and develop a relationship to VC. At Mobius they collect data on all portfolio companies on a weekly basis to best understand the companies. Mobius wants to help their ccompanies. There are good reasons to burn money, but there are also bad reasons. |
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Gajus Worthington: Building a Team and Picking the Right VCs
The founders understood that the key to creating a successful company was picking only the very best people at every level of the company, especially the VCs and Board of Directors. Gajus sacrificed time (it took a year and a half to recruit some board members) and money (settling for a lower valuation from a better VC) to assemble the right team. |
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Heidi Roizen: Bootstrapping - Still a great way to raise money
Roizen talks about the importance of bootstrapping, and maintaining control of the company in the early stages. Not only do entrepreneurs have to work for a living but they also have to make the money raised last for a longer time. When capital became easily available people stopped making the money the old fashion way, by working. If you create profit, shareholder value will definately follow. If you make profits you don't need other people to invest in your company. This is a great advantage. |
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Fenwick & West: Venture Capital for High Technology Companies
"This booklet introduces new entrepreneurs to a variety of legal and strategic issues relating
to founding and financing a start-up company, including determining your product and
market, assembling the right founding team, choosing your legal structure, making initial
stock issuances to founders, obtaining seed financing, negotiating the terms of your venture." |
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The Basic Venture Capital Formula
Briefly summarizes the process that venture capitalists use to analyze high-risk, long-term investments. Contains information on methods that can be used to calculate valuation, share price, percent ownership, implied valuation, dilution, and option pools. |
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PriceWaterhouse Coopers MoneyTree Survey
The MoneyTree Report is a quarterly study of venture capital investment activity in the United States. As a collaboration between PricewaterhouseCoopers and the National Venture Capital Association based upon data from Thomson Financial, it is the only industry-endorsed research of its kind. The MoneyTree Report is the definitive source of information on emerging companies that receive financing and the venture capital firms that provide it. The study is a staple of the financial community, entrepreneurs, government policymakers and the business press worldwide. |
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