finance intro 2010 final
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1
ENTREPRENEURIAL FINANCE INTRO
Introduce Basic Finance Concepts and Present Lenders and Investors View on Capital Markets
2
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
17
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
35
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
44
3
3BEFORE WE START…
4
.. I need three volunteers?
BEFORE WE START…
5
Tweet key learnings…
BEFORE WE START…
Control10Password:
MCF10
6
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 – kenneth@svenningsen.dk)
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
7
7THE IMPORTANCE OF MONEY
8
Once upon a time…
THE IMPORTANCE OF MONEY
…CASH WAS KING
9THE IMPORTANCE OF MONEY
Nowadays…
…CASH IS EVERYTHING
10
(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
11
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
12
12VENTURE CAPITAL FILLS A VOID
13
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
14
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
15
…and it is difficult to get financing from your customers
VENTURE CAPITAL FILLS A VOID
16
16
Filling a void in the capital market
HOW VENTURE CAPITAL WORKS
16
17
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
19
The players…
VENTURE CAPITAL IN DENMARK
Vækstfonden
• Incubators (”Innovationsmiljøer”) 7
• Business Angels 200+
• Venture Capital firms 45 (3-5 with money)
• Vækstfonden 1
20
Investment activity
VENTURE CAPITAL IN DENMARK
Vækstfonden Kvartalsanalyse Q4 2008
21
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
23
VC Classics…
VC’S INVEST IN
• New Technologies• Mobility• Internet
• Increasing Population• Health Problems
• Lack of ressources• Infinite demand
24
Opportunities arise…
VC’S INVEST IN
• New Lifestyles• Change in preferences• Increase in wealth
• Increasing aged Pop. • Health Problems
• General Purpose Technologies
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
26
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
27
The Ideal Entrepreneur - Is a team
28
The Google Team – Technical and Commercial Masterminds
VC INVEST IN
29
However the perfect entrepreneurs don’t always look great
VC’S INVEST IN
30
A good business case and plan..
VC’S INVEST IN
31
31WORKSHOP
32
Pitch a company that you know – Imagine the early beginnings of the company…
WORKSHOP
33
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
34
Be back on timeThe doors will lockDon’t keep VC’s waiting
35
35A VENTURE CAPITAL DEAL
36
The problems a VC must address
A VENTURE CAPITAL DEAL
Leach & Melicher, 2006
37
Two ways of addressing the problems...
A VENTURE CAPITAL DEAL
38
The Process
A VENTURE CAPITAL DEAL
39
Contractual…
A VENTURE CAPITAL DEAL
40
40THE VALUE VCS PROVIDE
41
Enabling the venture…
THE VALUE VCS PROVIDE
100% of a small pie
20% of a large pie
42
Smart Money
THE VALUE VCS PROVIDE
43
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
44
44EXIT STRATEGIES
45
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
46
Planning
EXIT STRATEGIES
47
Types of Exits
EXIT STRATEGIES
48
48THE VENTURE MODEL
49
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
50
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
51
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
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