basic rules of venture finance at venture out moldova, fall 2013
DESCRIPTION
Slides review basic rules of venture finance and considerations when thinking about how to raise money and from whom. Includes overview of crowdfunding.TRANSCRIPT
Acquiring Resources: Thinking About Growth VentureOut Moldova #VOMoldova October 28 – November 1, 2013 Prof. David A. Kirsch Robert H. Smith School of Business University of Maryland, College Park [email protected] @darchivist
Outline Basic Rules Mental Models
Sources of Capital
Comparison
New Venture Finance: Basic Rules
Rule 1: Do Not Run Out of Cash
CIMITYM
= Cash is more
important than your mother.
Accidents in North American Moutaineering
Accidents in North American Moutaineering
“…and they fell to their death.”
New Venture Finance: Basic Rules
Rule 1: Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the Right Investor(s)
Rule #3: Valuation as
Negotiation
New Venture Finance: Basic Rules, redux
Rule 1: Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the Right Investor(s)
Rule 3:
Valuation as Negotiation
Rule 4:
New Venture Finance: Basic Rules, redux
Rule 1: Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the Right Investor(s)
Rule 3:
Valuation as Negotiation
Rule 4:
Remember Rule 1
New Venture Finance: Mental Models New venture finance is different
because…
1. High uncertainty Fundamental, irresolvable
2. Asymmetric information Costly to overcome
3. Nature of assets Specific, transformed
4. Nature of markets Illiquid, high transaction costs
Venture Finance: Mental Models
“Splitting up the Pie” Traditional view
Zero sum assumption
Value extraction
“Build the Sandwich” Positive sum model
Longer sandwich = more resources
2500’ Sandwich = GOOG
Sources of Capital
Self-Financing
Savings Credit cards
Second Mortgages
Sweat
“Affordable Loss”
Bank Robberies
Friends, Family, Fools (and Faculty?)
People who are close to you trust you for other reasons Family members
Friends (close to you)
Fools (who cannot judge you)
Faculty (4th “F”)?
Solves information asymmetry problem
Reduces general uncertainty
Increases valuation Mom won’t negotiate with you (but
she should!)
Crowdfunding W/w, in 2012, more than 500 platforms
in operation
Expected to raise ~$5B USD in 2013, with possibility to go much higher
Four basic models Reward-based, Donation-based, Equity-
based & Lending-based
Campaigns Average 9 weeks, raise $7,000 USD
Fee structures vary, 10-35%
Converts social into financial capital, but not always reversible or readily replenished.
Fred Wilson, Union Square Ventures
Networks and markets are slowly changing the global economy and the creative sector is at the forefront of these changes. Instead of going to Hollywood studios for the funds to make their next movie, directors are choosing to harness the network of their fans. Instead of going to the publishing industry for their book advance, authors are choosing to harness the network of their fans. Instead of signing a deal with a record label, musicians are harnessing the network of their fans. The same thing is happening with comic books, video games, theater productions, and many other creative endeavors. Kickstarter has changed the way creative projects come to life.
http://bit.ly/1cmqVuS
Flow chart guide to 22 crowdfunding platforms… http://t.co/bFiGjkzZuK
Some words from our sponsors… http://bit.ly/18Ht9AN
Using CF to Access Capital Markets
Angels/Individual Investors High net-worth individuals who
invest in and support companies in the early stages of growth
Invests his or her own money
Weak personal tie to entrepreneur
Varying levels of sophistication Rich & foolish
Rich & wise
AngelList syndication?
Venture Capital
Venture Venture Venture Venture Venture Venture Portfolio Companies
Limited Partners
General (Venture) Partners
Large Funds
Regional Funds
Small Funds
Special Stage Funds
Foundations Universities Institutions
Commercial Loans Money borrowed from bank or
other commercial entity
Interest payments Cash-flow
Collateral
New Venture Finance: Sources of Capital
Source Risk? Return? Legit? Help? Control?
Self-financing Credit cards
Friends / family / fools
Crowdfunding
Angel / individual investors
Venture capital
Large private equity
IPOs
Bank / other CP
New Venture Finance: Sources of Capital
Source Risk? Return? Legit? Help? Control?
Self-financing + + + - n/a Credit cards ++ ++ + - n/a
Friends / family / fools +++ +++ + - common
Crowdfunding +++ +++ ++ - depends
Angel / individual investors ++++ ++++ ++ + / ++ com/pref
Venture capital +++++ +++++ +++ ++++ pref+
Large private equity ++++ ++++ +++ ++ pref
IPOs +++ +++ +++ + public?
Bank / other CP ++ ++ ++ + collateral