basic rules of venture finance at venture out moldova, fall 2013

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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

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Slides review basic rules of venture finance and considerations when thinking about how to raise money and from whom. Includes overview of crowdfunding.

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Page 1: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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    

Page 2: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Outline   Basic Rules   Mental Models

  Sources of Capital

  Comparison

Page 3: Basic rules of venture finance at Venture Out Moldova, Fall 2013

New Venture Finance: Basic Rules

Rule 1: Do Not Run Out of Cash

Page 4: Basic rules of venture finance at Venture Out Moldova, Fall 2013
Page 5: Basic rules of venture finance at Venture Out Moldova, Fall 2013

CIMITYM

= Cash is more

important than your mother.

Page 6: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Accidents in North American Moutaineering

Page 7: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Accidents in North American Moutaineering

“…and they fell to their death.”

Page 8: Basic rules of venture finance at Venture Out Moldova, Fall 2013

New Venture Finance: Basic Rules

Rule 1: Do Not Run Out of Cash

Rule 2:

Raise the Right Amount From the Right Investor(s)

Page 9: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Rule #3: Valuation as

Negotiation

Page 10: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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:

Page 11: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 12: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 13: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 14: Basic rules of venture finance at Venture Out Moldova, Fall 2013

2500’ Sandwich = GOOG

Page 15: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Sources of Capital

Page 16: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Self-Financing

  Savings   Credit cards

  Second Mortgages

  Sweat

  “Affordable Loss”

  Bank Robberies

Page 17: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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!)

Page 18: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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.

Page 19: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 20: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Flow chart guide to 22 crowdfunding platforms… http://t.co/bFiGjkzZuK

Page 21: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Some words from our sponsors… http://bit.ly/18Ht9AN

Page 22: Basic rules of venture finance at Venture Out Moldova, Fall 2013
Page 23: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Using  CF  to  Access  Capital  Markets  

Page 24: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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?

Page 25: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 26: Basic rules of venture finance at Venture Out Moldova, Fall 2013

Commercial Loans   Money borrowed from bank or

other commercial entity

  Interest payments   Cash-flow

  Collateral

Page 27: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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

Page 28: Basic rules of venture finance at Venture Out Moldova, Fall 2013

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