chapter 18: figure 18.1

Technology Ventures: From Idea to OpportunityChapter 18: Figure 18.1

Cumulative Cash Flow ($millions)

-3

+3

+2

+1

20

10 30 40 50 Time (months)

Cash Breakeven

0

-1

-2

Idealized cash flow diagram for a new enterprise

Technology Ventures: From Idea to OpportunityChapter 18: Table 18.3

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


1. Founding Stage

The Entrepreneurial Team Begins with a Vision, Business Model and Strategy

2. Seed Stage

Initial Financial Capital

3. Growth Stage

Growth Capital Required

4. Harvest Stage

IPO or Acquisition Provides Return to Investors and Founders

Four financial steps in building a successful firm.

Technology Ventures: From Idea to OpportunityChapter 18: Bootstrap Financing

Bootstrap Financing: to start a firm by one’s own efforts and to rely solely on the resources available from oneself, family, and friends.


•Advantages •Disadvantages

Low pressure on valuation

Easy terms on ownership

Control by founders

Little time spent on finding investors

Unable to fund growth phase

Lack of funding commitment for future

Loss of advice from professional investors

Advantages and disadvantages of bootstrap financing

Technology Ventures: From Idea to OpportunityChapter 18: Angels

Angels are wealthy individuals, usually experienced entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures.


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%

Technology Ventures: From Idea to OpportunityChapter 18: Venture 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.


50

40

30

20

10

0

Treasury Bonds

Corporate Bonds

Franchises

Imitations, Improvements

Innovations, Technology

Strong Growth Companies

Acquisitions

Money Market Funds

Risk: Low Medium High

Chance of 0 30% 60% Total Loss

E x p e c t e d

A n n u a l

R e t u r n

(%)

The Risk and Reward Profile for Various Investments

0


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.


I ssues to be resolved within the Terms of the Deal

Percent Ownership for the Investor Group

Timing of Investment

Control Exerted by Investor

Vesting Periods for Ownership by the Entrepreneur Team

Rights to Require an IPO, Registration Rights

Type of Security

Reservation of Ownership for Employees (Stock Option Pool)

Anti-dilution Provisions

Milestones of Achievement, if there are multiple tranches (steps) to the investment

Stock Option Plans

Technology Ventures: From Idea to OpportunityChapter 18: IPO

Initial Public Offering: the first public equity issue of stock made by a company.


Advantages and Disadvantages of I ssuing on IPO

Advantages

Raising new capital with the possibility of later, additional offerings

Liquidity — Ability to convert ownership to cash, potential of harvest for investors and founders

Visibility — Build brand and reputation

Disadvantages

Offering costs and effort required

Disclosure requirements and scrutiny of operations

Perceived pressures on achieving short-term results

Possible loss of control to a majority shareholder

Technology Ventures: From Idea to OpportunityChapter 18: Principle

Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully.

chapter 18: figure 18.1

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