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ENTREPRENEURIAL FINANCE INTRO

Introduce Basic Finance Concepts and Present Lenders and Investors View on Capital Markets

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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

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Workshop Pitch a company that you know… 31

VCs Invest In VCs invest in high-growth industries and A-teams

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A Venture Capital Deal A VC addresses the risk in the investment process, the contract and active involvement

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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

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3BEFORE WE START…

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.. I need three volunteers?

BEFORE WE START…

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Tweet key learnings…

BEFORE WE START…

Control10Password:

MCF10

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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

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7THE IMPORTANCE OF MONEY

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Once upon a time…

THE IMPORTANCE OF MONEY

…CASH WAS KING

9THE IMPORTANCE OF MONEY

Nowadays…

…CASH IS EVERYTHING

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(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

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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

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12VENTURE CAPITAL FILLS A VOID

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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

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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

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…and it is difficult to get financing from your customers

VENTURE CAPITAL FILLS A VOID

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Filling a void in the capital market

HOW VENTURE CAPITAL WORKS

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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

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The players…

VENTURE CAPITAL IN DENMARK

Vækstfonden

• Incubators (”Innovationsmiljøer”) 7

• Business Angels 200+

• Venture Capital firms 45 (3-5 with money)

• Vækstfonden 1

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Investment activity

VENTURE CAPITAL IN DENMARK

Vækstfonden Kvartalsanalyse Q4 2008

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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

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VC Classics…

VC’S INVEST IN

• New Technologies• Mobility• Internet

• Increasing Population• Health Problems

• Lack of ressources• Infinite demand

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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

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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

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The Ideal Entrepreneur - Is a team

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The Google Team – Technical and Commercial Masterminds

VC INVEST IN

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However the perfect entrepreneurs don’t always look great

VC’S INVEST IN

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A good business case and plan..

VC’S INVEST IN

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31WORKSHOP

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Pitch a company that you know – Imagine the early beginnings of the company…

WORKSHOP

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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

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Be back on timeThe doors will lockDon’t keep VC’s waiting

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35A VENTURE CAPITAL DEAL

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The problems a VC must address

A VENTURE CAPITAL DEAL

Leach & Melicher, 2006

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Two ways of addressing the problems...

A VENTURE CAPITAL DEAL

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The Process

A VENTURE CAPITAL DEAL

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Contractual…

A VENTURE CAPITAL DEAL

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40THE VALUE VCS PROVIDE

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Enabling the venture…

THE VALUE VCS PROVIDE

100% of a small pie

20% of a large pie

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Smart Money

THE VALUE VCS PROVIDE

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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

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44EXIT STRATEGIES

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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

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Planning

EXIT STRATEGIES

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Types of Exits

EXIT STRATEGIES

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48THE VENTURE MODEL

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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

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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

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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