raising money for starting and growing businesses chapter 10 bygrave & zacharakis,...

RAISING MONEY FOR STARTING AND GROWING BUSINESSESCHAPTER 10

Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, 2011. ©


Progression of Raising Money

Turning to friends &

family

Approaching business

angels

Raising VC funding

Going public

Being acquired


Basic Ways of Evaluating a Business

Earning-capitalization valuation Present value of future cash flows Market-comparable valuation Asset-based valuation

Valuation is not an exact science. Each of the above methods may get to vastly different monetary values of a company.


Earnings Capitalization Method:Company value = Net Income/

Capitalization Rate

Present Value of Future Cash Flows:PV = PV of the future free CF + the residual (terminal)

value of the firm

Market-comparable Valuation (Multiple of earnings):

Total Equity Valuation = NI x P/E

Income-based Valuation Methods


Asset-based Valuation Methods

Fair market value of assets

Liquidation Value

Adjusted book value

Replacement value


External Financing

External Financing

Vendor financing

Reduced rent

Customer financing

Leased equipment

Federal programs

Reduced-rate

services


Finding Business Angels

1.FORMAL ANGEL GROUPS

Pros: Easy to findCons: May charge for

the privilege to present or submit a business plan;Limited number (several thousand)

2. INDIVIDUAL ANGELSPros: Several hundred

thousand availableCons: Hard to find and

approach; must to indentify prospects and present


Types of Business Angels

Entrepreneurial Angels

May be valuable advisors

Corporate Angels May take over or ruin company

Professional Angels Silent partners

Enthusiast Angels Passive investors

Micromanagement Angels

Intervene in the business


Top 6 Investment Factors For VCs

Management team

Target market

Product/service

Competitive

positioning

Financial return

Business plan

VCs may helpyou hire a Team

Fragmented,

accessible, and

growing

Better andprotected

Open distribution channels

7X return in 5 years

Competent written business plan


How to Assess a VC

Value added Patience

Deep pockets Accessibility

Board ofdirectors

Board of Directors

Patience

Availability

Deep Pockets

Added Value


Harvesting (exiting) Investments

Initial Public Offering (IPO) An acquisition A buyback of the investor’s stock

Very Unlikely


Pros and Cons of an IPO

Upsides DownsidesFinancings High expenses

Follow-on financing Public fishbowl

Realizing prior investments

Short-term horizon

Prestige and visibility Post-IPO compliance costs

Compensation for employees

Management’s time

Acquiring other companies

Takeover target

Employee disenchantment


Advantages/Disadvantages of an Acquisition (part 1)

Founder & CEO

Selling a “baby” can be

traumatic

Management

Executives can stay

focused on growing the

company

Company

The buyer usually

has deep pockets

Investors

Investors easily exit

their investmen

t


Advantages/Disadvantages of an Acquisition (part 2)

Converting Stock

Entrepreneur &

employees get cash

right away

Culture

Could be a clash of cultures

Employment

Agreement

Key employees

may need to sign a non-compete

Costs

Expenses are lower than an

IPO


Recap

Sophisticated investment money requires a future harvest time (return on investment)

Harvest can be acquisitions or public offerings

Investors want to know entrepreneur will remain on with the company after harvest

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