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ETH2: Entrepreneurship > 6: Sources of Capital > Flashcards

6: Sources of Capital Flashcards

1
Q

The 4 stages of venture development

A
  1. Initial Ideas
  2. Feasibility
  3. Prototyping
  4. Commercialisation
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2
Q

Some 7 sources of capital by venture dev. stage

A

+ 4 Fs (founder, friends, family & fools) -> 12
+ consultancy/other earned income -> 1234
+ grants, eg from Gov -> 23
+ biz angels -> 234
+ venture capital -> 34
+ real sales -> 4
+ bank loan -> 4

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3
Q

Taxonomy of financ(ing)

A
  • Internal Finance
    • Cash Flow
  • External Finance
    • Equity
    • Debt
    • Subsidies
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4
Q

The 5(+1) sources (providers )of external finance

A
  • Subsidies
  • Business Angels
    (- Super Angels)
  • Venture Capital Funds
  • Strategic partner
  • Bank Loans
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5
Q

Bank loans

4+2 reqs.

A

§ Need for Collatoral
§ Valuation based upon Balance and P/L of the past
(no start-up!)
§ Need to build up confidence
§ Solvency
- Debt Ratio = TotalDebts/TotalAssets
- Debt coverage ratio = NetOpIncome/YearlyDebtService

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6
Q

Business Angels:
3 traits:
2 goals:
4 behaviors:

A

3 traits:

  • Wealthy private investors, often experienced entrepreneurs
  • There are approximately 18,000 active angels in the UK and >200,000 in the USA
  • They consider themselves as part of the entrepreneurial team

2 goals:

  • fun
  • return of 30-35%

4 behaviors:
- Usually want hands-on involvement in a sector that they understand
- £10-£250k is usual investment
(some angels and angel syndicates may do more)
- Use their friends and networks to spot opportunities
- invest in an early stage, at the moment that most VCs are reluctant
to invest

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7
Q

Super Angels:
3 goals:
4 behaviors:

A

3 goals:

  • Financial return: ??
  • Only invest if They can become CEO / Exec Team Member of NewCo - They are familiar with the sector the company is in

4 behaviors:

  • Invest in typical pre-seed stage, at the moment that most VCs are reluctant to invest
  • Are organised in forums such as Silicon comes to London/Cambridge, Keiretsu Angels, SeedCamp, ….
  • They invest minimal amounts of money (50 to 100K) and lots of effort and knowledge
  • They consider themselves as part of the entrepreneurial team
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8
Q 
Accelerators:
5 traits =
2x who
2x what
1x how
A
  • Focus on teams, rather than individuals
  • Operates in cohorts or classes
  • Offers pre-seed finance (usually in exchange for equity)
  • Time-limited support, with intensive mentoring and programmed events
  • Application process open to all, highly competitive
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9
Q

Accelerator

5+5 trends

A
  1. increase in #
  2. More corporate players
  3. More vertical specific programmes
  4. Evolving models (ecosys developer, matchmaker…)
  5. more social programmes, esp. US, UK, India

§ Demise of the demo day
§ Lengthening the period of support
§ Follow on funding – attempts to address the post- incubation gap
§ Diversification – new revenue streams and and markets
§ Opening up, better measurement and evaluation

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10
Q

Venture capital + Venture capital fund:

defs.

A

= Professional equity that is co-invested with the entrepreneur in
order to finance a company in an early stage or expansion phase

= The vehicle through which joint investments by several investors
can be made

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11
Q 
The VC's operating cycle
in 4(+1) phases
A
  • Building an investment base (looking for finance) & Building a management team
  • Selection and due diligence of investment projects
  • Follow-up on investments
  • Exit of investments
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12
Q

The VC’s selection & investment process in 3 stages:

A

First 9 months:

  • 100 to 10% via BP & first screening (w confidentiality agreement)
  • 10 to 2% via in-depth due diligence (w experts) leading to termsheet

Then:
- investment agreement (deal-making), follow-up w board roles till exit

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13
Q

VC:
5 main activities
&
4 key elements

A 
Deal sourcing
Deal analysis
Deal making
Follow up
Exit

§ Due Diligence
§ Valuation
§ Termsheet
§ Exit Potential

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14
Q

The 4 important elements of dealmaking

A
  • Term sheet
  • Shareholders agreement
  • Articles of Association -Management Agreements
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15
Q

The investor’s 4 major concerns addressed by the termsheet:

A

§ Did I pay the correct price?
§ How will my money be used?
§ How can I make my investment as liquid as possible?
§ How to make sure management doesn’t leave?

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16
Q

The 4 ways to address concern “Did I pay the correct price?”

A
  • exit/liquidation preference
  • anti-dilution protection against new shares issued at a price less than the initial valuation
    • full ratchet or weighted average
    • Preferential Subscription Rights for new shares
    • Right of First Refusal with selling shareholder
    • warrant coverage = right to buy newly issued shares at certain time and price ~ call & put options
  • milestones (ratchet clause)
  • phased investment (instalments)
17
Q

The 6 ways to address concern “How will my money be used?”

A
  • Business planning
  • Board seat (representation & warranties)
  • Shareholder consent
  • Veto & consent rights
  • Information rights
  • Corporate governance
18
Q

The 4 ways to address concern “How can I make my investment as liquid as possible?”

A
  • Tag along (take along / co-sale) = right to sell at same conditions, pro rata, w other investors, such as mgmt
  • Drag along = right to force other shareholders to sell together with you to a 3rd party
    • buy or sell 85% rule: the minority cannot veto sale wanted by 85%
  • Registration rights (cooperate in IPO) = right to register investor’s stock for IPO
  • Redemption rights (repurchase) = right to resell shares to issuer
19
Q

The 5 ways to address concern “How to make sure management doesn’t leave?”

A
  • Option plan
  • Founder shares
  • Lock-up
    (e.g. 3 years)
  • Reversed vesting -
  • Management agreement (key man clause/bad leaver
    /non compete etc. )
20
Q

VCs’ redux in 4 points:

A

The VCs

  • dream of exit
  • think in milestones
  • demand high 10y IRR to compensate for low success rate, so as to average ~10%
  • finance ~2% of received plans
21
Q

Variation among VC funds

A
  • large
  • Captives and public funds are often more hands-off
  • Specialized funds are most hands-on
  • Control vs. Value-adding
    • hiring execs
    • negotiating key contracts
    • opening fin/commercial network
22
Q

Taxonomy of VC exits, in 4 types

A

§ IPO, w Chances are limited (<5%)
§ Trade sale = to strategic partner
§ Sale to another financial investor
§ Bankrupcy/ Liquidation

23
Q

Business angels,
seen thru their 9 differences vs VCs

3 profile traits
3 time-related features
2 for 1 deal

A

3 profile traits:

  • invest own funds, not someone else’s
  • goal: mostly fun, not only return
  • lower return on investment

3 time-related features:

  • Faster decision process
  • Invests in a very early stage
  • Longer investment horizon

2 for 1 deal:
+ Large involvement, on avg
+ Lower legitimacy
- Less sophisticated contracts

24
Q

Strategic partnerships
2 for 1 deal:
why:
4 European examples:

A

2 for 1 deal:
+ Co-operation at R&D level, joint venture
+ Can take part in the shareholder capital, eg: biotech company with pharmaceutical
company as shareholder
- Downside: Restricts exit possibilities (fi. Via trade sale)

  • Why? Window on technology
  • Examples in Europe :
    BP AI, Bosch VC, Cisco Investments, SUN CV
25
Q

Government measures

1 feature + taxonomy in 7 types

A

§ Are country and region- dependent

\+ 7 types:
§ Substitution = 100% public fund
§ public/private Co-investment 
§ Refinancing 
§ Risk Sharing = cover private losses
§ Fiscal measures 
§ Incubation structures
§ Loans and loan guarantees
26
Q

Shares: 4 types and their trend w time

A

Technology Shares
Management Shares
Founder Shares
–> decrease in % of total value, w time

Capital Shares
–> increase

27
Q

Roic demanded by biz angels & by VCs

A

BAs: 35-40%= 5x in 5y
VCs: 50-60%=10x in 5y

28
Q

4 Stages of new venture dev for investors

A

seed: must dev prototype

early stage: must go to market

growth: survived market for some time & building up

sustained growth.

ETH2: Entrepreneurship (6 decks)

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