6: Sources of Capital Flashcards
The 4 stages of venture development
- Initial Ideas
- Feasibility
- Prototyping
- Commercialisation
Some 7 sources of capital by venture dev. stage
+ 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
Taxonomy of financ(ing)
- Internal Finance
- Cash Flow
- External Finance
- Equity
- Debt
- Subsidies
The 5(+1) sources (providers )of external finance
- Subsidies
- Business Angels
(- Super Angels) - Venture Capital Funds
- Strategic partner
- Bank Loans
Bank loans
4+2 reqs.
§ 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
Business Angels:
3 traits:
2 goals:
4 behaviors:
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
Super Angels:
3 goals:
4 behaviors:
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
Accelerators: 5 traits = 2x who 2x what 1x how
- 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
Accelerator
5+5 trends
- increase in #
- More corporate players
- More vertical specific programmes
- Evolving models (ecosys developer, matchmaker…)
- 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
Venture capital + Venture capital fund:
defs.
= 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
The VC's operating cycle in 4(+1) phases
- 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
The VC’s selection & investment process in 3 stages:
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
VC:
5 main activities
&
4 key elements
Deal sourcing Deal analysis Deal making Follow up Exit
§ Due Diligence
§ Valuation
§ Termsheet
§ Exit Potential
The 4 important elements of dealmaking
- Term sheet
- Shareholders agreement
- Articles of Association -Management Agreements
The investor’s 4 major concerns addressed by the termsheet:
§ 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?
The 4 ways to address concern “Did I pay the correct price?”
- 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)
The 6 ways to address concern “How will my money be used?”
- Business planning
- Board seat (representation & warranties)
- Shareholder consent
- Veto & consent rights
- Information rights
- Corporate governance
The 4 ways to address concern “How can I make my investment as liquid as possible?”
- 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
The 5 ways to address concern “How to make sure management doesn’t leave?”
- Option plan
- Founder shares
- Lock-up
(e.g. 3 years) - Reversed vesting -
- Management agreement (key man clause/bad leaver
/non compete etc. )
VCs’ redux in 4 points:
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
Variation among VC funds
- 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
Taxonomy of VC exits, in 4 types
§ IPO, w Chances are limited (<5%)
§ Trade sale = to strategic partner
§ Sale to another financial investor
§ Bankrupcy/ Liquidation
Business angels,
seen thru their 9 differences vs VCs
3 profile traits
3 time-related features
2 for 1 deal
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
Strategic partnerships
2 for 1 deal:
why:
4 European examples:
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
Government measures
1 feature + taxonomy in 7 types
§ 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
Shares: 4 types and their trend w time
Technology Shares
Management Shares
Founder Shares
–> decrease in % of total value, w time
Capital Shares
–> increase
Roic demanded by biz angels & by VCs
BAs: 35-40%= 5x in 5y
VCs: 50-60%=10x in 5y
4 Stages of new venture dev for investors
seed: must dev prototype
early stage: must go to market
growth: survived market for some time & building up
sustained growth.
