External Financing for Ventures Flashcards
what is a cap table
shows number of shares, fraction of equity and value of equity
what are the two simple methods VC firms use for pricing deals for investing into start up companies
NPV and IRR
What is the difference between NPV and IRR
how do you survive financially during growth stage
rely on internal cash flows: cash flow management
rely on external financing: VC method with rounds of financing
what is cash burn rate
refers to how quickly a venture uses its cash reserves
what is cash build rate
refers to how quickly a venture builds cash balances from collections on sales
what is net cash burn rate
net cash outflow over a fixed period
= cash burn - cash build
what is a reasonable burn rate
you should keep 10-12 months of cash runway at all times, so a reasonable burn rate is 1/12th of available cash
why is a high cash burn rate not necessarily bad
scale up in production, readiness for higher valuation
how to control/reduce cash burn rate
1) complimentary resources
2) thoughtful hiring
3) strategic expansion
4) healthy growth and market entry
what is having less than 6 months of runway bad
1) limited negotiator power for entrepreneurs
2) signals poor financial planning
3) erodes investors confidence in the leaderships ability to manager company survival
what to do when running low on cash?
1) adjust payment schedule with partners/vendors/suppliers
2) take a short term loan from bank
3) participate and win pitch competition
4) apply for grants
what are some sources of capital for startups
1) founders
2) family and friends
3) angels
4) VCs
5) strategic investors
6) customers
7) crowdfunding
8) suppliers
9) banks
10) government
founders key info for funding
bootstrapping
- savings
- personal loans (second mortgage)
- credit cards
family and friends key info for funding
- mixing business and private life
- can be debt like or equity like
angels key info for funding
different types
- many small investors (found through personal network)
- few large investors (hard to find)
- angel groups (easy to find, hard to convince)
angels are not motivated solely by profit, more persuaded by entrepreneurs drive to succeed, persistence and mental discipline
VC’s key info for funding
back up company with professional advice and bring prestige to company. Take majority control and then kick out founding entrepreneurs
customers key info for funding
prepayment on customer order
often considered the best funding
strategic investors key info for funding
large companies use their resources to invest in relevant startups. investments are aligned with their own strategic goals and diversification
potential for conflict of interest: influence strategic direction of the startup
crowdfunding key info for funding
process of financial ideas, venture and projects by gathering funds from a large network of people. Social media version of fundraising
suppliers key info for funding
getting discounts from suppliers is an implied form of getting funding. Typically requires repeat purchasing and good customer standing - hard to obtain for startups
banks key info for funding
loan officers are not in the business of determining value of start ups. Minor source of funding
government key info for funding
time and bureaucracy costs of applying and complying with rules is substantial
founders, family and freinds: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: easy
screening: limited
negotiation: founder driven
control: passive
value added: little
time horizon: patient
angels: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: mostly difficult to find
screening: detailed and personal
negotiation: investor driven
control: passive to active
value added: good bad and ugly
time horizon: 2-7 years
vc: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: need introduction
screening: detailed and professional
negotiation: investor driven
control: mostly active
value added: good bad and ugly
time horizon: 2-7 years
strategic investors: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: need business rational
screening: detailed and strategic
negotiation: investor driven
control: direction and exit
value added: synergies
time horizon: 2-4 years
customers: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: commercial basis
screening: product focused
negotiation: product driven
control: passive
value added: product feedback
time horizon:product delivery
crowdfunding: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: easy
screening: product focused
negotiation: crowd driven
control: passive
value added: product feedback
time horizon:product delivery
suppliers: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: commercial basis
screening: transaction based
negotiation: relationship based
control: passive
value added: none
time horizon: short term but repeated
banks: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: relationships help
screening: formal and score based
negotiation: standardized and investor driven
control: passive
value added: little
time horizon: varied
government: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)
accessibility: easy to research
screening: formal and administrative
negotiation: standardized
control: passive
value added: none
time horizon: patient
what stages fall under venture financing
- development stage
- startup stage
- survival stage
- rapid growth stage
what stages fall under seasoned financing
early maturity stage
what type of financing and what major sources are involved with development stage
seed financing; entrepreneurs assets and family and friends
what type of financing and what major sources are involved with startup stage
status financing; entrepreneurs assets, family and friends, business angels, venture capitalists
what type of financing and what major sources are involved with survival stage
first round financing; business operations, venture capitalists, suppliers and customers, government, commercial banks
what type of financing and what major sources are involved with rapid growth stage
second round financing, mezzanine financing, liquidity stage financing ; business operations, suppliers and customers, commercial banks, investment banks
what type of financing and what major sources are involved with early maturity stage
obtain bank loans, issue bonds, issue stocks; business operations, commercial banks, investment banks
what is seed financing
funds needed to determine whether an idea can be converted into a viable business opportunity
primary source: entrepreneur assets, family members and friends
what is startup financing
funds needed to take a venture from having establish a viable business opportunity to initial production and sales
primary source: VC
what is first round financing
early funds provided during survival stage to cover the cash shortfall when expenses and investments exceed revenue
primary source: suppliers and customers trade credit, government, commercial banks
what is second round financing
financing for ventures in their rapid growth stage to support investment in working capital
what is mezzanine financing
funds for plant expansion, marketing expenditures, working capital, and product or service improvement
what is liquidity stage financing
temporary financing needed to keep the venture afloat until the next offering
what is seasoned financing
the offering of a security by a firm that has previously offered the same or substantially similar securities
