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
