Financing High Growth Ventures

1. Financing High Growth Ventures ETP 3700

2. Courage: Risk and the Dimensions of Work Life Cycle of a Business Venture Bootstrapping Self, Friends and Family Equity Financing

3. Stages of High Growth Business Funding • Initial stage (usually angels and angel networks) • First round financing (angels and some venture capitalists) • Second round financing (usually venture capitalists) • Late round financing • Liquidation Event

4. Initial Stage Funding • File for incorporation • Write business plan • Find office and development space • Completion of initial design • Hire key development personnel • Complete prototype unit • Complete prototype testing

5. First Round Financing(Series A) • Secure key vendors • Hire key service or manufacturing personnel • Rent or build manufacturing facility • Purchase manufacturing equipment • Market testing • First sales contract • Production of first manufactured unit • First 100, 1000, 10000 units, etc.

6. Second Round Financing(Series B) • Break-even level of sales • Development of next generation of product

7. Venture Capital Financing • Looking for larger deals • Expectations of 70-100% annualized returns (want to average 30% for their investors) • 3-5 year pay-off • Don’t want control, but will take control if dissatisfied with management

8. Venture Capital Financing • Most prefer providing second or even third stage financing, with plans for liquidation event • Tend to specialize • Fund about 1% or less of plans they review • Local Venture Capital Firms

9. Initial Contact with a Venture Capitalist • Funding amount • Duration • Summary of the project • Use of funding • Confirm how the transaction will be liquidated • Existing investment in the project • Names of bankers, lawyers, accountants and consultants • Unusual or sensitive information

10. Venture Capital Term Sheet • Amount the venture capitalist wishes to invest. • Percentage of ownership to the venture capitalist. • The nature of the investment such as loan, stock, warrants, etc. • Governance rights of the venture capitalist. • Right to eventually register shares for a public offering. • Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc. • An estimate of valuation of the company. • Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds.

11. Liquidation Event • Sale of business • Initial public offering

12. Advantages of Initial Public Offering • Diversification and liquidity • Ability to raise new cash • Valuation • Future business deals • Publicity

13. Disadvantages of Initial Public Offering • Requirements of Sarbanes-Oxley • Reporting costs • Disclosure of information • Maintenance of control • Culture will likely change • Control is greatly reduced

14. Process of the IPO • Selecting an investment banking firm • The decision to underwrite or not underwrite • Getting the paperwork in order and certifying the price of the offering • The road show • Determine the size of the book • The first day of trading