ENT4013 Ch 16 & 17 Plan New Ventures
Typical funding stages:
1st stage: •Seed funding is usually needed 2nd stage: •May require outside capital from a private investor or early stage venture capitalist 3rd stage: •Need mezzanine financing or bride financing to get you through an IPO
The historical peak for venture capital investment occurred in the year ____.
2000
Venture capital firms in an early-stage investment characteristically demand a higher rate of return, as much as ____ percent or more annual cash-on-cash return, whereas a later-stage investment demands a lower rate of return, perhaps ____ percent annually.
50 / 30
Venture capital firms in an early-stage investment characteristically demand a higher rate of return, as much as ____ percent or more annual cash-on-cash return, whereas a later-stage investment demands a lower rate of return, perhaps ____ percent annually.
50/30
Entrepreneurs typically get startup capital from:
Angel investors
22. ____ is a floorless exchange that trades on the National Market System. a. AMEX b. NASDAQ c. NYSE d. SEC e. KNEX
B
Which industries have the highest venture capital investment?
Biotechnology and software
2. The venture capital firm invests in a growing business through the use of debt and equity instruments to achieve long-term appreciation on the investment within a specified period of time, typically five to seven years.
FALSE
5. An antidilution provision ensures that the selling of stock at a later date will increase the economic value of the venture capitalist's investment.
FALSE
7. The principal advantage of a public offering is that it provides the offering company with a tremendous source of interest-bearing capital for growth and expansion, paying off debt, or product development.
FALSE
An antidilution provision ensures that the selling of stock at a later date will increase the economic value of the venture capitalist's investment.
False
The principal advantage of a public offering is that it provides the offering company with a tremendous source of interest-bearing capital for growth and expansion, paying off debt, or product development.
False
The venture capital firm invests in a growing business through the use of debt and equity instruments to achieve long-term appreciation on the investment within a specified period of time, typically five to seven years.
False
Which type of venture typically requires considerable research and development cost prior to startup?
High-tech
____ is a floorless exchange that trades on the National Market System.
NASDAQ
Funding Sources for Entrepreneurs (in billions):
Personal savings: •$185 Friends and family: •$60 Venture capital: •$22 Angel investors: •$20 Banks: •$14 Crowdfunding: •$5
Which of the following are not "backend" costs for an entrepreneur seeking capital by selling securities (shares of stock in the corporation)?
Prospectus printing costs
When searching for a venture capital firm, what should you not do?
Shop around
____ from lawyers, accountants, consultants, and investment bankers are essentially a promise not to charge the full fee if an IPO fails.
Stop-loss statements
1. When venture capitalists scrutinize a new opportunity, they typically evaluate the market, management, and technology in that order.
TRUE
10. Comparable companies are those that are similar to the new venture in value characteristics such as risk, rate of growth, capital structure, and the size and timing of cash flows.
TRUE
3. The term sheet is a letter of intent that spells out the terms the VC is prepared to accept.
TRUE
4. VCs often want both equity and debt - equity because it gives them an ownership interest in the business, debt because they will be repaid more quickly.
TRUE
6. Following the IPO registration statement, an advertisement called a "tombstone" announces the offering in the financial press.
TRUE
8. Intrinsic value is the perceived value arrived at by interpreting balance sheet and income statements through the use of ratios, discounting cash flow projections, and calculating liquidated asset value.
TRUE
9. Nearly all valuation techniques rely on the analysis of the future market for the company's products.
TRUE
Venture capital con't:
The sequence of events in securing venture capital: •Must present good investment opportunity Getting to a term sheet: •VC firm is serious, but not a done deal Capital structure: •Try to enter negotiations from a position of strength, not weakness
Family and Friends:
Treat the deal as a business deal: •Put everything in writing so there is no question about what happens if the business fails •Many investors suggest structuring a convertible debt deal for friends and family
Comparable companies are those that are similar to the new venture in value characteristics such as risk, rate of growth, capital structure, and the size and timing of cash flows.
True
Following the IPO registration statement, an advertisement called a "tombstone" announces the offering in the financial press.
True
Intrinsic value is the perceived value arrived at by interpreting balance sheet and income statements through the use of ratios, discounting cash flow projections, and calculating liquidated asset value.
True
Nearly all valuation techniques rely on the analysis of the future market for the company's products.
True
The term sheet is a letter of intent that spells out the terms the VC is prepared to accept.
True
VCs often want both equity and debt - equity because it gives them an ownership interest in the business, debt because they will be repaid more quickly.
True
When venture capitalists scrutinize a new opportunity, they typically evaluate the market, management, and technology in that order.
True
Bootstrapping refers to:
Using other people's money
____ take an equity position through ownership of stock in the company.
Venture capital firms
12. VCs are fundamentally risk averse, so it is the entrepreneur's job to reduce risk in the three key areas: management risk, technology risk, and ____ risk. A. business model b. investment c. legal d. R&D e. none
a
20. Which of the following are not "backend" costs for an entrepreneur seeking capital by selling securities (shares of stock in the corporation)? a. prospectus pringing costs b. investment banking fees c. legal fees d. marketing costs e. brokerage fees
a
26. Venture capital firms in an early-stage investment characteristically demand a higher rate of return, as much as ____ percent or more annual cash-on-cash return, whereas a later-stage investment demands a lower rate of return, perhaps ____ percent annually. a. 50/30 b. 60/30 c. 40/25 d. 30/10 e. 80/20
a
33. The value derived by assuming the sale of all assets and calculating the amount that could be recovered from doing so is the ____ value. a. liquidation b. going concern c. intrinsic d. book e. investment
a
36. The first step in the IPO process is to ____. a. choose an underwriter b. decide on a stock exchange c. file a registration statement d. publish a tombstone e. none
a
Once a company has become a public company, returning to private status is ____.
a nearly insurmountable task
14. If after exhaustive due diligence the VCs are still sold on the business, they draw up the ____, which signals the start of a negotiation. a. business plan b. term sheet c. tombstone d. prospectus e. none
b
16. ____ from lawyers, accountants, consultants, and investment bankers are essentially a promise not to charge the full fee if an IPO fails. a. fair market provision b. stop loss statements c. forfeiture provisions d. liquidation agreements e. registration statements
b
24. When searching for a venture capital firm, what should you not do? a. get recommendations from attorneys b. shop around c. get recommendations from accountants d. look for venture capital firms that specialize in your industry e. get a referral
b
27. The historical peak for venture capital investment occurred in the year ____. a. 1999 b. 2000 c. 2001 d. 2002 e. 2003
b
30. Which type of venture typically requires considerable research and development cost prior to startup? a. restaruants b. high tech c. construction d. retail e. manufacturing
b
31. The ____ determines the present value of the projected cash flows and is, in reality, the expected rate of return for the investor. a. forecast period b. discount rate. c. terminal value d. book value e. stable earnings history
b
32. A factor affecting the final valuation of the business is the degree of ____ that the owner has over the business. a. estimated value b. legitimate control c. risk d. discount e. none
b
34. The price at which a willing seller would sell and a willing buyer would buy in an arm's-length transaction is the ____ value. a. book b. fair market c. investment d. intrinsic e. liquidation
b
38. A form of startup capital managed by professionals is ____. a. corporate bonds b. private venture capital c. retained earnings d. common stock e. loans
b
40. The term ____ refers to tangible choices such as - in the case of a new venture - investing in research and development for new technology. a. options b. real options c. assets d. discount rate e. none
b
Which industries have the highest venture capital investment?
biotechnology and software
VCs are fundamentally risk averse, so it is the entrepreneur's job to reduce risk in the three key areas: management risk, technology risk, and ____ risk.
business model
11. ____ take an equity position through ownership of stock in the company. a. investment bankers b. IPOs c. Venture capital firms d. angel networks e. super angels
c
15. A VC may request a ____, a penalty requiring founders to give up some of their stock to the VC if the company does not achieve its projected performance goals. a. fair market provision b. stop loss statement c. forfeiture provision d. liquidation agreement e. letter of intent
c
19. Bootstrapping refers to: a. getting by on as few resources as possible b. leasing or sharing c. using other people's money d. a through c e. a and b only
c
25. Any investment deal includes all of the following components, except ____. a. the amount of money to be invested. b. the timing and use of the investment moneys c. the liquidation of strategy d. the return on investment to investors e. the level of risk involved
c
28. The ____ lays out the amount of investment the VC firm is willing to consider and the conditions under which it is willing to consider making that investment. a. common stock b. negotiation deal c. term sheet d. antidilution provision e. none
c
39. Which industries have the highest venture capital investment? a. software and medical b. software and IT services c. biotechnology and software d. biotechnology and semiconductors e. industrial and energy
c
The first step in the IPO process is to ____.
choose an underwriter
13. Most VCs invest in the ____ stage because it is more likely to bring them to the liquidity event they need in three to five years to make the investment worthwhile. a. business model b. startup c. transition d. rapid growth e. none
d
21. Entrepreneurs typically get startup capital from: a. personal savings b. family & friends c. credit cards d. angel investors e. a through c only
d
29. VC funding is usually ____. a. early stage funding b. mid stage funding c. growth stage funding d. later stage funding e. none
d
35. A ____, or prospectus, discusses all the potential risks of investing in the initial public offering. a. book value b. tombstone c. stop loss statement d. red herring e. none
d
37. Once a company has become a public company, returning to private status is ____. a. a way of raising more capital b. easy to accomplish c. not allowed by the SEC d. a nearly insurmountable task e. not allowed by the board of directors
d
Entrepreneurs considering a strategic partner should do all of the following except ____.
depend on a partner for significant revenue generation
The ____ determines the present value of the projected cash flows and is, in reality, the expected rate of return for the investor.
discount rate
17. An underwriter draws up a/an ____, which outlines the terms and conditions of the agreement between the underwriter and the entrepreneur/selling stockholder. a. fair market provision b. stop loss statements c. forfeiture provision d. prospectus e. letter of intent
e
18. The ____ method is probably the technique most commonly used to account for the going-concern value of a business, but it has problems as well. a. discounted cash flow b. venture captial c. comparables d. multiple of earnings e. real options
e
23. All of the following disadvantages are associated with IPOs except ____. a. high cost b. being very time consuming c. public scrutiny d. loss of control e. pressure to perform in the long term
e
The price at which a willing seller would sell and a willing buyer would buy in an arm's-length transaction is the ____ value.
fair market
A VC may request a ____, a penalty requiring founders to give up some of their stock to the VC if the company does not achieve its projected performance goals.
forfeiture provision
Which type of venture typically requires considerable research and development cost prior to startup?
high-tech
VC funding is usually ____.
later-stage funding
A factor affecting the final valuation of the business is the degree of ____ that the owner has over the business.
legitimate control
A factor affecting the final valuation of the business is the degree of ____ that the owner has over the business. a.
legitimate control
An underwriter draws up a/an ____, which outlines the terms and conditions of the agreement between the underwriter and the entrepreneur/selling stockholder.
letter of intent
The value derived by assuming the sale of all assets and calculating the amount that could be recovered from doing so is the ____ value.
liquidation
All of the following disadvantages are associated with IPOs except ____.
pressure to perform in the long term
A form of startup capital managed by professionals is ____.
private venture capital
Which of the following are not "backend" costs for an entrepreneur seeking capital by selling securities (shares of stock in the corporation)?
prospectus printing costs
Most VCs invest in the ____ stage because it is more likely to bring them to the liquidity event they need in three to five years to make the investment worthwhile.
rapid growth
The ____ method is probably the technique most commonly used to account for the going-concern value of a business, but it has problems as well.
real options
The term ____ refers to tangible choices such as - in the case of a new venture - investing in research and development for new technology.
real options
The term ____ refers to tangible choices such as⎯in the case of a new venture⎯investing in research and development for new technology.
real options
A ____, or prospectus, discusses all the potential risks of investing in the initial public offering.
red herring
When searching for a venture capital firm, what should you not do?
shop around
____ from lawyers, accountants, consultants, and investment bankers are essentially a promise not to charge the full fee if an IPO fails.
stop-loss statements
____ tend to favor the types of businesses where the investment required is relatively small and it's easy to determine whether the business will be a success within six months to a year.
super angels
If after exhaustive due diligence the VCs are still sold on the business, they draw up the ____, which signals the start of a negotiation.
term sheet
The ____ lays out the amount of investment the VC firm is willing to consider and the conditions under which it is willing to consider making that investment.
term sheet
Any investment deal includes all of the following components, except ____.
the liquidation strategy
____ take an equity position through ownership of stock in the company.
venture capital firms
Crowdfunding:
•A collective effort by consumers who network and pool their money together, usually vis the Internet, to invest and support efforts by other people or organizations •Can raise a maximum of $1million
The Cost and Process of Raising Capital:
•A time consuming and costly process: -growing more slowly may be better option •It may take twice as long as expected: -It you wait until you need it, it may be too late •Use financial advisers who have experience in raising money •Have a good management team in place •Continue to look for backup investors
Convertible debt:
•Avoids having to place a valuation on the firm that may be wrong diluting their ownership shares
New Venture Action Plan:
•Calculate how many personal resources you have to help fund a new venture •Determine ways to bootstrap the startup of your new venture •Network to come in contact with potential angels •Identify an attorney who can help structure any legal documents •Investigate the sources of debt financing in the community •Determine if any of the non-dilutive sources of funding are appropriate for your business
Public Offering Process
•Choosing an investment banker and draw up a letter of intent with terms and conditions •File a registration statement with the SEC (red herring) •Publish the tombstone in the financial press •Decide on a stock exchange •Do a road show to secure the subscriptions to the IPO
Other Non-Dilutive funding Sources:
•Crowdfunding •Strategic alliances •Grants
Unique Funding Issues of High-tech Ventures:
•Early seed funding and grants support a long period of product development: -the time form an idea generation through the stages to product launch is the "valley of death" failure rate is high •Approaching market readiness as it moves into "early adopter" stage, where tech-oriented users buy it: -company needs cash for marketing •A critical mass of users shift the product into the "tornado", a period of mass adoption; becomes the standard
Financing With Debt:
•Entrepreneurs typically provide a business or personal asset as collateral when applying for a loan bearing a market interest rate
If you are seeking equity capital, you will need a prospectus or offering document which contains:
•Expenses of marketing, advertising, travel and brochures •Also back-end costs such as investment banking fees, legal fees, brokerage fees, marketing costs and more
Factors In Valuation of Pre-revenue Companies:
•Founding team experience •Coachability of founder •Completeness of management team •Size of the opportunity •Competitive landscape •Status of business and funding requirements
Funding Startups Through Bootstrapping:
•Get traction as quickly as possible: -get into business in some form quickly •Hire as few employees as possible: -subcontract work to other firms; use temp help, interns •Lease or share everything -leasing avoids tying up capital •Use other people's money: -accounts payables, longer pay periods
Accessing The Public Markets:
•Going public is often the goal •Going public means that the founders agree to sell a portion of the company to the public by filing with the SEC
Commercial Finance Companies:
•Hard asset lenders, not so heavily regulated •Charge more than banks, perhaps 5% or more over prime •Base their decisions on the quality of the assets of the business
Commercial Banks:
•Highly regulated, and load portfolios scrutinized carefully •Do not make loans with a significant degree of risk •Generally make loans on the basis of 5 C's: -Character -Capacity -Capital -Collateral -Condition
Funding With Equity:
•Investors usually seek an ownership share in the business which will grow •Distinguished from best because equity investors put their capital at risk •Sources of equity financing include: -informal capital (personal resources, family, friends) -private investors (angels) -venture capital
Venture capital:
•Is a pool of money managed by professionals •Prefer growth stage, not startup ventures •Want stock ownership, and seat on board •Only 18% of funds are in $100-$500 million
Private Investors-Angels:
•Normally invest between $25,000 and $100,000 •Seek a return of about 20-30 times the original amount of investment, over 5 years •They focus on first stage financing close to home, like to be involved in their investments
Advantages of Going Public:
•Provides the firm with a tremendous source of interest -- free capital for growth and expansion, paying debt or product development
Bootstrapping:
•Refers to techniques for getting by on as few resources as possible, using others' resources whenever possible
Disadvantage of Going Public:
•Risk of loss shareholder value, and the expense of an IPO •Private offering cost about $100,000 •Very time consuming •Everything the company does becomes public
Grants:
•The Small Business Innovation Development Act designed to stimulate technological innovation by small business is the US •Requires that all federal agencies with R&D budgets in excess of $100 million give a portion of their budget to tech based small businesses in the form of SBIR grants •To qualify, your firm must employee fewer than 500, be at least 51% independent, be technology based, for profit and not dominant in your field
In a R&D Limited Partnership:
•The startup is a general partner developing technology, and structures a license agreement with the R&D partner
Valuing a Pre-revenue or Very Early Stage Company:
•There are moony ways to value a business, but early stage valuation is very subjective, partly because its assets are often intangible •Most financial measures rely on the analysis of the future market in firms products •The discounted cash flow (DCF) method is most commonly used to account for the going-concern value of a buisness, but not problems
Strategic alliances:
•These are partner (formal or informal) with another business •Structure deals with suppliers, manufacturers, distributors or customers that will help reduce expenditures for marketing, raw material
Bootstrapping techniques:
•Use interns •Barter for media time •Seek ways to motivate employees w/o money •Manage receivable weekly •Leverage purchasing discounts •Put resources into things that make money rather than use money
Small Business Administration Loans:
•You can apply for a loan up to $2mill form your bank; SBA guarantees that it will repay up to 90% of loan to the lender if your business defaults