Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Chapter 10 Raising Money for...

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. ©

Chapter 10

Raising Money for Starting and Growing Businesses


Ways of raising moneyWays of raising moneyTurning to family

and friendsApproaching

business angels

Going Public

Being Acquired

Looking for Venture Capital


Four basic ways of evaluating Four basic ways of evaluating a businessa business

Earning-capitalization valuation

Present value of future cash flows

Market-comparable valuation

Asset-based valuation


Earnings Capitalization Method:

Company value = Net Income/ Capitalization Rate

Present Value of Future Cash Flows:

PV = PV of the future free CF + the residual (terminal) value of the firm

Market-comparable Valuation (Multiple of

earnings):

Total Equity Valuation = NI x P/E


Asset-based Valuation

Modified (adjusted) book value Replacement value

Liquidation value


External FinancingExternal Financing

Customerfinancing

Customerfinancing

Reduced rentReduced rent

Governmentprograms

Governmentprograms

Leased equipment

Leased equipment

Vendor financing

Vendor financing

Services atreduced rates

Services atreduced rates

External Financing

External Financing


Finding business angelsFinding business angels

1. Formal angel groups

Pros: Easy to findCons: May charge

you for presentation or even business plan submission;

Few in number (several thousand)

2. Individual angels

Pros: Several hundred thousand

Cons: Hard to find and approach – the best way is through your network


Types of Business Angels

Entrepreneurial Angels

Corporate angels

Professional Angels

Enthusiast Angels

Micromanagement Angels

Can be invaluableadvisors and mentors

Can take over or ruin yourcompany

Silent partners

Passive investors

Intervene in the business


Target Market

Business Plan

Management Team

Product/Service

Competitive Positioning

FinancialReturns

Top 6 factors according to Top 6 factors according to VCsVCs

VCs may helpyou hire a Team

Fragmented,accessible, and growing rapidly

Better andprotected

No dominance, distribution channels are open

7X return in 5 years

Competent written business plan


Assessing a VCAssessing a VC

Value added Patience

Deep pockets Accessibility

Board ofdirectors


Harvesting (exiting) Harvesting (exiting) investmentsinvestments

► Initial Public Offering (IPO)Initial Public Offering (IPO)

►An acquisitionAn acquisition

►A buyback of the investor’s stockA buyback of the investor’s stock

Very Unlikely


Pros and Cons of an IPOPros and Cons of an IPO

FinancingFinancing High Expenses High Expenses

Follow-On FinancingFollow-On Financing Public Fish Bowl Public Fish Bowl

Realizing Prior InvestmentsRealizing Prior Investments Short-Term Time Horizon Short-Term Time Horizon

Prestige and VisibilityPrestige and Visibility Post-IPO Compliance Costs Post-IPO Compliance Costs

Compensation for Compensation for EmployeesEmployees

Management’s Time Management’s Time

Acquiring Other CompaniesAcquiring Other Companies Takeover Target Takeover Target

Employee Disenchantment Employee Disenchantment

Upsides Downsides


Advantages and disadvantages of an Advantages and disadvantages of an acquisition for the selleracquisition for the seller

Management Founderand CEO

Company Investors

Convertingstock

EmploymentAgreement Culture

Expenses andCommissions

Managers canstay focused on

building thecompany

Selling a “baby”can be

traumatic

The buyer usually hasbig pockets

Investors easilyexit their

investments

If it is a cashtransaction, theentrepreneursand employeesget cashimmediately

Key employeessign non-competingagreement

There is a riskthere will be aclash of cultures

The expenses arelower for an acquisitionthan for an IPO

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Chapter 10 Raising Money for...

Documents

Transcript of Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley. © Chapter 10 Raising Money for...