The Investment DealStages of FinancingSeed CapitalStartup CapitalSubsequent-Stage FinancingEquity FinancingInvestment-Deal TermsWill an Investor Invest?Loan Terms from BanksLoan Terms (cont.)If a Bank Turns You DownNon-Collateral Loans from BanksExit StrategyAny Questions?The Investment DealDr. Stan AbrahamMHR 423Spring 2010Stages of FinancingEarly-stage financing (highest risk)Seed capital – to prove the concept is viableStartup capital – to make the business operationalExpansion financing (lower risk)Second-stage financing – first commercial salesThird-stage financing – rapid expansionFourth-stage financing – to go publicSeed CapitalHighest risk (no assurance of success, long time before revenues are achieved)Sources typically include relatives and entrepreneur’s own capitalNeeded typically for R&DTo prove the conceptTo develop a working prototypeVCs won’t invest at this stageBiotech companies were an exceptionStartup CapitalTypically funded by venture capitalists or angel investorsThey require ROIs of 40-200%High ROI required in part to offset an average 80% failure rateProceeds typically used forMarketing (expansion)Operations or production (expansion)Continued R&DStaffingSubsequent-Stage FinancingTypically provided by venture capitalists, investors, investment banks, corporationsMultiple investors common (to share risk when investment required is too large )Required ROIs in the 25-100% rangeProceeds typically used for marketing, systems, new product development, expansion, and brand developmentEquity FinancingCompany must be valued first (value is often estimated) so a value can be placed on the shares owned by the investor The investor getsAn equity stake in the company (percentage is negotiated)A seat on the board of directorsInvestment does not have to be paid backRisk is borne by the investor(s)Investment is for a limited time (about four years)Investment-Deal TermsCapital requestedPercentage of the company given in exchangeUses of the proceedsExit strategy (how would the investment be recouped and when?)Other conditionsFor example, stock buybacks based on achieving agreed upon performance milestonesWill an Investor Invest?Depends on how attractive the deal isDepends on how strong the business model isAnd how well margins can be sustainedDepends on the level of trust the entrepreneur can command (usually more with more experience) (chemistry)Depends on how seductively the business plan is writtenLoan Terms from BanksLoan amountFor how long? When will it be repaid?At what monthly payment? What interest rate?What is offered as collateral?When is the money needed and when will the first payment begin?Other conditions (e.g., need for a co-signer)Loan Terms (cont.)Investors or relatives – not just banks – can also lend you moneyOffer an interest rate that would induce them to lend (double the bank’s?)Negotiate the term of the loan and how it would be repaidNo collateral is typically requiredMake sure the terms of the loan are put in writing and agreed upon (both parties sign)If a Bank Turns You DownIt’s not the end of the worldThere are thousands of other banks to approachSome of them will need you more than you need themWhen you find them, you will have some bargaining powerNegotiate good loan termsNon-Collateral Loans from BanksConditions that must be metCompany must have been in business three yearsTwo of those years must have shown a profitPrincipal must have good character, credit rating, and no criminal recordExit StrategyThis is when everyone “cashes out”Often at an IPO (initial public offering)Company goes publicEquity financing received from the public offering pays off the owners and investors of recordCould be when acquired by another companyBusiness plan must indicate when this might happenProceeds go to the owners in proportion to the number of shares they ownAny