1A. Amount of Cash Needed and PurposeB. Sources of CapitalC. Deal StructureE140A: Basics of Venture FinanceE140A: Basics of Venture Finance2A. Amount of Cash A. Amount of Cash ……Two Key QuestionsTwo Key Questions#1 How much money is needed for this “round” of financing?Typical Financing Stages (or Rounds):Seed Î Early Î Mezzanine Î Late (e.g., IPO)3#2 Which “white hot” risks are to be reduced with this money?Team RiskTechnology RiskCapital RiskMarket Risk4B.B.Sources of CapitalSources of Capital5TraditionalVentureCapitalAngel InvestorsCorporate VCBoot-strappingOtherSpecific Sources:Specific Sources:Pros and ConsPros and Cons6US Venture CapitalUS Venture Capital• GDP: about $12.5 trillion annually• Hedge funds: $1 trillion over 3 years• Mutual funds: $136 billion in 2005• Buyout funds: $86 billion in 2005• Venture capital?$25 billion in 2005… just 0.2% of GDP.Source: BLS website, Investment Company Institute, Thomson Financial, NVCA7But VCBut VC--BackedBackedCompanies = Companies = 17% of GDP17% of GDPMarch 21, 2007, Washington, D.C. – U.S. companies that received venture capital from 1970-2005 accounted for 10 million jobs and $2.1 trillion in revenues in 2005… This represents 9 percent of the total private sector work force and 17 percent of total U.S. GDP.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.8At Year End # Venture Firms Capital Under Mgt 1970 28 $1B 1980 89 $4B 1990 398 $31B 2000 887 $223B 2001 949 $252B 2005 866 $259B Number of US VC Firms Has PeakedNumber of US VC Firms Has PeakedSource: 2006 NVCA Yearbook, prepared by Thomson Financial, page 189After a 2000 US Peak of over $100B, After a 2000 US Peak of over $100B, Now on a $20+B Annual Pace Now on a $20+B Annual Pace $0$20,000$40,000$60,000$80,000$100,000$120,000$ Million Invested198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420051H06Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report10Venture Exits in US: Venture Exits in US: IPOs and M&As by YearIPOs and M&As by Year0100200300400500600700737475767778798081828384858687888990919293949596979899'00'01'02'03'04'051HYearM&AIPOSource: Thomson Financial/National Venture Capital Association11C. Key Questions C. Key Questions Regarding the Regarding the ““DealDeal””1. What percentage of the company do the investors receive for their cash?2. What special terms and conditions are necessary to compensate them for the risk?12A Simple Venture Finance ExampleA Simple Venture Finance Example• Roma’s hot startup requires $10 million in order to form its business. She expects to earn $5 million in its fifth year. • Randy’s VC firm has reviewed the company's business plan and believes that he is entitled to a 50% return on his investment. Hint: how many “times” must his firm’s money grow in 5 years?)• Publicly traded companies in this category and industry trade at an average of 30 times earnings (PE ratio). There is no material difference between these companies and Roma’s startup. • What portion of the company should Randy’s VC firm receive today? Hint: what is future value of that investment?1. Value of VC Investment in Year 5 = $10 m*(1+50%)^5 = $76m2. StartUp’s Value in Year 5 = $5 m*(P/E of 30) = $150m3. VC Firm’s Share Today = Step 1/Step 2= $76 m/$150m = ~ 50%4. “Post-Money” Value Today = $10 m / 50% = $ 20 m13A MultiA Multi--Stage Venture Finance ExampleStage Venture Finance ExampleTimeI II III IV V33 1/3 %33 1/3 %33 1/3 %1mm shares for each founderΣ=3mmshares @ $0.001 ea.Value=$3kNote: not to scale20 %20 %20 %20 %20 %+1mm shares each for CEO & employeesΣ= 5mmshares @ $0.01 each Value=$50k10 %10 %10 %10 %10 %50 %+5mm shares for first VC firmΣ=10mmshares @ $1.00 eachValue=$10mmUse of $: R&DPost-money value = $10mmPre-money value = ?1433 1/3 %33 1/3 %33 1/3 %20 %20 %20 %20 %20 %10 %10 %10 %10 %10 %50 %TimeI II III IVV1mm shares for each founderΣ=3mmshares @ $0.001 ea.Value=$3k1mm shares each for CEO & employeesΣ= 5mmshares @ $0.01 each Value=$50k5mm shares for first VC firmΣ=10mmshares @ $1.00 eachValue=$10mmUse of $: R&D5 %5 %5 %5 %5 %25 %25 % 25 %+5mm shares for sale to public in IPO Σ = 20mmshares @ $15.00 eachValue=$300mmUse of $: Operations6 2/3 %6 2/3 %6 2/3 %6 2/3 %6 2/3 %33 1/3 %33 1/3 %+5mm shares for second round VCsΣ=15mmshares @ $5 eachValue=$75mmUse of $: Mktg.A MultiA Multi--Stage Venture Finance ExampleStage Venture Finance ExampleNote: not to
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