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Module 4

The Search for Capital


Module 4
Topics
Sources of Capital

Background
Start-up
Ongoing Operations
Growth
Review
The Search for Capital

We Know That Small Firms

need capital
don’t have access to capital markets
have limited choices
owners are often inexperienced
The Search for Capital
Finance Theories: Common Themes

(CAPM, Agency theory, Signaling theory, Pecking order theory)


Applicable to large firms, but less applicable to small firms
Most firms have a preferred target capital structure
Preferred target capital structure may vary by firm
Capital structure may affect value
Appropriate capital structure affected by many factors (taxes,
cost, collateral, uncertainty, owner preferences)
Perspective on Raising Capital

http://edcorner.stanford.edu/authorMaterialI
nfo.html?mid=1374

(3 minutes)
General Sources of Capital

Equity Personal Sources


Profits
Angel Capital
Venture Capital

Debt Financial Institutions


Credit Cards
Other (Home Equity Loan, Life Insurance)

Other Local Community Grants and Loans


Government Programs
Other (customer, suppliers)
Common Sources of Start-Up Capital

Personal Equity
Friends and Family
Loans from Financial Institutions
Bootstrap Financing
Common Sources of Growth Capital

“Angel” Investors
Venture Capital
Sale of Stock
Profits
Angel Investors

Local Wealthy Individuals


234,000 active investors in US
Work in informal groups
Pool investments
300 informal “angel” groups in US
Angel Investors

Invest < $1 million dollars


Average = $500,000
Annual Angel Investment = VC Investment
(2006: 25.6 billion vs $26.1 billion)
Invest in 10 times number of firms as VCs
(2006: 51,000 firms vs 3522 firms)
Angel Investor Expectations

Return of > 10 times investment

Exit within 5 years

Defined exit strategy


Finding Angel Investors

Not Easy
Cluster
Personal Network
Referrals: attorneys, accountants, bankers
Local Associations
Angel Investors: Due Diligence

Business Plan
Product
Nature of Opportunity
ROI
Cashflow
Management Team (Background Checks)
Exit Opportunity
“ Portals” to Angels

“Gatekeepers” (Initial introduction)


Venture Capital Clubs
Regional-Based Groups of Investors
Matching Networks
Venture Capital: Background

Professionally Managed Investment Funds

$29.4 billion into 3,800 U.S. start-ups in 2007

$6.6 billion in 800 deals in U.S. – 3rd quarter, 2006

1300 Venture Capital Firms in US

Invest in 1 of 400 proposals


Venture Capital
35 years VCs > $441 billion
> 57,000 companies

½ of IPOs have VC investment

Europe (2006) 71 billion invested in 2006


8.3% Seed 21% Expansion
70% Buyout financing

US (2007) $1.4 billion in China


$1.0 billion in India
US Venture Capital
VC investment down 8.5% - 1st quarter 2008 vs 4 th quarter 2007
(consistent with slowdown of US economy)

VCs and angel investors more cautious, pursued later stage investments

Shortage of money for seed and early stage ventures

US Investment (California, Massachusetts, Texas, Washington, NY)

Invested in >1,400 companies

Life sciences, clean technology and information technology

55 new venture capital funds


Identifying a Venture Capitalist

Needs
Of Characteristics
Firm of VC Firm
Identifying a Venture Capitalist

Stage of Development
Amount of Investment
Industry
Services Offered
Reputation
Successful Record
VC Investment Criteria

Entrepreneur
Rate of Potential (50%/year)
Board of Directors
Management Team
Intellectual Property
Exit Opportunity
Venture Capital in Portugal

VC sector is one of smallest in OECD relative to


size of economy

1999-2002 0.09% of GDP


vs
0.29% of GDP for OECD

Dominated by banks and public VC companies


Venture Capital Process

Screening

Due Diligence

Deal Structure and Negotiation

Post Investment Monitoring


VC Due Diligence

Management Team
Competitive Advantage
Growth Potential
Exit Opportunity
Financial Projections
Intellectual Property
Venture Capital in Portugal

Most investment in Lisbon and Porto

2002 50% of investments in Lisbon


16% in Porto
23% rest of country
10% other European countries
Venture Capital in Portugal

Favor expansion stage projects

Average deal = 1.2 million Euros (2001)

Investments 40% manufacturing


18% services
15% IT
9% retail
Going Public

 Process
– Underwriter
– Security and Exchange Commission
– Road Show

 Very Expensive (~ $3,000,000 in US)


Discussion
Assignment

How much money to start your proposed


business?

Where will money come from?

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