The Rocket Analogy

Just as with complex rockets, the venture proceeds in stages

• Each stage gives an opportunity to terminate or make minor
midcourse corrections.
• Rocket needs fuel. The new business needs cash.
• The rate at which the cash is consumed during each stage is the
“burn rate”.

Differences
• Venture being fueled with enough cash at each stage to reach the
next stage. There are stations to refuel the venture. In each station
the fuel can be cheaper.
• The Venture can change objective
New Venture Financing: Considerations and
Choices
Money is the seed of money, and the first guinea
is sometimes more difficult to acquire than the
second million.
Jean-Jacques Rousseau
Stages of New Venture Development
Stages
Opportunity
Obtain Seed Financing
Assess Opportunity
Actions
Assess Strategic Alternatives
Determine Organizational Structure
Determine Organizational Form
Prepare Business Plan
Continue to Next Stage
Options
Real
Modify Concept
Abandon
All activities through preparation of
Description
business plan and before incurring
significant expense.
Research and
Development
Obtain R&D Financing
Build Research Team
Conduct R&D Activities, e.g.:
Secure Patent
Develop Prototype
Build Website
Test Market/Market Research
Assess/Update Business Plan
Continue to Next Stage
Extend Stage/Financing
Modify R&D Strategy
Abandon
All research and development
activity that must be completed
before revenue generation can
commence.
Stages of New Venture Development
Start-up
Obtain Start-up Financing
Acquire Facilities and Equipment
Initiate Production
Build Starting Inventory
Build Sales and Marketing Team
Initiate Revenue Generation
Assess/Update Business Plan
Continue to Next Stage
Modify Production/Financing
Modify Marketing/Financing
Abandon
All activities related to start of
production and marketing and
initiation of revenue-generating
activities.
Early Growth
Obtain Early-Growth Financing
Work Toward Breakeven
Expand Team as Needed
Expand Facilities as Needed
Assess/Update Business Plan
Continue to Next Stage
Extend Stage/Financing
Abandon
All activities during the period
before the venture reaches a level
of sales sufficient for cash-flow
breakeven.
Rapid Growth
Obtain Rapid-Growth Financing
Work Toward Proven Viability
Expand Team as Needed
Expand Facilities as Needed
Build Track Record for Harvest
Assess/Update Business Plan
Continue to Next Stage
Extend Stage/Financing
All activities during the period
after break-even and before
sustainable viability is
established.
Exit
Obtain Continuing Financing:
IPO
Acquisition
Buy-Out
Early Investors Harvest
Assess/Update Business Plan
Choose Form of Exit
All activities related to
establishing continuing financing
and enabling early investors to
harvest.
Measuring Progress with Milestones
• Rather than thinking of staging in terms of time
intervals, orienting around milestone is more
useful.

• Each milestone functions as a working

hypothesis about the venture
• Understanding the reasons for failing to met a
milestone is important

• Postpone financial commitments until they are

needed.
Milestones by Block and MacMillan (1985)

Completion of a concept and product testing

Completion of a prototype
First financing
Completion of initial plant tests
Market testing
Production start-up
Bellwether sale
First competitive reaction
First redesign or redirection
Financial Performance and Stages of New Venture
Development
Successful Venture Life Cycle
Venture Life Cycle: stages of a successful venture’s life from development through various stages of revenue
growth)

▪ Development Stage:
period involving the progression from an idea to a promising business opportunity
▪ Startup Stage:
period when the venture is organized, developed, and an initial revenue model is put in place
▪ Survival Stage (Early-Growth):
period when revenues start to grow and help pay some, but typically not all, of the expenses
▪ Rapid-Growth Stage:
period of very rapid revenue and cash flow growth
▪ Maturity Stage:
period when the growth of revenue and cash flow continues but at a much slower rate than in the rapid-
growth stage
The Sequence of New Venture Financing
Early stage Bootstrap techniques
Seed financing Earliest external financing – Angel
. investors, maybe Venture Capitalist
Start-up financing Venture Capitalist
Later-stage financing Venture capitalists (rounds)
Mezzanine financing High-risk debt financing
Bridge financing Towards harvesting
Exit stage
The Sequence of New Venture Financing
▪ Development Stage
Developing opportunities and seed financing

▪ Startup Stage
Gathering resources and startup financing

▪ Survival Stage
Gathering resources, managing and building operations and first-round financing

▪ Rapid-Growth Stage
Managing and building operations and second-round mezzanine, & liquidity stage financing

▪ Early Maturity Stage

Managing and building operations and obtaining bank loans, issuing bonds, & issuing stock
Selected Financing Definitions
Seed Financing:
funds needed to determine whether the idea can be converted into a viable business opportunity
Startup Financing:
funds needed to take the venture from having established a viable business opportunity to initial
production and sales
Venture Capital:
early-stage financial capital often involving substantial risk of total loss
Venture Capitalists:
individuals who join in formal, organized firms to raise and distribute venture capital to new and
fast-growing ventures
Selected Financing Definitions
Business Angels:
wealthy individuals operating as informal or private investors who provide venture financing for
small businesses
Investment Banker:
individual working for an investment bank who advises and assists corporations in their security
financing decisions and regarding mergers and acquisitions
First Round Financing:
equity funds provided during the survival stage to cover the cash shortfall when expenses and
investments exceed revenues
Second Round Financing:
financing for ventures in their rapid-growth stage to support investments in working capital
Selected Financing Definitions
Mezzanine Financing:
funds for plant expansion, marketing expenditures, working capital, and product or service
improvements
Bridge Financing:
temporary financing needed to keep the venture afloat until the next offering
Initial Public Offering (IPO):
a corporation’s first sale of common stock to the investing public
Seasoned Securities Offering:
the offering of securities by a firm that has previously offered the same or substantially similar
securities