1 andy guo new ventures financing. 2 andy guo sources of financing own money/customers/suppliers –...
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3 Andy Guo Matching Need with Type of Capital l Key is the duration the capital will be required and the risk associated with it The longer the term and the riskier, the closer to equity The shorter term and less risk, the closer to debtTRANSCRIPT
1 Andy Guo
New Ventures Financing
2 Andy Guo
Sources of Financing
Own Money/Customers/Suppliers – “bootstrapping” Friends and family “Angels” and sophisticated angels Early Stage / Seed VC Traditional VC Debt Financing / Banks Corporate partners or strategic investors Public Capital Markets
3 Andy Guo
Matching Need with Type of Capital
Key is the duration the capital will be required and the risk associated with it
The longer the term and the riskier, the closer to equity The shorter term and less risk, the closer to debt
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Some Alternative Sources of Financing
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Pluses and Minuses
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Source + - Own money/Customers/ Suppliers
Relatively Easy Helps assure future success Retains control with minimum
oversight
Requires well-established network Requires some personal wealth Requires positive cash flow
Friends & Family Easily Accessible Good Terms Little Due Diligence
Thanksgiving Dinner Lack of sophistication
Angels & Sellers Eager/Knowledgeable “Good” Terms
Idiosyncratic More or Less sophisticated
Early Stage VC Expertise Legitimacy
Managerial control Scarcity of Early Stage VC firms
Traditional VC Expertise Legitimacy
Deal Terms It’s about the money
Asset Lenders Leverage Benefits No/Little Equity dilution
Covenants Bankruptcy Exposure
Corporations Extensive Resources Provide Credibility Exit Strategy
Slow Decision Making Process Foreclosing Exit Options
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Questions to Ask
What are the venture’s MONTHLY cash flows? How much cash is required in total – how deep is the trough? What size bites do we want it in? What are the particular risks and rewards and who has an appetite
for them? How can the Reward / Risk ratio be managed? What returns will investors expect?
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More Questions
What terms matter other than price, and am I willing to live with these terms ?
What alternatives do I have? What do I need other than $$, and what do they bring other than $$? Likely exit routes / liquidity path? What will the returns look like for me after I give up what will be
required?
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Bootstrapping vs. Taking Other People’s Money
Imposes a significant legal and moral burden upon the entrepreneur
Imposes the requirement for some kind of “exit” or “liquidity” event
Much simpler / easier / better if the business can be started w/ the entrepreneur’s own $$ and grown w/ internally generated funds
But, often not possible for high potential ventures
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F&F & Angels
Individual investors often invest for some reason other than pure cash return
What are their reasons: a + or – for you Managing info flows is key
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Venture Capital
Require probability of exceptional returns – swinging for the fences
Need to put large amounts of capital to work High stakes – majority of founders do not make it
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Corporate Partners
Often want something other than a pure financial return This can be a + or – depending upon whether their
objectives line up w/ entrepreneur’s / venture’s Even if they appear to be aligned at the start, can easily
change
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Banks
Will always look to cash flow first Then to corporation assets Then to personal assets, guarantees You can reach a point where it is in their interests to pull the plug
– their last chance to get out whole – will not be in the equity holders’ best interests
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LBO Value Creation
Value of the firm
(EBITDA Multiple)
Value of Debt
$
Time
Value of the Equity
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Cumulative Cash Flow in $
Time
The Cash Flow Cycle for a Venture
Burn Rate
Date of First Cash Flow Positive
Maximum Financing Needs
Date of Cash Breakeven
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Risk/Reward Management
Probability of
Occurrence Expected Value
-100% +25% +100% Return on Investment
Probability ofLosing 100%
Goal 1
Goal 2
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Free Cash Flow and the Choiceof Burn Rates
TIME
CASHFLOW
0
+
-
Step on the gas
Moderatespending rate
Conserve fuel
Free Cash Flow and The Choice of Burn Rates
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Staged Capital Commitment, Risk and Marketplace InformationCASH FLOW
TIMESeed Stage 1 Stage 2 Stage 3
IPO/Partial Sale/Recap
Seed. Intense Customer Interviews ……Segmentation/ Value
Stage 1. Construction of Prototype or Simulation……Verification
Stage 2. Beta Site Selection & Installation……Influence Gathering
Stage 3. Broad Customer Interviews & Targeting…..Niche v. Mass Market
Then Accumulation of Target Segment Reference Account... References that matter to the type of Customers and Partners you need…the Recurring Requirements are Interviewing (Discovery)….and Qualification (Product Capability v. Customer Need)..and Selling What You Have
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Reduced Uncertainty Over Time
CASH FLOW
TIME
Access to Debt Capital
Staged Capital Commitment
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Impact of Leverage on Equity Risk
Returns
Probability of outcome
Distribution of Total Value (Debt and Equity)
Distribution of Total Equity Value