i need money for my startup: now what? with meziane lasfer
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Raising Capital by Private Firms
Meziane LasferProfessor of Finance
Cass Business School, City, University of London
2 m.a.lasfer@city.ac.uk
Types and Characteristics of Financing Methods
Fixed claimTax deductible
High priority in financial troubleFixed maturity
No management control
Residual claimNo tax deductibility
Lowest priority in financial troubleInfinity
Management control
DebtBank Debt
Commercial PaperCorporate Bonds
Leases
EquityOwner’s equityVenture CapitalCommon stock
Warrants
Hybrid SecuritiesConvertible debtPreferred Stock
Option-linked Bonds
3 m.a.lasfer@city.ac.uk
3
Stage 2Rapid Expansion
Stage 1Start-up
Stage 4Mature Growth
Stage 5Decline
Financing Choices across the life cycle
ExternalFinancing
Revenues
Earnings
Owner’s EquityBank Debt
Venture CapitalCommon Stock
Debt Retire debtRepurchase stock
External fundingneeds
High, but constrained by infrastructure
High, relative to firm value.
Moderate, relativeto firm value.
Declining, as a percent of firm value
Internal financing
Low, as projects dryup.
Common stockWarrantsConvertibles
Stage 3High Growth
Negative orlow
Negative orlow
Low, relative to funding needs
High, relative tofunding needs
More than funding needs
Accessing private equity Inital Public offering Seasoned equity issue Bond issuesFinancingTransitions
Growth stage
$ Revenues/Earnings
Time
Start-up Rapid Expansion
High GrowthMaturity
Decline
Example of the financing of growth: Amazon.comDates Share Price $ Sources of funds
July-Nov 94
Feb-Jul 95
Aug-Dec 95
Dec-May 95/96
May 96
June 96
May 97
Dec-May 97/9822 Nov 2016
0.001
0.1717
0.13
0.33
0.33
2.34
18
52.11780
Founder: Geoff Bezos starts with $10,000 and borrows $44,000Family: Founder’s father and mother invest $245,000
Business Angels: 2 angels invest $54,408
Business Angels: 20 angels invest $937,000
Family founder and siblings: $20,000
Venture capitalists: 2 funds $8m
IPO 3m shares $49.1m. 1st day Open 29.25 (62%), close 23.50 (30.6%)Bond issue: $326mThis price is affected by stock splits: 02-Jun-98 [2:1], 05-Jan-99 [3:1], 02-Sep-99 [2:1] Equity Market value = $371bn
4 m.a.lasfer@city.ac.uk
But: “In the suburbs there are twice the number of new businesses as the rest of France but their chance of succeeding within three years is 32 per cent lower. They don’t have access to finance and there is a lack of networks – they don’t know the right people.” FT 25 January 2012
Raising funds from angels/Venture Capitalist
Stage I Stage II Stage III Stage IV
Provoke Equity Investors’ InterestFactors that can contribute:• Type of business• Track record of the top managers (e.g., converting private business into IPO)•Windows of opportunity…
Valuation and Return AssessmentBased on assessment of firm’s prospects- Venture Capital Method (Exit or terminal value) e.g., use PE multiple in the year of IPO-Discount terminal value at higher discount rate (e.g., 30%)
Structuring the dealNegotiate 2 factors:- Investor: Proportion of value to demand in return for funding and the Owner how much of the firm she is willing to give up in return for capital. Thus Ownership proportion = Capital provided over Estimated value- Private equity imposes constraints on new investments and fresh financing so that private equity are protected and have a say in how the firm is run.
Post deal Management and ExitPost deal:-Investor takes active role through advice and contactsExit:-Private equity invest in firms to earn high returns in short-term-These returns are realised through
IPO or Trade salesLow returns through
Refinancing orLiquidation
5 m.a.lasfer@city.ac.uk
www.cass.city.ac.uk
m.a.lasfer@city.ac.uk
Thank you for your attention
All the best with your ventures
Cass Business School106 Bunhill Row
London EC1Y 8TZT: + 44 (0)20 7040 8600
www.cass.city.ac.uk
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