Lecture 10 Raising Money

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					            Lecture 10
   $$$$$ Raising Money $$$$$$
Debt and Equity for a New Company
            Ken Pickar
        Lecture Feb 16, 2011
                   Agenda
• HW presentation (Fluidica)
• Pasadena Leadership Opportunity
  – Trity Pourbahrami
• Lecture on Raising Money
       HW for Feb 21 (revised!)
1. How will you sell your product? (Sales
   strategy) 20%
2. Why should you be successful using these
   avenue/avenues? 20%
3. What will be your funding source? 20%
4. Why they should invest in you? 20%
5. Marketing research update 20 %
What other product issues drive companies
            besides profits?




                                            4
           For a new company
         Some financial principles
Cash flow is typically a negative
  quantity
Monthly Negative Cash Flow= Burn
  Rate

Central riveting thought

Cash in Bank/Burn Rate
= number of months until you are
  out of business
           For a new company
         Some financial principles
Cash flow is typically a negative
  quantity
Monthly Negative Cash Flow= Born
  Rate

Central riveting thought

Cash in Bank/Burn Rate
= number of months until you are    The horror!
  out of business                   The horror!
                   Cash Profile
     Initial
      investment                       Product takes off
                                       “Hockey stick”


               Cash Burn           Second
+$                                 investment




          Start here

                       Time (months)
              For a new company
            Some financial principles
• “Cash is King”
  – Think cheap
• Need to lower burn rate?
  –   No office space - “virtual company”
  –   Smallest team you can use
  –   Buy/make??
  –   Outsourcing of everything
  –   Ebay
  –   Smaller prototypes
  –   Low inventory
  –   Lower salary
  –   Zero salary
            For a new company
          Some financial principles
• “Cash is King”
  – Think cheap
• Need to lower burn rate?
  –   Lease rather than buy
  –   Sell stuff
  –   Fire people or hire less
  –   Keep your day job
  –   Barter for space, services
  –   Pay in stock
                 Questions
• When do you raise new money?
• Debt vs Equity
  – What’s the difference?
   Founder’s financing concern for
          a new company

Keep Control                                    Need $

                       Issues
     •Degree of Desperation
     •Need for advice, contacts and mentoring
     •Valuation
     •Reserve for the future
          Existential Questions

• What is your reason for going into business?
• Do you really need outside financing?
• Are you a business with a potential “liquidity
  event” or are you a “lifestyle business”?
• How important is control to you?
• What is your minimum burn rate
• How long until you are “cash flow neutral”?
            Start-up Rule


CEO looks for financing all the time
Where can you get money?
 Summary Categories of places to get
             money
1. Advance on Sales
2. Debt
3. Equity
    Plus and Minus of Debt or Equity
             Debt +                            Equity +
•   More control                  •   Easier To begin with
•   No sharing of success         •   Helpful (?) partner
•   Fixed interest rate           •   Motivator
    (predictable)                 •   Validates model
•   Big motivator
•   Tax advantage                                 Equity -
                                  • Share upside
                 Debt –           • Loss of control
• Affects cash flow
• Reduces profits
• Have to pay good times or bad
              1. Operating funding
• “Sweat” Equity
• SBIRs (Small Business Innovation Research)
• Research Contracts
  –   Feds
  –   State
  –   Corporate partner
  –   Customer
  –   Supplier
• Barter
  – Rent
  – Professional services
  – What else?
• Free services
• Part-time consulting
            2. Debt- Sources of Funds
• Short term loans
  Securing a succession of small loans can help you cover expenses while building
  revenues

• Personal Credit
  They're not just for car loans and home mortgages. Now credit unions are making
  business loans.

• Credit Cards

• Home Equity
  Assuming you have any

• Purchase orders as entry-level collateral

• SBA Loans

• Private Loan Guarantees
  Find an investor to guarantee your loan.
              Debt (continued)
• Asset-Based Loans
  Use your assets—like accounts receivable and
  inventory—to help you land funding.

• Equipment Leasing
  .
• Inventory-based lines of credit

• Royalty Financing
  Get advance against future sales.
             Debt Sources
• Credit Unions
• Community Development organizations
• Home Equity
• Subordinated Debt
• Warrants
                 3. Equity Sources
• Self-Funded Corporation
• Outside Capital Sources
  – Seed (10-100K)
       •Friends, Family and Fools
  –   Angel (250K- 1M)
  –   VC (2-10M)
  –   Mezzanine (50M)
  –   Liquidity event (500M- ? )
       •IPO
       •Acquisition
How do you trade-off ownership for capitalization?

 • Before funding, you owe 100% of the company
 • Assume you would like to raise money. How do you
 calculate who owns what after the money is raised?

                                Ownership     Ownership
                                before        after

   Pre-money      2M            100%          67%


   Angel          1.0M                        33%
   Investment

   Post Money     3.0M                        100%
  A round

Pre-money 2M (how is this determined?)
Angel invest        1M (Why this amount?)
Total       3M (Valuation after A Round)
Congratulations (?)
  1. You have lost 1/3 of your company.
  2. You have added strangers to your Board.
  3. Well, at least you have majority ownership
  4. Your company is worth 3M of which your share is
  2M. This is the best measure of a companies worth.
  What are others?
       How to determine Pre money
               valuation
• Some Factors
  –   IP protection
  –   Market addressed (Validated?)
  –   Management Team
  –   Net present value of future profits
  –   Return on investment
  –   What else?
        How to determine Pre money
                valuation
• Some Factors
   –   IP protection
   –   Market addressed (Validated?)
   –   Management Team
   –   Leadership
   –   Net present value of future profits
   –   Return on investment
   –   What else?
Market for start-ups!
         How much do I need?
• Usually more than you think
  – Time = money
  – Excessive optimism
     •Market development
     •Hire people
     •Murphy’s Law
     •You don’t know what you don’t know
• Leverage all sources
• Never stop
• Allow 6 + months to raise money
  I need more money to grow (or to
              survive)
B Round
Pre-money 10M (how is this determined?)
VC invest        5M (Why this amount?)
Total       15M (Valuation after B Round)
Congratulations (?)
  1. Your company is now worth 15M
  2. You have added new strangers to your Board.
  3. How much do you own?
             Ownership after B round
• You own            (66%) (15M) (66%)            = 6.7M
• Angels own         (33%) (15M) (66%)            = 3.3M
• VC owns            (33%) 15M                    = 5M

Bad news: You’ve lost control! 66%X66% = .44
Good news: Your investment is now “valued” at
  6.7M (Up round. What is the alternative?)
Bad News: This investment is illiquid, i.e. there is no market to conver
  to cash (changing: there are markets now being established for pre-
  public companies)
Good News: You have funding to take you to the next level
And so it goes. . .
          And so it goes. . .
• Until
  – RIP
           And so it goes. . .
• Until
  – Walking wounded
             And so it goes. . .
• Until
  – Life style company
            And so it goes. . .
• Until
  – Acquisition
          And so it goes. . .
• Until
  – IPO
                Projections
• In Business Plan, need to project income and
  cash flow statements ~ 5 years
• We will discuss this in a future lecture
               Conclusion
• Financing Decision determines what kind of
  company you will build

				
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