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Chapter 11 - Raising money for starting and growing businesses. This chapter describes various financing options for entrepreneurs and identifies potential financing pitfalls and solutions. We also discuss how these issues are influenced by the type of industry and the life cycle of the firm and how to plan accordingly.
RAI SI NG MONEY FOR STARTI NG AND GROWI NG BUSI NESSES Chapt e r 11 Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Progression of Raising Money Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Basic Ways of Evaluating a Business q Earning-capitalization valuation q Present value of future cash flows q Market-comparable valuation q Asset-based valuation Valuation is not an exact science Each of the above methods may get to vastly different monetary values of a company Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Income-based Valuation Methods Earnings Capitalization Method: Company value = Net Income/ Capitalization Rate Present Value of Future Cash Flows: PV = PV of the future free CF + the residual (terminal) value of the firm Market-comparable Valuation (Multiple of earnings): Total Equity Valuation = NI x P/E Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Asset-based Valuation Methods Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © External Financing Click icon to add SmartArt graphic Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Finding Business Angels Formal angel groups Pros: Easy to find Cons: May charge for the privilege to present or submit a business plan; Limited number (several thousand) Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Individual angels Pros: Several hundred thousand available Cons: Hard to find and approach; must identify prospects and present Types of Business Angels Entrepreneurial Angels May be valuable advisors Corporate Angels May take over or ruin company Professional Angels Silent partners Enthusiast Angels Passive investors Micromanagement Angels Intervene in the business Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Top 6 Investment Factors For VCs VCs may help Click icon to add SmartArt graphic you hire a Team Competently written business plan 7X return in years Fragmented, accessible, and growing Better and protected Open distribution channels Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © How to Assess a VC Value added Patience Deep pockets Board of directors Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Accessibility Harvesting (exiting) Investments q Initial Public Offering (IPO) q An acquisition q A buyback of the investor’s stock Very Unlikely Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Pros and Cons of an IPO Upsides Downsides Financing High expenses Follow-on financing Public fishbowl Realizing prior investments Short-term horizon Prestige and visibility Post-IPO compliance costs Compensation for employees Management’s time Acquiring other companies Takeover target Employee disenchantment Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Advantages/Disadvantages of an Acquisition (part 1) Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Advantages/Disadvantages of an Acquisition (part 2) Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Recap q q q Sophisticated investment money requires a future harvest time (return on investment) Harvest can be acquisitions or public offerings Investors want to know entrepreneur will remain on with the company after harvest Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © ... Market-comparable Valuation (Multiple of earnings): Total Equity Valuation = NI x P/E Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © Asset-based Valuation Methods Zacharakis,. .. Market-comparable valuation q Asset-based valuation Valuation is not an exact science Each of the above methods may get to vastly different monetary values of a company Zacharakis, Bygrave and Corbett, ... distribution channels Zacharakis, Bygrave and Corbett, Entrepreneurship, New York: Wiley, 2017 © How to Assess a VC Value added Patience Deep pockets Board of directors Zacharakis, Bygrave and Corbett, Entrepreneurship,