OVERVIEW OF NEW VENTURE FINANCING,Overview of New Venture Financing,Choosing the organization form One of the earliest decisions Important implications for a variety of factors, including taxes, liability, succession, and ability to attract financing and employees,Information problems facing entrepreneur and investors,Entrepreneurs info about the value of the opportunity may be incomplete and uncertain Asymmetric info about the value of the idea and the ability of the entrepreneur Risk of appropriation of intellectual property,Unique features for entrepreneurial finance,Need tangible evidence of the market potential and entrepreneurs ability Institution of milestones What is milestone: specific and verifiable performance benchmarks e.g. completion of clinical tests, production of prototype, initiation of sales (as demonstrated in Ir-v case),Unique features for entrepreneurial finance,Staging of financing Funds not made upfront and staged and linked to achieving milestone Financing of one stage does not commit an investor to finance additional stages,Unique features for entrepreneurial finance,Concern over appropriation of intellectual property note that the reputation of the outside investors for trustworthiness is far more important to the entrepreneur than is a signature on an confidentiality agreement,Measuring progress with milestones,Understand the difficulties of forecasting cashflows and/or profitability at an early stage Milestones enable the parties to postpone financial commitments until they are needed and to inject funds when meeting the levels of risk and expected return,Measuring progress with milestones,Milestones working hypothesis about the venture important to understand the reasons for failing to meet a milestone 1st milestone: concept testing 2nd milestone: completion of a prototype gain increased understanding of technological bottlenecks, manufacturing costs and materials supply More: first financing, completion of initial plant tests, market testing, production start-up, first competitive action,Stages of new venture development,Development Start up Early growth Rapid growth Exit Extension of life cycle,Sequence of new venture financing,Early stage personal savings and borrowing where repayment does not count on success of the new venture Bootstrap techniques cash out savings, second mortgages, credit lines of credit cards, borrowing on life insurance Seed financing for hi-tech, initial funds for R&D,Sequence of new venture financing,Start up financing from later R&D to initiation of sales First stage financing initiate production and generate revenue More rounds of financing possible Mezzanine financing support major expansion of profitable business,Sources of new venture financing,Family and friends Angel funds Strategic partners Venture capital Asset based lenders Equipment lessors Trade credit Factoring Mezzanine lender Public debt IPO Acquisition, LBO, MBO,The deal,Negotiation between entrepreneur and the provider of funds Every deal is different: An art and science Common to reflect the understanding of the agreement in a term sheet Term sheet: agreed on valuation, amount of investment, ownership,The deal,Once term sheet is agreed upon, then prepare formal agreement contract between entrepreneur and investor Options, rights, or contingencies retained by either party, a comprehensive list of representations and warranties, covenants and undertaking Rep and warranty e.g. ownership of tangible and intangible assets, absence of litigation, accuracy of financial statements,The deal,Covenants and undertakings: affirmative and negative undertakings and covenants Right of first refusal, preemptive rights (right to maintain its fractional ownership share by participating in subsequent sales as an investor),Overview of new venture financing,END,