New Venture Valuation and Transaction structure

New Venture Valuation and Transaction structure - New...

Info icon This preview shows pages 1–19. Sign up to view the full content.

View Full Document Right Arrow Icon
New Venture Financing Looking Through an Emerging Market Lens Prof. Ben J. Sopranzetti, Ph.D. Rutgers Business School
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
You start a business that earns 25% return on equity What % do you have to give up if your investors want a 25% return on their investment?
Image of page 2
All of it! 100%
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The big question What percentage of a company will a given amount of money buy? If I buy 10% of your business for $1 million, then I’ve implicitly valued your business at $10 million
Image of page 4
The relationship between risk and return Investors will require a higher return for higher levels of risk Typical required returns for emerging market VC investors are 50-60% a year at the early stages of financing Your job is to find ways to mitigate the perceived risk
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Dilution The percentage of the company that you must relinquish to obtain outside capital
Image of page 6
The lower the dilution… The more equity (and control ) that you keep for yourself! Issuing equity dilutes your upside potential
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Debt vs. Equity Lottery Example
Image of page 8
Equity is the most expensive form of financing Try to keep a high % of the equity for yourself How…
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Three ways to keep more for yourself. Start a business that... Requires low amounts of initial capital Either not capital intensive or generates lots of cash flow Requires large of amounts of capital, but little equity Because it is capable of being financed with debt (e.g. real estate) May require substantial outside equity, but earns extraordinary rates of return Look for durable competitive advantage
Image of page 10
Seed Capital This is the “idea” stage, where the firm has the most risk Usually you must make the initial investment yourself Some firms will provide “seed” capital, but at an outrageous cost
Image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Bootstrapping Many successful ventures receive no outside funding at all Keep 100% ownership for yourself Ideal businesses for bootstrapping are ones which quickly generate positive cash flows
Image of page 12
Angel Investors Wealthy individuals Friends, family, successful entrepreneurs Angel Investor groups Several rich investors with different areas of specialization Much more formal sophisticated financing terms More involved in the running of the enterprise
Image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
How to approach an angel? You’ll need at least a business plan Perhaps, a formal offering memorandum Gives you more legal protection But, makes you appear more negative Is more costly and limits the # of offerees
Image of page 14
Get the advice of legal council! Many angels are not “sophisticated” and often claim that you have misled them if things go poorly
Image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Angels are well-suited for small investments <$1mm Angel financing is usually cheaper than VC financing Many angels do not possess the expertise or time to advise you Are often big “time sinks” Lots of hand-holding, phone calls, frustration
Image of page 16
Venture Capital Firms Pools of equity capital that are professionally managed Wealthy individuals invest in these as limited partners, but also pension funds and endowments The general partners manage the pool in exchange for a fee and a % gain on the investments
Image of page 17

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
VC’s look for large market size And HIGH GROWTH!
Image of page 18
Image of page 19
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern