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. | RAISING MONEY FOR STARTING AND GROWING BUSINESSES Chapter 11 1 Progression of Raising Money Basic Ways of Evaluating a Business Earning-capitalization valuation Present value of future cash flows Market-comparable valuation Asset-based valuation Valuation is not an exact science. Each of the above methods may get to vastly different monetary values of a company. 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 Income-based Valuation Methods Asset-based Valuation Methods External Financing 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) 2. 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 Top 6 Investment Factors For VCs VCs may help you hire a Team Fragmented, accessible, and growing Better and protected Open distribution channels 7X return in 5 years Competently written business plan How to Assess a VC Value added Patience Deep pockets Accessibility Board of directors Harvesting (exiting) Investments Initial Public Offering (IPO) An acquisition A buyback of the investor’s stock Very Unlikely 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 Advantages/Disadvantages of an Acquisition (part 1) Advantages/Disadvantages of an Acquisition (part 2) Recap 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 | RAISING MONEY FOR STARTING AND GROWING BUSINESSES Chapter 11 1 Progression of Raising Money Basic Ways of Evaluating a Business Earning-capitalization valuation Present value of future cash flows Market-comparable valuation Asset-based valuation Valuation is not an exact science. Each of the above methods may get to vastly different monetary values of a company. 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 Income-based Valuation Methods Asset-based Valuation Methods External Financing 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) 2. Individual angels Pros: Several hundred thousand available Cons: Hard to find and approach; must identify
