Financing startup and growth at all for all level

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Not everyone is born a leader, but anyone can be

To be or not to be… born a leader? Are leaders born or made? These are the questions.

There are some theories that put the innate factor first and others that postulate our ability to become leaders. Reality has shown us, though, that there are, in fact, three categories:

1.Those who are indeed born leaders,
2.Those who simply aren’t ever going to be very good leaders and
3.Then there’s the middle category — where the vast majority of us lie. This is precisely where the real potential for becoming a leader can be found.

From within this vast pool of wannabe Lion-Kings, through the process of teaching, learning, practice, observation, and experience over time, true leaders arise.

So, what does it take? How do you know you can become a leader? And most of all, how do you become a great leader, not just a good one?

Then, I remember our heyday romance with William Shakespeare’s “Twelfth Night” to peruse what Malvolio reads from Maria: “…be not afraid of greatness. Some are born great, some achieve greatness, and some have greatness thrust upon them”

I have discovered that there are six (6) main pillars of leadership wisdom.

Let’s check them out.

1.Be confident

Showing confidence is a thing of nonverbal communication more than the verbal one — more than half of human communication comes from nonverbal cues. But being confident is a must for a leader, so if you haven’t already, you should start today by practising strong nonverbal communication — standing tall, making eye contact, and learning to control your fidgeting.

Confident leaders are the best kind. Confident leaders win over their followers because it inspires people to do the same.

2.Be honest

Rumour has it that successful business leaders aren’t the most honest men out there, but this isn’t what I have learned about true leaders. Dishonesty goes hand in hand with pretend-leaders, that’s all. That is because every one of your followers looks at your level of honesty and ethics code and responds in accordance.

When you are honest and you treat people just the way you expect to be treated back, you will cultivate honesty and integrity. And that will propagate to your staff as well — because in order to make perfect sense, each member of your team needs to line up with your core expectations. So make sure they follow the same ethics „rules” as you do.

3.Inspire

A true leader does not only open his/her eyes to novelty and innovation but is himself/herself a figure of inspiration. So, if you want to reach wild success, you should definitely hone your leadership vision and communicate it to the others around you.

Inspiration is essential and pushes people to overcome difficult times and also accompanies people on their way to accomplish their goals when times are not all that difficult and challenging. Inspiration is a true must-have in leadership.

4.Interact with

1. Chapter 18
Financing Start-up
and Growth

2. Copyright © Houghton Mifflin Company 18-2
Overview
•Starting with a plan
•Financing start-ups
•Financing growth
•Valuing the business

3. Risk Points and Associated Funding
Preparation for Start-Up
Seed Capital
Friends and Family
Private Investors
SBIR/STTR
Early Stage Funding
Private Investors
Some Venture Capital
Strategic Partners
Late Stage Funding
Venture Capital
Public Equity
Strategic Partners
Revenues
Manufacturing
Risk
Development
Risk
First
Customer
Marketing
Risk
Management
Risk
Initial
Public
Offering
Year 1 Year 2 Year 3

4. Copyright © Houghton Mifflin Company 18-4
The Fundamental Truths
About Raising Money

5. Copyright © Houghton Mifflin Company 18-5
1: Raising Capital
•Takes twice as long as projected
•Investors identified may not work out
•Second-round may request buyout
•Significant costs to raising capital

6. Copyright © Houghton Mifflin Company 18-6
Upfront Costs
Financials
Consultant
CPA/Auditor
I-Banker
Marketing Costs
Prospectus
Legal
Printing
Back-end Costs
I-Banking
Legal
Brokerage
Easily up to $200,000
2: Cost of Raising Capital

7. Copyright © Houghton Mifflin Company 18-7
3: Can You Impress Investors?
•Defensible competitive advantage?
–Patented technology
–Cycle time
–Marketing, advertising, and sales force
–Low cost manufacturing
•Customers?
•Experience?
•Growing market?
•Who are your friends?

8. Understanding the Funding Stages

9. Copyright © Houghton Mifflin Company 18-9
Start with a Financing Strategy
•Look for smart money (who invests is
more important than terms)
•Buy top management with first $$$
•Get moving fast, early prototype with
customer feedback
•Focus on one investor and get an intro
•Don’t marry your first date
•Go for the best deal, not the biggest

10. Copyright © Houghton Mifflin Company 18-10
Financing the Start-up
•Entrepreneur resources
–Savings, credit cards, mortgages, stock
market accounts, friends and family
•Bootstrap
–Hire as few employees as possible
–Lease or share everything
–Use other people’s money

11. Copyright © Houghton Mifflin Company 18-11
Stage One: Bootstrapping
in an Incubator
•Average incubee’s sales increased
•> 400% from time entered to time exited
•> Average annual growth in sales
was $239,535
•87% of grads still in business
–Only 20% of new start-ups

12. Copyright © Houghton Mifflin Company 18-12
Do Incubators Meet Needs?
•Higher order needs need to be met
–Human network, access to expertise and
capital, partnerships, professional resources,
product design, first 100 customers
•Some negatives
–Perception of being babied
–Artificial buffer
–Equity stake by incubator

13. Copyright © Houghton Mifflin Company 18-13
Stage One: Private Investor
“Angel” Profile
•Educated white males—40s/50s
•Net worth over $750k
•Used to be entrepreneurs
•First stage financing and young firms
•Invest near home—involved
•One to two deals a year
•Invest between $10,000 and $500,000

14. Copyright © Houghton Mifflin Company 18-14
More on Angels
•3 to 10 year time frame for ROI
•5–10 times their investment, function
of risk
•Find deals through referrals from
business associates
•Make decisions more quickly
•Requirements for due diligence may
be lower

15. Copyright © Houghton Mifflin Company 18-15
MORE on Angels
•Order of investment interest
–Manufacturing—industrial/commercial
–Manufacturing—consumer
–Energy/natural resources
–Services
–Retail/wholesale

16. Copyright © Houghton Mifflin Company 18-16
An Unlikely Angel Investment
•A “me too” type of product
•No intellectual property
•Business location more than 100 miles away
•Mature or fading industry
•Return on investment less than 15 percent
•Not enough market research with customer
•Weak competitive analysis

17. Copyright © Houghton Mifflin Company 18-17
An Unlikely Angel Investment (cont.)
•A poorly defined vision for the company
•No management team, a solo entrepreneur
•Weak management team with no experience
•Exit time more than 7 years away
•Unfamiliar business or industry
•Minority position with no voting rights
•Too many co-investors

18. Copyright © Houghton Mifflin Company 18-18
What Winning Angels Do
•Consider the source carefully
•Focus on the model, not the plan
•Emphasize the entrepreneur and the team
•Seek a scalable business
•Look for the exit
•Identify the unfair advantage
•Focus on deals where they know something

19. Copyright © Houghton Mifflin Company 18-19
Stage One/Two:
Private Placement
•Raising capital from
private investors
–Securities:
common/preferred stock,
notes, bonds, debentures,
limited partnership shares, etc.
•Reg D
–Sophisticated investors
–Blue Sky laws

20. Copyright © Houghton Mifflin Company 18-20
Private Placement
•Advantages
–Less costly, less time consuming than IPO
–Availability of standardized offering
statements
–Don’t have to file with SEC

21. Copyright © Houghton Mifflin Company 18-21
Alternative Sources
•Strategic alliances
–R&D limited partnership
–Joint venture
•Small Business Investment
Company (SBIC)
•SBIR Grants
–Phase I: develop concept and test feasibility
–Phase II: pursue the innovation and develop
the product
–Phase III: commercialize the technology

22. Copyright © Houghton Mifflin Company 18-22
Debt Sources
•Commercial banks
•Commercial finance
companies
•Small business
administration
•State-funded venture capital
•Incubators
•Customers and suppliers

23. Copyright © Houghton Mifflin Company 18-23
Venture Capital
•Less than 1% of the
300K companies growing
20%+ per year are
backed by VCs

24. Copyright © Houghton Mifflin Company 18-24
Venture Capital Terms:
Basic Principles
•VC gets money back first
•Participation in upside
•Control over fundamental events
•Creation of path to liquidity
•Preferred stock is the investment security
of choice

25. Copyright © Houghton Mifflin Company 18-25
Capital Structure
•Investment deal has
–Amount of money to be invested
–Timing and use of investment moneys
–Return on investment to investors
–Level of risk involved
•Preferred stock or debentures

26. Copyright © Houghton Mifflin Company 18-26
Rules for Dealing with VCs
•Know your enemy
•Don’t shop the business plan
•Approach through a referral
•Write a killer executive summary
•Check out the terms sheet carefully
•Be patient
•Be prepared for a staged investment

27. Copyright © Houghton Mifflin Company 18-27
What VCs Relate to
•Location can matter
•Growth track: bigger is better
•10X investment in 5 years
•25–50% per year
•PE = 15:1 or more

28. Copyright © Houghton Mifflin Company 18-28
What VCs Relate to (cont.)
•Planned exit—make it short
•New paradigm, lead products
•Number of co-investors
•Bridge financing to position for an IPO
•Board seats

29. Copyright © Houghton Mifflin Company 18-29
Ownership
•Stage 1: give up 30% + for every $1M
•Stages 2–3: give up 8–15% per $1M
•Stages 4,5,6: give up 5–6%

30. Copyright © Houghton Mifflin Company 18-30
Your Due Diligence on the VC
•Identify your dream teams
•Don’t accept a term sheet before due
diligence. Stay in control
•Request 5 references from each VC

31. Copyright © Houghton Mifflin Company 18-31
Your Due Diligence on the VC (cont.)
•Interview references
–Why did you choose this firm?
–How effective have they been in securing deals
and partnerships?
–How effective have they been in recruiting
board members?
–How have they helped your company increase
its valuation?
–On a scale of 1–5, how would you rate the
contact partner?

32. Copyright © Houghton Mifflin Company 18-32
The Initial Public Offering (IPO)

33. The IPO Process

34. Copyright © Houghton Mifflin Company 18-34
Advantages of Going Public
•Source of interest-free growth capital
•More prestige and clout
•Easier to form alliances and
negotiate deals
•Public stock used to attract employees
and reward existing employees

35. Copyright © Houghton Mifflin Company 18-35
Disadvantages of Going Public
•Expensive process: $300,000+
•Time-consuming
•Company information is public
•CEO responsible to shareholders
•Entrepreneur may not control stock
•Pressure to perform in the short term
•SEC reporting requirements

36. Copyright © Houghton Mifflin Company 18-36
Of 3,186 firms that went
public in 1980s, only 58
percent still listed on one
of three major exchanges

37. Copyright © Houghton Mifflin Company 18-37
The stock of only one
third of these firms was
selling above issue price

38. Development
Seed & Early Stage Growth & Harvest
R&D Break-even
Profitable, Needs
Expansion
Capital
Buyout,
Merger, IPO
Direct Offerings
Warrants
Common Stock
Common Stock Common Stock
First Customer
Multiple
Customers
Multiple Products
May 2002 Nov 2002 June 2003 Sept 2005
Notes
Bonds
Debentures
Common Stock
Preferred Stock
Direct Offerings
Sept 2003
Direct Offerings
Warrants
Notes
Common Stock
Preferred Stock
Debentures
Major Financing Instruments
at Different Milestones

39. Copyright © Houghton Mifflin Company 18-39
Valuing the Business
•Fair market value: willing seller and buyer
•Intrinsic value: interpreting balance sheet and
income statements
•Investment value: worth to an investor
•Going concern value: current financial status
•Liquidation value: amount recover from
sale of assets
•Book value: accounting measure that is the
difference between total assets and total liability

40. Copyright © Houghton Mifflin Company 18-40
Valuation Methods
•Multiple of earnings
–Market price of common stock/earnings
per share
•Discounted Cash Flow Analysis
–How much an investor would pay today to
have a cash flow stream of X dollars for X
number of years into the future

41. Copyright © Houghton Mifflin Company 18-41
Other Factors in Valuation
•The assumptions used to estimate value
•The degree of legitimate control the owner
has in the business
•Intangibles like a loyal customer list and
intellectual property
•The bottom line: Negotiation determines
the value

42. Copyright © Houghton Mifflin Company 18-42
Summary
•Plan financing stages carefully
•Use friendly money first
•Stick with private placement as long
as possible
•Do YOUR due diligence
•Get references
•Be proactive

43. Copyright © Houghton Mifflin Company 18-43
Take-Aways
•List what students took away from the
discussion in real time