Slides review basic rules of venture finance and considerations when thinking about how to raise money and from whom. Includes overview of crowdfunding.
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Basic rules of venture finance at Venture Out Moldova, Fall 2013
1. Acquiring
Resources:
Thinking
About
Growth
VentureOut
Moldova
#VOMoldova
October
28
–
November
1,
2013
Prof.
David
A.
Kirsch
Robert
H.
Smith
School
of
Business
University
of
Maryland,
College
Park
dkirsch@umd.edu
@darchivist
10. New Venture
Finance: Basic
Rules, redux
Rule 1:
Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the
Right Investor(s)
Rule 3:
Valuation as Negotiation
Rule 4:
11. New Venture
Finance: Basic
Rules, redux
Rule 1:
Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the
Right Investor(s)
Rule 3:
Valuation as Negotiation
Rule 4:
Remember Rule 1
12. New Venture
Finance:
Mental Models
New venture finance is different
because…
1. High uncertainty
Fundamental, irresolvable
2. Asymmetric information
Costly to overcome
3. Nature of assets
Specific, transformed
4. Nature of markets
Illiquid, high transaction costs
13. Venture
Finance:
Mental Models
“Splitting up the Pie”
“Build the Sandwich”
Traditional view
Positive sum model
Zero sum assumption
Longer sandwich = more
resources
Value extraction
17. Friends, Family,
Fools (and
Faculty?)
People who are close to you trust
you for other reasons
Family members
Friends (close to you)
Fools (who cannot judge you)
Faculty (4th “F”)?
Solves information asymmetry
problem
Reduces general uncertainty
Increases valuation
Mom won’t negotiate with you (but
she should!)
18. Crowdfunding
W/w, in 2012, more than 500 platforms
in operation
Expected to raise ~$5B USD in 2013,
with possibility to go much higher
Four basic models
Reward-based, Donation-based, Equitybased & Lending-based
Campaigns
Average 9 weeks, raise $7,000 USD
Fee structures vary, 10-35%
Converts social into financial capital,
but not always reversible or readily
replenished.
19. Fred Wilson,
Union Square
Ventures
Networks and markets are slowly
changing the global economy and the
creative sector is at the forefront of these
changes. Instead of going to Hollywood
studios for the funds to make their next
movie, directors are choosing to harness
the network of their fans. Instead of going
to the publishing industry for their book
advance, authors are choosing to
harness the network of their fans. Instead
of signing a deal with a record label,
musicians are harnessing the network of
their fans. The same thing is happening
with comic books, video games, theater
productions, and many other creative
endeavors. Kickstarter has changed the
way creative projects come to life.
http://bit.ly/1cmqVuS
24. Angels/Individual
Investors
High net-worth individuals who
invest in and support companies
in the early stages of growth
Invests his or her own money
Weak personal tie to
entrepreneur
Varying levels of sophistication
Rich & foolish
Rich & wise
AngelList syndication?
27. New Venture Finance:
Sources of Capital
Source
Self-financing
Credit cards
Friends / family / fools
Crowdfunding
Angel / individual investors
Venture capital
Large private equity
IPOs
Bank / other CP
Risk?
Return? Legit? Help? Control?
28. New Venture Finance:
Sources of Capital
Source
Risk?
Return? Legit? Help? Control?
Self-financing
+
+
+
-
n/a
Credit cards
++
++
+
-
n/a
Friends / family / fools
+++
+++
+
-
common
Crowdfunding
+++
+++
++
-
depends
Angel / individual investors
++++
++++
++
+ / ++
com/pref
Venture capital
+++++
+++++
+++
++++
pref+
Large private equity
++++
++++
+++
++
pref
IPOs
+++
+++
+++
+
public?
Bank / other CP
++
++
++
+
collateral