Slides review basic rules of venture finance and considerations when thinking about how to raise money and from whom. Includes overview of crowdfunding.

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

2. Outline

Basic Rules

Mental Models

Sources of Capital

Comparison

3. New Venture
Finance: Basic
Rules
Rule 1:
Do Not Run Out of Cash

5. CIMITYM
=
Cash is
more
important
than your
mother.

6. Accidents in
North American
Moutaineering

7. Accidents in
North American
Moutaineering
“…and they fell
to their death.”

8. New Venture
Finance: Basic
Rules
Rule 1:
Do Not Run Out of Cash
Rule 2:
Raise the Right Amount From the
Right Investor(s)

9. Rule #3:
Valuation as
Negotiation

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

14. 2500’ Sandwich = GOOG

15. Sources of Capital

16. Self-Financing

Savings

Credit cards

Second Mortgages

Sweat

“Affordable Loss”

Bank Robberies

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

20. Flow chart
guide to 22
crowdfunding
platforms…
http://t.co/bFiGjkzZuK

21. Some words from
our sponsors…
http://bit.ly/18Ht9AN

23. Using
CF
to
Access
Capital
Markets

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?

25. Venture
Capital
Limited
Partners
General
(Venture)
Partners
Foundations
Large
Funds
Universities
Regional
Funds
Small
Funds
Institutions
Special
Stage
Funds
Portfolio
Venture Venture Venture Venture Venture Venture
Companies

26. Commercial
Loans

Money borrowed from bank or
other commercial entity

Interest payments

Cash-flow

Collateral

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