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Module 4
The Search for Capital
Module 4
Topics
Sources of Capital
Background
Start-up
Ongoing Operations
Growth
Review
The Search for Capital
We Know That Small Firms
need capital
don’t have access to capital markets
have limited choices
owners are often inexperienced
The Search for Capital
Finance Theories: Common Themes
(CAPM, Agency theory, Signaling theory, Pecking order
theory)
Applicable to large firms, but less applicable to small firms
Most firms have a preferred target capital structure
Preferred target capital structure may vary by firm
Capital structure may affect value
Appropriate capital structure affected by many factors (taxes,
cost, collateral, uncertainty, owner preferences)
Perspective on Raising Capital
http://edcorner.stanford.edu/authorMaterialIn
fo.html?mid=1374
(3 minutes)
General Sources of Capital
Equity
Personal Sources
Profits
Angel Capital
Venture Capital
Debt
Financial Institutions
Credit Cards
Other (Home Equity Loan, Life Insurance)
Other
Local Community Grants and Loans
Government Programs
Other (customer, suppliers)
Common Sources of Start-Up Capital
Personal Equity
Friends and Family
Loans from Financial Institutions
Bootstrap Financing
Common Sources of Growth Capital
“Angel” Investors
Venture Capital
Sale of Stock
Profits
Angel Investors
Local Wealthy Individuals
234,000 active investors in US
Work in informal groups
Pool investments
300 informal “angel” groups in US
Angel Investors
Invest < $1 million dollars
Average = $500,000
Annual Angel Investment = VC Investment
(2006: 25.6 billion vs $26.1 billion)
Invest in 10 times number of firms as VCs
(2006: 51,000 firms vs 3522 firms)
Angel Investor Expectations
Return of > 10 times investment
Exit within 5 years
Defined exit strategy
Finding Angel Investors
Not Easy
Cluster
Personal Network
Referrals: attorneys, accountants, bankers
Local Associations
Angel Investors: Due Diligence
Business Plan
Product
Nature of Opportunity
ROI
Cashflow
Management Team (Background Checks)
Exit Opportunity
“ Portals” to Angels
“Gatekeepers” (Initial introduction)
Venture Capital Clubs
Regional-Based Groups of Investors
Matching Networks
Venture Capital: Background
Professionally Managed Investment Funds
$29.4 billion into 3,800 U.S. start-ups in 2007
$6.6 billion in 800 deals in U.S. – 3rd quarter, 2006
1300 Venture Capital Firms in US
Invest in 1 of 400 proposals
Venture Capital
35 years VCs
> $441 billion
> 57,000 companies
½ of IPOs have VC investment
Europe (2006)
71 billion invested in 2006
8.3% Seed
21% Expansion
70% Buyout financing
US (2007)
$1.4 billion in China
$1.0 billion in India
US Venture Capital
VC investment down 8.5% - 1st quarter 2008 vs 4th quarter 2007
(consistent with slowdown of US economy)
VCs and angel investors more cautious, pursued later stage
investments
Shortage of money for seed and early stage ventures
US Investment (California, Massachusetts, Texas, Washington, NY)
Invested in >1,400 companies
Life sciences, clean technology and information technology
55 new venture capital funds
Identifying a Venture Capitalist
Needs
Of
Firm
Characteristics
of VC Firm
Identifying a Venture Capitalist
Stage of Development
Amount of Investment
Industry
Services Offered
Reputation
Successful Record
VC Investment Criteria
Entrepreneur
Rate of Potential (50%/year)
Board of Directors
Management Team
Intellectual Property
Exit Opportunity
Venture Capital in Portugal
VC sector is one of smallest in OECD relative to
size of economy
1999-2002
0.09% of GDP
vs
0.29% of GDP for OECD
Dominated by banks and public VC companies
Venture Capital Process
Screening
Due Diligence
Deal Structure and Negotiation
Post Investment Monitoring
VC Due Diligence
Management Team
Competitive Advantage
Growth Potential
Exit Opportunity
Financial Projections
Intellectual Property
Venture Capital in Portugal
Most investment in Lisbon and Porto
2002
50% of investments in Lisbon
16% in Porto
23% rest of country
10% other European countries
Venture Capital in Portugal
Favor expansion stage projects
Average deal = 1.2 million Euros (2001)
Investments
40%
18%
15%
9%
manufacturing
services
IT
retail
Going Public

Process
– Underwriter
– Security and Exchange Commission
– Road Show

Very Expensive (~ $3,000,000 in US)
Discussion
Assignment
How much money to start your proposed
business?
Where will money come from?