11_12_24 class

Chapter 13: Financing for Startups

Page 1: Introduction

  • Topic: Financing for Startups, continued.

  • Context: UNCW™ University of North Carolina Wilmington

Page 2: Recap of Previous Class

  • Discussion of the first half of Chapter 13.

  • Definition of Equity Financing:

    • Involves giving away pieces of the company.

    • Aims to grow the value of ownership stake as the company grows.

  • Difficulty in Valuing a Company:

    • Essential to issue equity, but challenging.

Page 3: Today's Agenda

  • Attendance will be taken.

  • Discuss the second half of Chapter 13.

  • Announcements will be made.

  • Conduct a Kahoot! review for Exam #3.

Page 4: Context for Funding Sources

  • Entrepreneurs seeking more formal financial capital may pursue:

    • Angel Investors.

    • Venture Capitalists (VCs).

  • Similar opportunities sought by both, but with key differences.

Page 5: Origins of Angel Investors

  • Definition of "Angel":

    • Originally referred to wealthy individuals investing in theatrical productions.

  • Characteristics:

    • Typically older, personally invested in the successes of plays.

  • Modern Angel Investors:

    • Invest in companies for personal fulfillment rather than solely monetary returns.

    • Similar to the term "patron."

Page 6: Characteristics of Angel Investors

  • Requirements:

    • Accredited investors: earn >$200,000/year or have net worth >$1 million.

  • Often entrepreneurs or executives, typically retired.

  • Resources to find Angel Investors:

    • AngelList, Angel Capital Association.

Page 7: Types of Angel Investors

  • Classification based on:

    • Characteristics.

    • Desires.

  • Some angels prefer to be actively involved.

Page 8: Venture Capitalists Overview

  • VCs similar to angels but:

    • Primarily professional money managers.

    • Focus more on ROI versus personal fulfillment.

  • Investment Focus:

    • Higher growth industries and later-stage businesses to minimize risk.

Page 9: Operation of VC Firms

  • Niche specialization:

    • Invest in industries/products they are familiar with.

  • Investment Philosophy:

    • Emphasis on great teams, big markets, and unique ideas.

Page 10: Likelihood of Investment

  • Potential for significant funding through VC and angel investments.

  • However, difficulties in securing these funds:

    • Example: In 2022, only 2,800 out of 5 million new businesses received VC funding.

Page 11: Debt Financing as an Alternative

  • Definition:

    • Borrowing money to start a business, to be paid back with interest.

  • Simpler concept than equity financing.

  • Accessing loans is still challenging:

    • Only 18% of all businesses secure a bank loan.

Page 12: Importance of Due Diligence

  • Definition of Due Diligence:

    • Rigorous evaluation of an investment opportunity prior to finalization.

  • Angel Investors vs VCs:

    • Angels conduct less due diligence due to investment in earlier stage companies.

Page 13: Due Diligence for VCs

  • Comprehensive checks involved for VCs:

    • Background checks, legal compliance, intellectual property assessments.

  • For entrepreneurs:

    • Important to evaluate VC’s track record and previous investments.

Page 14: Exiting Investment Strategies

  • Discussing exit plans during due diligence:

    • Importance for VCs planning a return in 5-10 years.

  • Main Exit Strategies:

    • Initial Public Offering (IPO).

    • Mergers and Acquisitions.

    • Buybacks.

Page 15: Initial Public Offerings (IPO)

  • Definition of IPO:

    • First opportunity for a company to sell stock on the market to the public.

  • Role of IPO in Equity Financing:

    • Determines company valuation based on share price (e.g., 100,000 shares at $5 = $500,000 valuation).

Page 16: Mergers and Acquisitions

  • Definitions:

    • Acquisitions: Smaller companies bought by larger ones.

    • Mergers: Similar-sized companies combine to form a new entity.

  • Differences:

    • Acquisition involves one company absorbing another, while mergers create a new business identity.

Page 17: Buybacks

  • Definition:

    • Rare strategy where entrepreneurs buy back stock from venture capitalists.

  • Considerations:

    • Often not feasible for young companies; more common among established businesses.

    • Can increase price of outstanding shares by reducing supply.

Page 18: Trade-offs for Entrepreneurs

  • Dilemma:

    • Balancing between wealth and control of business.

  • Insight:

    • Many entrepreneurs sacrifice control for capital (e.g., Steve Jobs's experiences).

Page 19: Ownership Dynamics

  • Visualizing Ownership:

    • Pre-investment: 100% control.

    • Post-investment: Reduced control for potential growth.

  • Key Question: Importance of control versus ownership.

Page 20: Share Analysis

  • Comparison:

    • Pre-investment share at 100% to post-investment 50% share.

  • Decision Focus:

    • What matters more: maintaining control or wealth increase?

Page 21: Key Conclusions

  • Angel investors and VCs have distinct motivations and operational styles.

  • Both equity and debt financing present challenges.

  • Conducting due diligence is crucial for investment success.

  • Understanding exit strategies is vital for long-term planning:

    • IPOs, mergers/acquisitions, buybacks.

  • Entrepreneurs often face trade-offs between control and financial growth.

Page 22: Next Steps

  • Preparation for Exam #3 by November 14th.

  • Read Chapter 14 for the next class on November 19th.

  • Open invitation for additional questions after class.