Financing Your Dream ◾ 127
technology industries, for example, biotechnology, IT, or software. The typi-
cal VC investment occurs after the seed-funding round, frequently referred
to as growth funding round (or Series A round). The VC seeks to generate
returns through an eventual realization event, such as an IPO or a trade sale
of the company.
6
VC is a subset of private equity.
One of the rst steps toward a professionally managed VC industry was
the passage of the Small Business Investment Act of 1958; this Act ofcially
permitted the U.S. Small Business Administration (SBA) to license private
“Small Business Investment Companies” (SBICs) to help nance and manage
small entrepreneurial businesses in the U.S.
Before World War II, money orders (originally known as “development
capital”) were primarily the exclusive domain of wealthy individuals and
families. Modern private equity investments began to emerge after World War
II with the founding of the rst two VC rms in 1946—American Research
and Development Corporation (ARDC) and J.H. Whitney & Company.
ARDC was founded by Georges Doriot,
7
the “father of venture capital-
ism” (and former dean of Harvard Business School and founder of INSEAD),
8
with Ralph Flanders and Karl Compton (former president of MIT), to encour-
age private sector investments in businesses run by soldiers returning from
World War II. ARDC was the rst institutional private equity investment rm
that raised capital from sources other than wealthy families, although it had
several notable investment successes as well. ARDC is credited with the rst
trick when its 1957 investment of $70,000 in Digital Equipment Corporation
(DEC) would be valued at over $355 million after the company’s IPO in 1968
(representing a return of over 1200 times on its investment and an annual-
ized rate of return of 101%).
9
6.8 Principles of Raising Capital
The amount of money you plan to raise should be sufcient to accomplish
key milestones that will either (1) make your startup self-sufcient or (2)
enable you to raise additional capital at a higher valuation. Higher valuations
enable management to keep a greater percentage of the company.
The entrepreneur needs to prepare for the due diligence process. Due
diligence is the analysis and evaluation conducted by rms considering an
investment in your company, and focuses primarily on (1) your management
team, (2) the market opportunity, and (3) your technology, including intellec-
tual property protection.
128 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Prepare a list of references and accomplishments of key management
team members (including your scientic advisory board members) and your
technology. Furthermore, have your patent rm prepare a status report on
your patents, including a freedom to operate opinion, so you can verify that
your products are proprietary and that you are not encumbered by the pat-
ents of others.
Most startups follow a predictable series of steps, prior to raising capital.
Figure6.4 summarizes the typical history of a startup.
The equity nancing characteristics for startups is summarized in
Table6.4.
Table6.5 summarizes the differences between debt and equity nancing.
6.9 Persuasive Business Presentations
“Leadership is communication.”
As a budding entrepreneur, you might as well get used to this: as an entre-
preneur, you will be giving presentations until the cows come home.
Moreover, persuasive presentations will be your trademark.
Proof of principle Sweat equity
Typical Historical Development
Working prototype
Beta site
Friends & family
investments
Initial sale (s)
Angel investors
Rapid expansion
Financial event
IPO sale
Strategic partnership
Venture capital
Figure 6.4 Typical historical development—Predictable steps undertaken by startups
pre-funding.
Financing Your Dream ◾ 129
A persuasive presentation (speech) aims to get your audience to accept
your business premise by prompting them to act, think, or feel in a desired
manner, without coercion or force. Figure6.6 presents the four cornerstones
of persuasive presentations.
Pathos refers to presenting your reasons to believe in something, over-
coming risks, natural apprehensions, perceived problems, etc. Ethos refers
to your personal technical competence, goodwill, and dynamism to be
trusted with investor’s moneys. Logos are your set of rational, logical, and
validated proofs. Last, mythos is the combined forces of ethical values,
Types of Financing for Startups
Equity
Capital
Debt
Capital
Other
Family & friends
Angels
Joint
ventures
Family & friends
SBIRs, STTRs
Customers
Small business
administration
Banks
Figure 6.5 Types of nancing—You can nance your startup with (1) equity, (2) debt,
or (3) other hybrid forms.
Table6.4 Equity Financing
Friends and family
Typical round: $10–$100,000
Not necessarily “accredited” individuals
“Passive” investment
Personally interested in the technology
Angels
Typical round: $50–$500,000
Increasingly as angel groups
Accredited individual
Expertise and personal investments
Bets on the jockey, not the horse
VC
Typical round: $1–$5 million
Looks for “exit”
Professional investors
LLP, GP
Follow-on investments
130 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
industry beliefs, and national culture that may prompt investments in you
and your company.
Persuasive speech is the most complicated form of verbal communication.
It involves moving your audience to accept your premise from a position
of deep skepticism/opposition to strongly/enthusiastically embracing your
proposed solution based on its perceived benets.
10
The entire sequence is
shown in Figure6.7.
• Pathos (risk, apprehension)
• Ethos (speaker’s competence)
• Logos (rational, logical arguments)
• Mythos (values, beliefs, culture)
e Four Cornerstones
of Persuasive Presentations
Note: If this sounds Greek to you, you are right. It is Greek.
Figure 6.6 The four cornerstones—Your basic forms of persuasion (prompting action
without coercion).
Table6.5 Summarizes the Differences Between Debt and Equity Financing
Debt (Bank loan) Equity (angels, VC)
Emphasis on collateral and cash ow Return on investment
Repayment starts immediately after
funding
Deferred repayment
Debt return based on ability to pay Repayment based on nancial
performance
Lowest risk for lender Highest risk for investor
Lowest cost if business is successful Higher cost if business is successful
No ownership dilution Heavy ownership dilution
Focused on short-term expansion Focused on long-term business
prospects
Monitoring relationship May demand Board plus upper
management participation
Boilerplate documents Complex documentation
Financing Your Dream ◾ 131
6.9.1 Rookie Mistakes
There is an old adage that goes, “Your presentation is 20% what you say, and
80% how you say it.” Most rookie entrepreneurs tend to ignore their demeanor
when making presentations, believing that their data “speaks for itself.”
Another hurdle is the fact that most people become tongue-tied when
placed in front of an audience. Most of us “freeze” when asked to give an
important presentation. Did you hear the joke about the survey that asked
aspiring entrepreneurs what are their three greatest fears in life? Their
answers are as follows:
1. Fear of dying.
2. Fear of speaking in public.
3. Fear of dying while speaking in public.
Figure6.8 presents a tongue-in-cheek list of don’ts for the young readers
of this Guide.
6.10 Your Elevator Pitch
“I only had one superstition. I made sure to touch all the bases
when I hit a homerun.” —Babe Ruth
The “Elevator Pitch” derives its name from an apocryphal story: after hav-
ing submitted a “teaser” document to a VC, and after having waited many
Degrees of Convincing, Persuading
Convincing and persuading involves the degree
of movement by a listener from left to right
Strongly
Opposed
Moderately
Opposed
Slightly
Opposed
Neutral
Slightly
in Favor
Moderately
in Favor
Strongly
in Favor
Convinced
Persuaded
Figure 6.7 Degrees of convincing—Differences between convincing and persuading.
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.