Raising Capital

1
Raising Capital

• New businesses
• Five year success rate
• Banks
• Sources of funding
• Structure?
• Security law violations?

2
Raising Capital

• Crowd funding Companies can raise up to 1
  million
• Investors
• Invest up to lt 10,000 10 of income
• No need to register securities with SEC/state

3
Private offerings

• 35 or fewer investors and accredited investors
• Accredited investors
• Assets gt 1 million (not home) or income gt
  200,000
• 35 other investors must be able to judge merits
• No registration statement with the SEC needs to
  be filed

4
Venture capital financing for new businesses

• Financing provided in stages
• Initial financing includes goals
• Fail to meet goals, financing ends
• Goals met, additional financing provided
• May be provided by another vc firm

5
Venture capital financing for new businesses

• Financing not cheap
• Will get large equity position in the company
• Often preferred stock
• Not long-term money. Exit strategy
• Hope to sell in IPO or when founders are able to
  get financing to buy them out.

6
Venture capitalists

• Hope 1 in 10 will be a home run
• Introductions to sell concept
• Some "hands on" others provide guidance when
  they are asked

7
Public offerings

• Seasoned offering
• Reaction of market
• Why not debt?
• Signal regarding stock price?

8
Public offerings

• IPO
• Must file registration statement
• contains financial statements, summary of
  business and use of financing
• Similar to Form 10-K
• SEC has 20 days to review the registration
  statement
• Doesn't judge merit of offering
• Only makes sure required disclosure is made
• Shelf registration sell during next two years if
  requirements met

9
Public offerings

• Prospectus issued to potential investors during
  registration period
• Management will do "road shows" for potential
  institutional investors such as Fidelity
• After the review period ends, securities can be
  offered to the public

10
Underpricing IPOs

• Occurs most often when markets strong
• Annies IPO at 19, raising 95 million
• Stock closed first day at 34.65
• Company left 15 per share or 75 million on the
  table
• Recent study underpricing not a concern
• Existing owners getting rich, don't mind millions
  left on the table

11
IPOs investors perspective

• Difficult for most investors to get their hands
  on IPO issues
• Large investors
• Execs of other companies
• Politicians
• Small investors
• Able to get shares, IPO that does not do well
• Winners curse

12
Underpricing IPOs

• Google auction to set IPO price for shares
• Then accept offers at that price (85)
• Allow small investors to participate

13
Public offerings

• Lockup period stock can not be sold for a period
  of time
• Typically six months (Ferraris gt Linked In)
• Underwriters syndicate of investment firms
  shares risk of selling the issue
• Discourage flipping
• Lead underwriter will price issue
• Too high, issue may be forced to be withdrawn
• Too low, company/existing shareholders leaving
  money on table

14
Costs of raising capital

• As percent, much higher for small issues
• Higher for IPOs vs. seasoned equity
• Higher for equity versus bonds
• Higher for junk bonds versus investment grade
  bonds

15
Issuing bonds

• Often in private placements
• Life insurance companies, pension plans and
  mutual funds