Technology Ventures: From Idea to Opportunity

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Capital is to the progress of society what gas is
to car. James Truslow Adams
Summary
What are the sources of capital that a new
venture can use to finance the start and growth
of its company? Entrepreneurs can estimate the
capital required for their new business by
reviewing the financial projections they prepare
using the methods detailed in Chapter 17.
Typically, several stages of investment will be
required over the life of the business.
Technology Ventures From Idea to Opportunity
Chapter 18 Summary
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Idealized cash flow diagram for a new enterprise
Chapter 18 Figure 18.1
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Real Option the right to invest in (or purchase)
a real asset (a new start-up firm) at a future
date. V IV OV IV Intrinsic
Value OV Option Value
Chapter 18 Real Option
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• The Value of A Real Option Based on Four Factors
• Increases with the level of uncertainty measured
  by the standard deviation s.
• Increases with the length of time, T, the person
  holding the option has to decide whether or not
  to exercise it.
• Increases with the ratio of the current stock
  price, P, to the exercise price, X. The ratio is
  P/X.
• Increases with the discount rate, r.

Chapter 18 Table 18.2
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• Sources of Capital
• Founders
• Family
• Friends
• Small Business Investment Companies (SBIC)
• Small Business Innovation Research (SBIR)
• Professional Investors Angels
• Venture Capitalists
• Banks
• Leasing Companies
• Established Companies
• Public Stock Offering
• Government Grants and Credits
• Customer Prepayments
• Pension Funds
• Insurance Companies

Chapter 18 Table 18.3
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Four financial steps in building a successful
firm.
Chapter 18 Figure 18.2
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Bootstrap Financing to start a firm by ones own
efforts and to rely solely on the resources
available from oneself, family, and friends.
Chapter 18 Bootstrap Financing
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Advantages and disadvantages of bootstrap
financing
Chapter 18 Table 18.4
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Angels are wealthy individuals, usually
experienced entrepreneurs, who invest in business
start-ups in exchange for equity in the new
ventures.
Chapter 18 Angels
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• Criteria for Angel Investments
• The New Venture is/has
• Within the industry that the angel has
  experience.
• Located within a few hours driving distance
• Recommended by trusted business associates
• Entrepreneurs with attractive personal
  characteristics such as integrity and
  coach-ability.
• Good market and growth potential for the
  opportunity.
• Seeking an investment of 100,000 to 1 million
  and offers minority ownership, less than 40

Chapter 18 Table 18.5
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Venture capital is a source of funds for new
ventures that is managed by investment
professionals on behalf of the investors in the
venture capital fund.
Chapter 18 Venture Capital
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The Risk and Reward Profile for Various
Investments
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Chapter 18 Figure 18.3
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• Characteristics of An Attractive Venture Capital
  Investment
• Potential to Become a Leading Firm in a High
  Growth Industry with few competitors.
• Highly Competent and Committed Management Team
  and High Human Capital (Talent).
• Strong competitive Abilities and a Sustainable
  Competitive Advantage.
• Viable Exit or Harvest Strategy.
• Reasonable Valuation of the New Venture.
• Outstanding Opportunity.
• Founders Capital Invested in the Venture.
• Recognizes Competitors and Has a Solid
  Competitive Strategy.
• A sound business plan showing how cash flow turns
  positive within a few years.

Chapter 18 Table 18.9
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The valuation rule is the algorithm by which an
investor such as an angel or venture capitalist
assigns a monetary value to a new
venture. Capital Return after N years CR M x
I Market Value in Year N MV PE x EN or PS x
SN
I investment EN earnings in year N G
expected annual return
Chapter 18Valuation Rule
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Chapter 18 Table 18.15
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Initial Public Offering the first public equity
issue of stock made by a company.
Chapter 18 IPO
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Chapter 18 Table 18.16
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Principle Many kinds of sources for investment
capital for a new enterprise exist and should be
compared and managed carefully.
Chapter 18 Principle
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A new firm intends to sell specialized integrated
circuits for wireless applications. Its
projections show Year 1 2 3 Sales (
millions) 3.0 6.2 9.8 Profit (
millions) -1.0 1.0 3.2 Use the valuation rule to
determine PO required when investors provide 5
million and expect a return of at least 55 per
year. Assume the investors use PE 14 and PS 4.
Chapter 18 Exercise
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• VENTURE CHALLENGE
• What sources of capital will you use?
• Why did you select these sources?
• How much capital is needed now and for what
  purpose?
• What percentage of your venture do you plan to
  offer to outside investors?

Technology Ventures From Idea to Opportunity
Chapter 18 Venture Challenge
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DVD Videos Venture Capital versus Customer
Funding Vic Verma (Savi Technology) The
Benefit of Picking the Right Venture
Capitalist Marc Fleury
Technology Ventures From Idea to Opportunity
Chapter 18 DVD Videos