Campaign to Raise Capital and Securities
Laws
New venture financing
The campaign to raise capital
The vast majority of funded deals using venture capital follow this
course of events:
1. Set funding objectives
2. Prepare the plan to attract investors
3. Pick the best capital-raising strategy
4. Assign tasks
5. Launch the campaign
6. Make presentations
7. Incorporate feedback from presentations
The campaign to raise capital
8. Modify plan but maintain vision
9. Due diligence
10. The lead VC says “We will invest!”
11. Closing the VC contract
12. Closing week
13. Cash in the bank
The Road Show
Definition: a presentation by an issuer of securities to potential
buyers
The term “road show” applies to the presentations management
gives to analysts, fund managers, and potential investors around the
country when they want to issue securities or do an initial public
offering (IPO)
The road show is intended to generate excitement and interest in the
issue or IPO, and is often critical to the success of the offering.
Also known as a "dog and pony show."
1994: Netscape’s Road Show
Netscape files to go public on June 23, 1994
Overwhelming reception on the road suggests a bubble psychology is
taking over the investment community
Instead of meeting with 3-4 analysts from a given institutional
investor in each city, Netscape got 50-75 at their presentations –
most wanted to understand the Internet
Investors didn’t want to miss “the next Microsoft”
Chips and Technologies
Chips and Technologies
First products
“EGA” = Enhanced Graphics Adapter. EGA produces a display of 16 simultaneous
colors from a palette of 64 at a resolution of up to 640×350 pixels. Yes, it’s now
obsolete…
Here’s the full 64-color EGA palette
Chips and Technologies Financing
Chips and Technologies Equity Ownership
Chips and Technologies Equity Ownership
How do they figure out valuations? Angel investor
valuation techniques for seed stage companies
• Cost-to-duplicate
• Market multiple
• Discounted cash flow
• Valuation by stage (milestones)
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Cost-to-duplicate
• Calculate how much it would cost to build another company just like
it from scratch – the idea is that a smart investor wouldn't pay more
than it would cost to duplicate.
• The cost-to-duplicate a software business, for instance, might be
figured as the total cost of programming time that is gone into
designing its software.
• Problem: Doesn’t reflect future earnings potential of company and
ROI
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Market multiple
• Values the company against recent acquisitions of similar companies in the
market.
• Example: mobile application software firms are selling for 5x sales.
Knowing what real investors are willing to pay for mobile software, you
could use a five-times multiple as the basis for valuing your mobile apps
venture, while adjusting the multiple up or down to factor for different
characteristics (Note: if your mobile software company, say, were at an
earlier stage of development than other comparable businesses, it would
probably fetch a lower multiple than five, given that investors are taking on
more risk)
• Problem: Difficult to find comparables
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Discounted cash flow
• For most startups – especially those that have yet to start generating
earnings – the bulk of the value rests on future potential.
• DCF involves forecasting how much cash flow the company will
produce in the future and using an expected ROI to calculate how
much that cash flow is worth. Startups get higher discount rate to
account for high risk company fail to generate sustainable cash flows
• Problem: depends on the analyst's ability to forecast future market
conditions and make good assumptions about long term growth rates
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Valuation by stage
• “Rule of thumb" values are typically set by the investors, depending
on the venture's stage of commercial development.
• The further the company has progressed along the development
pathway, the lower the company's risk and the higher its value.
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Valuation by stage
• Many private equity firms will utilize an approach whereby they
provide additional funding when the firm reaches a given milestone.
• For example, the initial round of financing may be targeted toward
providing wages for employees to develop a product. Once the
product is proved to be successful, a subsequent round of funding is
provided to mass produce and market the invention.
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Valuation by stage examples
Estimated Company Value
Stage of Development
$250,000 - $500,000
Has an exciting business idea or business plan
$500,000 - $1 million
Has a strong management team in place to execute on
the plan
$1 million – $2 million
Has a final product or technology prototype
$2 million – $5 million
Has strategic alliances or partners, or signs of a customer
base
$5 million and up
Has clear signs of revenue growth and obvious pathway
to profitability
http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Securities law and private
financing
What are the rules for issuing shares of private equity?
What is a security?
• Common and preferred stock, notes, bonds,
debentures, voting-trust certificates, CDs, warrants,
options, subscription rights, etc. – investor must be
passive or “nearly so”
• Exists whenever one person provides money or some
item of value with the expectation that it will be used
to generate profits or other monetary return for the
investor primarily from the efforts of others
What is a security?
•A limited partnership
•A cow
•An orange grove
•A condominium unit
•A parcel of oil property
Business financing disclosures
• Laws require seller of securities to make buyer aware of material factors
that bear on present conditions and future prospects of the business, plus
relevant details regarding participation in business and its profits
• Prospectus, offering circular, or memorandum are common practice
• These prevent arguments over whether disclosures have been made or
what they were
• Since 1995 “safe harbor” statements are allowable in disclosures when
making “future-looking statements”
• The company – not the accountant – is responsible for the accuracy of
pro forma financials
Private offerings
• Do not require company to undergo expensive and lengthy
registration process with SEC
• Offerees are presumed to be sophisticated enough not to
need review of prospectus by government
• Historically exempt from govt oversight based on
“sophistication” of investor, number of purchasers, and
amount of $ raised – all highly subjective and resulted in
liabilities for issuers
Regulation D to the rescue
• File a notice with the SEC on “Form D”
• Rule 504 – issuer can sell up to $1M in securities during any 12month period – no limits on sophistication or number of investors –
not available to investment companies or “blank check” companies
• Rule 506 – issuer can sell unlimited amount of its securities but only
to “sophisticated” investors – available for transactions that do not
involve > 35 investors – sales to accredited investors, relatives of
investors are not included
• Rule 505 – adds flexibility to 506 issuers; permits sale of up to $5M in
12-month period to any 35 investors + unlimited accredited investors
Form D is 3 (ish) pages long!
Other issues with private securities
• Issues are still subject to antifraud and civil liability
provisions, even if exempt from federal regulation
• Resale is severely restricted, limiting liquidity
• Securities regulation is complex – an error can cost
the entrepreneur and its effects last for several years
The “prospectus” is your business plan with
risk factors
1.
2.
3.
4.
5.
6.
7.
Executive summary
Company description
Risk factors
Products
Market
Competition
Marketing program
8. Management
9. Manufacturing
10. Service and field engineering
11. Future products
12. Facilities
13. Capital requirements
14. Financial data and forecasts
Other stuff
• Term sheets
• Stock rights issue