Bachelor in Finance
Pós-graduação em
Entrepreneurial Finance
II. FUNDING SOURCES
Chapter 1
4. STAGE OF VENTURE
DEVELOPMENT
Stages of Venture Development
Stages of venture development
Sources of Financing
Sources of financing
Internal and
bootstrapping
Equity
Debt
Sources of Capital for Startups
How important are the various arrows?
The Who and What
External Sources
Debt
Equity
Credit
Loans, etc..
Stocks/shares
Bonds
External equity
Private
Public
Indep. VCs
Security
Intermediated
(funds)
Corporate VCs
PEs
Hedge Funds
BAs
Disintermed.
IPOs
Crowdfunding
Financing Landscape 80s/90s
A narrow world!
Friends
&
Family
M&A
or IPO
SeriesA
5x
Series B
2x
Series C,D,..
Financing Landscape Now
Holy cow!
Seed Ecology
•
•
•
•
•
•
•
Angels
Inst’l Angels
Corp Seed
Accelerators
Incubators
Crowdfunding
ICO
Scale Ecology
SeriesA
Series
Series B
A,B,..+
venture
debt
Series
•
•
C,D,..
•
•
•
•
IPO
Pvt IPO
JV
Crowdfundig
Mezz Debt
PE
$200K /
Seed Aug 1,
$37 M /
Series B Dec
$1.2 B /
Series E Dec4,
$200M /
Private Equity
2009
7,2011
2014
Feb12, 2016
Garrett Camp
Menlo Ventures (Lead)
Lone Pine Capital
LetterOne
Travis Kalanick
Benchmark
New Enterprise Associates
Bobby Yazdani
Qatar Investment Authority
$3.5 B /
Private Equity
Jun1, 2016
$1.25M /
Angel Oct15,
CrunchFund
Sherpa Capital
2010
Uber : 15 funding
rounds
for $12B
Investment Fund
First Round (Lead)
Data Collective
Alfred Lin
Goldman Sachs
Babak Nivi
Jeff Bezos
Valiant Capital Partners
$1.15 B / Debt Financing
Jul 7, 2016
$600 M /
Series E Dec16,
Morgan Stanley (Lead)
2014
Cyan Banister
Nihal Mehta
David Cohen
Signatures Capital
Founder Collective
Summit Action Fund
Baidu
Barclays PLC
Citigroup
$1.6 B /
Debt Financing
Jan21,2015
Jason Calacanis
Troy Carter
Jason Port
Tusk Ventures
Goldman Sachs
Josh Spear
$1 B /
Lowercase Capital
2015
AITV (Accelerate IT
$258 M /
Series C
Series E Feb18,
Aug 23, 2013
Ventures)
Mike Walsh
Google Ventures (Lead)
Foundation Capital
Mitchell Kapor
TPG Growth
HDS Capital
Naval Ravikant
Benchmark
Times Internet
$1.2 B /
$1 B /
Oren Michels
Scott Banister
Series D Jun
Series F Jul31,2015
6, 2014
Shawn Fanning
$11 M /
Source: Crunchbase
Saudi Arabia’s Public
Series A Feb14,
Fidelity Investments
Bennett Coleman and Co
(Lead)
Ltd
BlackRock
Microsoft
Google ventures
Microsoft Corp. - Strategic
2011
Benchmark (Lead)
Investments
Kleiner Perkins Caufield
& Byers
Alfred Lin
Menlo Ventures
$100 M /
Private Equity
Aug 19,2015
First Round
Sherpa Capital
Innovation Endeavors
Summit Partners
Lowercase Capital
Wellington Management
Scott Banister
Tata Opportunities Fund
Goldman Sachs
5. EARLY SOURCES OF
FUNDING
Sources of Capital for Startups
Two Critical Lessons
• A $1 is not just a $1: from whom you raise
money can be as important as how much
you get
– Investors can be important business leads who
can help you build your business; they are not
just there to plug holes in a cash flow statement
(although they might be)
– These “value-added" services end up costing
more in terms of greater loss of control, of
ownership (but sometimes are worth it)
– Some businesses are not well suited to some
types of investors
Sources of Capital for Startups
Two Critical Lessons
• Timing is everything
– Investors specialize in certain points of the
lifecycle of a business
– It takes time to build relationships that lead to
funding outcomes
– Capital providers are often complements, not
substitutes
– Raising too much money too early can be
deadly
Sources of Funding
5.1. BOOTSTRAPPING
Bootstrapping
• obtaining capital from one’s own savings,
personal loans, and from close relatives
• obtaining capital without giving away
ownership of the company
• rarely related to business concept or
market potential
5.2. DEBT
Kauffman Firm Survey 2004
All Firms
What about Garage businesses?
Garage businesses vary by size
140,00
0
120,00
0
100,00
0
54,536
80,00
0
50,087
44,839
DT
R
42,208
Outside Debt
Outside Equity
60,00
0
Insider Debt
21,530
Insider Equity
16,268
18,753
26,960
40,00
0
Owner Debt
8,841
Owner Equity
19,353
2,774
4,731
20,00
0
17,269
20,035
31,201
35,433
31,784
31,609
0
Non Employer
Home Based
Pre Revenues
Pre
Profits
Survived
thru 2006
Closed by
2006
Sources of financing in EU-28
Source: SAFE Analytical report, 2014
A Closer Look at Debt
Debt
• Borrow money, receive cash, repay principal
plus interest
• This means that entrepreneur keeps the upside
• Debt has covenants: guidelines that must be
adhered to if the debt is considered to be in
good standing
• If default, debtholders can seize the firm’s assets
and liquidate them
• Collateral is typically required, often this is the
entrepreneur’s personal assets (home, etc.)
Chapter 2
5.3. INCUBATORS,
ACCELERATORS AND
CROWDFUNDING
Early Market Sources
Early sources of funding by orientation and venture development
phase.
Incubator
• Organization that provides start-ups with a
shared operation space and network
opportunities, mentoring resources and
shared equipment
• First: 1959, Batavia Industrial Center, New
York
Incubator
• Earliest type of formal support that
entrepreneurs can access to
• Consist of a physical location that provides
general infrastructures and network for its
participants
• Most incubators have a restricted
membership: selection is based on the
characteristics of the individual
Accelerator
• Organization that offers start-ups support
services and funding opportunities, in
intense programmes that offer mentorship,
resources and access to capital.
• First: 2005, Y Combinator, Boston
2000, Seedcamp, London
Accelerator
Benefits
• Foster new networks (entrepreneurs,
corporations, mentors)
• Signalling effects and PR exposure
• Increases the odds of getting additional
funding
Accelerator
Costs
• Variable quality of the accelerators
• Equity stake is non-dilutable up to fixed,
minimal future value of the venture
Top 10 accelerators by capital investment: Europe (2017).
Incubator vs Accelerator
Differences between an incubator and accelerator
Later-stage Accelerators
• speed up the market success of businesses that
are already established companies
• build these companies into ‘scale-ups’
• support the process from start-up to growth
phase
• Tailor-made programmes
– assess the factors limiting the growth of the company;
– address these limiting factors, enabling the desired
growth.
Crowdfunding
• Form of financing that connects those who
can give, lend or invest money directly
with those who need financing.
• First: 2003, ArtistShare, US
2006, Sellaband, Netherlands
Crowdfunding
Process
Crowdfunding
Benefits for the Entrepreneurs
• Lowers the transaction costs involved in
finding investors
• Expand the reach and potential set of
investors
• Increase the change and speed of
obtaining funding
• Marketing tool, revealing the initial market
response and building investor credibility
Crowdfunding
Benefits for the Investor
• Reduces the search an transaction costs
• Exposure to new and unthought-of
propositions
• Receiving feedback from the target market
Crowdfunding
Costs
Entrepreneurs
• Reputation risk - the visibility can be
harmful if the goal is not met
• Risk of being copied by rival firms
Investors
• Options for doing a proper due diligence
are diminished
Types of Crowdfunding
Types of Crowdfunding
Types of Crowdfunding
Donations
• e.g. Gofundme.com
• [typically] individuals raise money from other
individuals for charitable causes
• Typically, transparent as long as the donners in
the crowd carry out due diligence to ensure the
campaign they are giving to represents a real
need and not a scam.
Types of Crowdfunding
Rewards
• e.g. Kickstarter and Indiegogo
• Entrepreneurs raise money from crowdfunders
in exchange for a promise to receive a reward
(such as a yet to be made product)
• More complicated than donations, as it typically
involves the creation of a good or service, and
the funding is used for advance access to capital
for the entrepreneur to create that good or
service.
Types of Crowdfunding
Rewards: Most successful projects
• https://www.kickstarter.com/projects/getpebble/p
ebble-time-awesome-smartwatch-nocompromises?ref=discovery_most_funded
• https://www.kickstarter.com/projects/ryangrepper
/coolest-cooler-21st-century-cooler-thatsactually?ref=discovery_most_funded
• https://www.kickstarter.com/projects/baubax/theworlds-best-travel-jacket-with-15-featuresbau?ref=discovery_most_funded
Types of Crowdfunding
Debt/ Lending
• Two types
1. Peer-to-Peer (P2P) such as Lending Club and
Prosper
2. Marketplace landing such as Funding Circle
• Individuals (in the case of P2P lending) or firms
(in the case of marketplace lending) raise money
from individuals in exchange for a debt security
that pays a specified rate of interest
Types of Crowdfunding
Debt/ Lending Setup
• Borrowers Create Listings
– Amount requested (<=$25,000)
– Maximum interest rate
– Duration
– Financial information
– Personal information
• Lenders Place Bids
– Amount bid (>=$50)
– Minimum interest rate
Types of Crowdfunding
Debt/ Lending Setup
• Outcomes (duration is over)
– Amount bid>=Amount Requested -> Listing
becomes loan, bids with the highest interest
rates are outbid
– Amount Bid\ Amount Requested -> Listing
expires
Types of Crowdfunding
Benefits Peer-to-Peer Lending
• Receive strong support as means to
alleviate constraints for financing of
individuals and small business
• Attracts significant attention in particular
the online lending in peer-to peer
transactions
• Eliminate formal intermediaries
Crowdfunding
Costs Peer-to-Peer Lending
• Potential investors might being taken
advantage of by unscrupulous lenders
Types of Crowdfunding
What happen in P2P lending?
• Disintermediation in P2P
– Investors actively screen
– Wisdom of crowds
– Active investors
• Intermediation in P2P
– Loan evaluation is done by the platform
– Passive investors
Types of Crowdfunding
What happen in P2P lending?
Types of Crowdfunding
What happen in P2P lending?
P2P lending is NOT peer-to-peer lending anymore
– It is dominated by institutional investors
– Sophisticated investors are adopting more passive
strategies
– They are doing automated investments relying on
platform’s information.
– Platform has become increasingly sophisticated over
time
– Platforms are producing valuable information which
the market relies on
– Platform’s default prediction ability has steadily
improved over time.
Types of Crowdfunding
Equity
• e.g., Crowdcube, OurCrowd, Wefunder
• Firms raise money from individuals in exchange
for ownership in the firm.
• Equity crowdfunding typically involves the most
uncertainty and complexity
• The equity share, valuation of the company, and
financial and business model of the company
need to be set by the entrepreneur and
understood by the crowd.
Types of Crowdfunding
Equity: US Market
• JOBS Act was pivotal in allowing crowdfunding.
• Prior to JOBS
– Companies had to file a registration statement with
the SEC for any security offering (debt or equity).
– Or had to get an exemption e.g., Regulation D,
private placement exemption
– Such exemptions are typically for sophisticated
players (accredited investors)
– General solicitation or marketing not allowed.
Types of Crowdfunding
Equity: US Market
• Before JOBS - Any company larger than
$10m in assets with securities held by 500
people or more had to register and
disclose, effectively becoming a public
company
• The JOBS Act raised this limit to 2000
people
Types of Crowdfunding
Equity: US Market
• The Act suggested that companies would
be able to “crowdfund” up to $1M in any
12-month period from unaccredited
investors using one intermediary which
could be an Internet Funding Platform
(registered with FINRA) or a Broker/Dealer
with an Internet site
• Companies were simultaneously allowed
to raise money using other means under
existing accredited investor rules
Types of Crowdfunding
Equity: US Market
• 3 essential forms of equity
crowdfunding:
– General Solicitation (Reg 506(c)): syndication
of wealthy investors (eg. AngelList)
– Regulation Crowdfunding
– Regulation A+, designed as a low cost
alternative to a full public offering for growing
companies.
Types of Crowdfunding
Equity: US Market Accredited Investors
• Banks, insurance companies, investment
companies, etc.
• Charity, corporation or partnership with >$5M assets
• Employee benefit plans
• Director/executive officer/GP of company selling the
securities
• SEC Rule 501 defines:
– A person with net worth >$1m, excluding value of primary
residence
– A person with income >$200K in both of the last two years
(or joint with spouse $300K)
Types of Crowdfunding
Equity: US Market
Regulation A+ (mini-IPO)
• “testing the waters”
• This type of crowdfunding allows
companies to raise up to $20 million per
year (Tier 1) or up to $50 million per year
(Tier 2) from the general public
(investment limits apply) in a “mini-IPO”
style offering.
Types of Crowdfunding
Equity: US Market Regulation Crowdfunding
• “Traditional” or “real” equity crowdfunding
brought on by the JOBS ACT’s (May 16, 2016)
• Can raise up to $1, 070,000 p.a. from general
public
• Over 44 funding portals approved and growing;
e.g., Wefunder.com
• Compliance costs -Per the SEC’s estimation
– <$100k offerings: $7k – $12k
– $100k – $500k: $21k – $56k
– > $500k: $48k – $120k
Crowdfunding Volume
Three largest countries
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
China
United States
United Kingdom
$ millions, Averaged 2015-16, Selected Countries, All Types Crowdfunding
Source: Rau (2019)
0
• $ millions, Averaged 2015-16, Selected Countries, All Types
Crowdfunding Source: Rau (2019)
Philippines
Iran
Luxembourg
Hungary
Greece
Portugal
Norway
Malaysia
Hong Kong
Russia
Argentina
Indonesia
Austria
Czech Rep
Switzerland
Poland
Taiwan
Ireland
Belgium
Sweden
Brazil
Denmark
India
Italy
Spain
Singapore
Finland
Israel
Netherlands
Korea South
New Zealand
Canada
Germany
Japan
France
Australia
Crowdfunding Volume
Rest of the World
500
450
400
350
300
250
200
150
100
50
To sum up
Early sources of funding
• Improved learning curve of entrepreneurs
– Sharing experiences, networking and
participating in accelerator and incubator
programs
• Lowered transaction costs for investors
– Selection process of investors improved:
number of initiatives increased
Chapter 3
5.4. ANGEL INVESTORS
Who are Angels?
• Term comes from financiers of early Broadway
shows
• High net worth individuals who invest their own
money, along with time and expertise, directly in
unquoted (usually new) companies in which they
have no family connections, in hope of financial gain.
– US: SEC Rule 501 defines “Accredited Investor" as
• Net Worth > $1 million
• Annual Income > $200K for last 2 yrs, or joint income >
$300K
• 10 million qualified households
What do Angels do?
• Invest in unregistered securities offerings
• Primarily to support pre-seed, seed and very early
stage companies
• Europe: €10,000 to €100,000 and typically have a
portfolio of 2 to 5 investments
What do Angels do?
• Make their own investment decisions
• Invest their own money
– They do not have to invest
– They make quicker investment decisions
– They adopt their own criteria
Some Success Stories
• Amazon.com
– 8/1995: Two angels invest $54K. At IPO in 5/97,
this was worth $7.6M.
• Some other famous examples:
– Bell Telephone (1874),
– Ford Motors (1903),
– Apple (1977),
– Pete’s Brewing (1986)
Why do Angels invest?
• Financial returns, through capital gains
• Non-monetary considerations
Type of Angels
• Business angels are typically successful
entrepreneurs with disposable wealth, but
they exhibit considerable heterogeneity:
– Active angels
•
•
•
•
Most active investors
Takeover and turnaround artists
Founder angels
Super angels
– Latent angels
– Virgin angels
The Changing Structure of the
Angel Market
•
•
•
•
•
Invisible Market
Individual
Small
Fragmented
Ad hoc
Word-of-mouth
Visible Market
• Angel groups
• Routines for accessing
deals, screening deals,
undertaking due
diligence, negotiating and
investing
Why did Angel Groups Appear?
• Individual angels are rarely involved in
follow-up investments
– Do not like to join with VC
– Do not have enough money
• Advantages in working together
– Better deal flow
– Superior evaluation and due diligence
– Ability to make more and bigger investments
– Saving time on screening process
Chapter 4
VENTURE CAPITAL, PRIVATE
EQUITY AND CORPORATE
VENTURE CAPITAL
Venture Capital
• Subsector of the private equity industry
• Innovative high risk businesses, mainly in
their early stages of development
– Seed
– Early stage/Start-up
– Expansion
• 1946, George Doriott, American Research
and Development Corporation (ADRC)
VC vrs Private Equity
Private Equity
• Mature companies in traditional sectors
with proven business models that are
trying to expand their business or
consolidate their activity.
– Growth funds
– Leverage Buyout funds
Corporate Venture Capital
• A lot of large companies mainly involved in
technology, have venture arms to invest in
other young companies.
– Google Ventures, Intel Capital, Siemens,
Santander
• Sponsor other independent venture firms,
have their in-house venture activities or
create acceleration programs
What is a VC Investor?
Fund Lifecycle
Fund Lifecycle
• Most funds have a 10 year life, include
provisions to extend beyond 10.
Fund Lifecycle
Contract of the Fund
• Maximum/minimum amount of money invested per
portfolio company
• Activity/sector
• Geography
• Stage of the company
• Target stake in the venture
• Type of deal
• Time horizon: average period between 3 to 7 years,
maximum 10 years
• Return required
Fund Lifecycle
Exit Multiples
European VC funds
Compensation Basics
How do VC Investors Earn Money?
• Management fees
– Typically 1.5% to 2.5%
– Fee reductions common as fund gets older
• Carried interest
– Typically between 20% and 30% of net return
– Often cannot be earned until fund’s whole
invested capital is returned to Limited
Partners
Chapter 5
PUBLIC SOURCES OF
FUNDING
Public Support Programs
Value
• Benefit from networks and key players
• Benefit from financial support
• Source of information
Public Support Programs
Alternatives
•
•
•
•
•
Grants
Public Loans
Guarantees
Limited Partners
Fund of funds
Grants
• Direct funds
– Non-refundable grants
– Selection process
• public authorities select the entrepreneur
• entrepreneurs privately funded
• Convertible grants
Public Loans
Public Loans to Entrepreneurs and Investors
• Favourable interest rates
• Long maturities
• Grace periods
Guarantees
• Public authority agrees to bear some of
the downside risk
– Assuming the borrower’s debt in the event of
default
• Mobilizes financing
• Lowers financing costs
Limited Partner
• Become a limited partner together with
other limited partners in a venture capital
fund
• Provide funds to very active business
angels
Fund of Funds
• Select a private manager
• Private manager will select the VC funds