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Chapter 10 Raising Money for Starting and Growing Businesses

Chapter 10 Raising Money for Starting and Growing Businesses. Turning to family and friends. Approaching business angels. Looking for Venture Capital. Going Public. Being Acquired. Ways of raising money. Four basic ways of evaluating a business. Earning-capitalization valuation

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Chapter 10 Raising Money for Starting and Growing Businesses

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  1. Chapter 10Raising Money for Starting and Growing Businesses

  2. Turning to family and friends Approaching business angels Looking for Venture Capital Going Public Being Acquired Ways of raising money

  3. Four basic ways of evaluating a business • Earning-capitalization valuation • Present value of future cash flows • Market-comparable valuation • Asset-based valuation

  4. Earnings Capitalization Method: Company value = Net Income/ Capitalization Rate Present Value of Future Cash Flows: PV = PV of the future free CF + the residual (terminal) value of the firm Market-comparable Valuation (Multiple of earnings): Total Equity Valuation = NI x P/E

  5. Asset-based Valuation Modified (adjusted) book value Replacement value Liquidation value

  6. External Financing

  7. Finding business angels • Formal angel groups • Pros: Easy to find • Cons: May charge you for presentation or even business plan submission; • Few in number (several thousand) 2. Individual angels Pros: Several hundred thousand Cons: Hard to find and approach – the best way is through your network

  8. Types of Business Angels Can be invaluable advisors and mentors Entrepreneurial Angels Corporate angels Professional Angels Enthusiast Angels Micromanagement Angels Can take over or ruin your company Silent partners Passive investors Intervene in the business

  9. Fragmented, accessible, and growing rapidly VCs may help you hire a Team Better and protected Competent written business plan No dominance, distribution channels are open 7X return in 5 years Top 6 factors according to VCs

  10. Assessing a VC Value added Patience Deep pockets Accessibility Board of directors

  11. Very Unlikely Harvesting (exiting) investments • Initial Public Offering (IPO) • An acquisition • A buyback of the investor’s stock

  12. Pros and Cons of an IPO Upsides Downsides

  13. Managers can stay focused on building the company Selling a “baby” can be traumatic The buyer usually has big pockets Investors easily exit their investments If it is a cash transaction, the entrepreneurs and employees get cash immediately There is a risk there will be a clash of cultures The expenses are lower for an acquisition than for an IPO Key employees sign non-competing agreement Advantages and disadvantages of an acquisition for the seller Management Company Founder and CEO Investors Converting stock Employment Agreement Expenses and Commissions Culture

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