Internet Funding Strategies for New Businesses

1. Raising Capital • New businesses • Five year success rate • Banks • Sources of funding • Structure? • Security law violations? Chapter 2: The Internet

2. Raising Capital • “Crowd” funding: Companies can raise up to $ 1 million • Investors: • Invest up to < $10,000; 10% of income • No need to register securities with SEC/state Chapter 2: The Internet

3. Private offerings • 35 or fewer investors and accredited investors • Accredited investors • Assets > $ 1 million (not home) or income > $200,000 • 35 other investors: must be able to judge merits • No registration statement with the SEC needs to be filed Chapter 2: The Internet

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 Chapter 2: The Internet

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. Chapter 2: The Internet

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 Chapter 2: The Internet

7. Public offerings • Seasoned offering • Reaction of market • Why not debt? • Signal regarding stock price? Chapter 2: The Internet

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 Chapter 2: The Internet

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 Chapter 2: The Internet

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 Chapter 2: The Internet

11. IPOs: investor’s 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 Chapter 2: The Internet

12. Underpricing IPOs • Google: auction to set IPO price for shares • Then accept offers at that price ($85) • Allow small investors to participate Chapter 2: The Internet

13. Public offerings • Lockup period: stock can not be sold for a period of time • Typically six months (Ferraris > 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 Chapter 2: The Internet

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 Chapter 2: The Internet

15. Issuing bonds • Often in private placements • Life insurance companies, pension plans and mutual funds Chapter 2: The Internet