Chapter 10

Raising Money for Starting

and Growing Businesses
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Ways of raising money

Turning to family
and friends

Going Public

Approaching
business
angels
Looking for
Venture Capital

Being Acquired
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Four basic ways of evaluating

a business
Earning-capitalization
Present

valuation

value of future cash flows

Market-comparable
Asset-based

valuation

valuation

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

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
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Asset-based Valuation

Modified (adjusted) book value

Replacement value

Liquidation value

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

External Financing
Services
Servicesatat
reduced
reducedrates
rates

Customer
Customer
financing
financing

Vendor
Vendor
financing
financing

External
External
Financing
Financing
Leased
Leased
equipment
equipment

Reduced
Reducedrent
rent

Government
Government
programs
programs

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Finding business angels

1. 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

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Types of Business Angels

Entrepreneurial Angels

Can be invaluable
advisors and mentors

Corporate angels

Can take over or ruin your

company

Professional Angels

Silent partners

Enthusiast Angels

Passive investors

Micromanagement
Angels

Intervene in the business

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Top 6 factors according to

VCs
Fragmented,
VCs may help
you hire a Team

Management
Team

Competent written Business

business plan
Plan

7X return in
5 years

accessible, and
growing rapidly

Target
Market

Better and
protected

Product/
Service

Financial
Returns

Competitive
Positioning

No dominance,
distribution
channels are
open

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Assessing a VC

Value added
Deep pockets

Patience
Accessibility

Board of
directors
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Harvesting (exiting)
investments
Initial
An
A

Public Offering (IPO)

acquisition

buyback of the investors stock

Very Unlikely
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Pros and Cons of an IPO

Upsides

Downsides

Financing

High Expenses

Follow-On Financing

Public Fish Bowl

Realizing Prior Investments Short-Term Time Horizon

Prestige and Visibility

Post-IPO Compliance Costs

Compensation for
Employees

Managements Time

Acquiring Other Companies Takeover Target

Employee Disenchantment
Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.

Advantages and disadvantages of an

acquisition for the seller
Management

Founder
and CEO

Converting
stock
Managers can
stay focused on
building the
company

Employment
Agreement

Selling a baby
can be
traumatic

If it is a cash
transaction, the
entrepreneurs
and employees
get cash
immediately

Company

Investors

Culture

The buyer
usually has
big pockets

Key employees
sign
non-competing
agreement

Expenses and
Commissions

Investors easily
exit their
investments

There is a risk
The expenses are
there will be a
lower for an acquisition
clash of cultures than for an IPO

Bygrave & Zacharakis, 2007. Entrepreneurship, New York: Wiley.