This document discusses various sources of financing for startups, including self-funding, crowdfunding, equity financing, venture capital, business angels, and debt financing. It provides details on bootstrapping, the different types of angel and venture capital investors, and common terms in VC deals like liquidation preferences, blocking rights, and warrants. The document also notes that while hundreds of thousands of startups are formed each year, only a small fraction receive venture capital funding.

1. Start Up Finance & Venture Capital
Serdar Temiz

2. Is there a universal cure for successful
new ventures and commercialization of
new technology?
• Start up!
• Venture Cup
• Public seed capital
• Incubators
• Business angels
• Venture Capital
2

3. Who or What is the first Investor of your start
up
3

4. Raising Capital
1. Self-funding & bootstrapping
2. Customers (funding growth via retained
earnings)
3. Debt financing (lender charges interest for
money loaned)
4. Equity financing (investor provides money
in exchange for an ownership share)
5. Crowdfunding
6. Other: government grants, business plan
competitions, incubators, etc.
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5. Five different kinds of services
• ICT-related business models: These Can
distribute services instantaneously to
everyone
•Manual services at many different locations.
•Knowledge intensive services
• Infraservice
•Manufacturing companies integrating forward
Source: Eric Giertz, KTH

6. Bootstrapping
using creative means to obtain resources other
than borrowing money or raising capital from
traditional sources
• Personal savings
• Credit cards
• Creditors (delay payables)
• Pre-payment (sell first, then build/ship)
• Extreme cost controls
• Trade Credit
Source: Bill Snow, Venture Capital 101, Iteration 1.8, February 8, 2004
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7. Non-Financial Resources for Start-Ups
1. Family & friends
2. Network
3. Alumni association
4. Board of directors
5. Board of advisors
6. Mentors
7. Volunteers
8. Interns
9. Unpaid workers (stock options)
10. Industry experts
11. Incubators
12. Bartering
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8. The Art of Bootstrapping
Do not buy new what you can
...buy used
...lease
...borrow
...barter
...beg
...scavenge
...get for free
...what someone will pay you for
...what someone will bid for
g
growthstrategies
© 2008 growthstrategies; Terrence Brown 8

9. Bootstrapping
Pros
• Bootstrapped firms
almost always spend
cash more effectively
than equity-financed
ventures
• Requires being close
to customers, clearly
identifying problems
and solutions
Cons
• Resources for product
development and
market development
constrained by cash
flows
• May miss big
opportunities
• May be left behind by
competitors
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10. Structuring 3F Deals
(“friends, families, & fools”)
1. Consider the impact on everyone involved
2. Never accept more than they can afford to lose
3. Strictly business (market-based interest rates)
4. Prepare a business plan
5. Settle details upfront with written contract
6. Treat as “bridge financing” to other investments
7. Develop realistic payment schedule that suits all
8. Exit plan: how investors repaid or cash out
Source: Norman Scarborough, Essentials of Entrepreneurship & Small Business Management, Pearson 2011
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11. Matching Financing with the Venture
3 F’s &
Bootstrapping
• Weak cash
flow
• Low-to-moderate
growth
• Unproven
management
Debt
Financing
• Strong cash
flow
• Audited
financial
statements
• Good
management
• Healthy
balance sheet
Equity
Financing
• Unique
business idea
• High growth
• Proven
management
• High-risk,
high-reward
Source: Bruce Barringer & R. Duane Ireland, Entrepreneurship: Successfully Launching New Ventures (Pearson, 2010) 11

12. Equity Financing
Advantages
• Common interest in success
• No regular interest payments
• Dividends at discretion of
the board
• In absence of profits,
investors do not get paid
• Cannot force firm into
bankruptcy to recoup
investment
Disadvantages
• Founders must share profits
with other equity investors
• Seeking higher return than
lenders due to higher risk
• Investors may interfere
(inquiries, scrutiny, advice,
etc.)
• Founders can lose control
Source: Mariotti & Glackin, Entrepreneurship and Small Business Management 12

13. Angel Investors
invest their personal capital
Examples:
• Individuals with rather small funding
• Angel Investors Networks
• Very rich Angels (entrepreneurs)
- 3Fs
- Angels
- VCs
directly in new ventures
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14. Angels (vs. VCs)
1. Simpler term sheets, BMC, Business Plan
2. Don’t squeeze as hard on valuations
3. More realistic on time frames
4. Exert less control over the team
5. Exert less financial control over the firm, strategy, and exit plans
6. Don’t add as much money or value as VCs
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Marty Zwilling, ”7 Key Drivers to the Best Investor for Your Startup,” Startupprofessionals blog, April 7, 2012

15. Vetting an Angel
1. Do they have investment criteria?
 Industry focus?
 Investment size range?
 Geographic focus?
2. Expected ROI & time horizon?
3. Chemistry & fit (values & vision)?
4. Reputation?
5. Can they help you raise VC money in next stages? (relationships)
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16. 16
VENTURE
CAPITAL

17. Business Plan Funnel
100
business plans come in to VC
10
left after quick screen
1
receives funding after
extensive due diligence
Source: National Venture Capital Association, Venture Impact, Fourth Edition, 2007
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18. 600,000 new businesses are started in the U.S. each
year, and the number of startups funded by VCs was
about 300. This means that the probability of an
average new business getting VC is about 0.0005
(300/600,000)
Source: http://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-wasting-time-seeking-venture-capital/
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19. Investor returns require a successful “exit” or “liquidity event”:
1. Sale of the company ... OR ...
2. Initial public offering (IPO):
- issuing shares to the public for the first time
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20. “The day you take a dollar or pound or
rupee from most venture capital
investors is the day you have agreed to
sell your business.” -John Mullins
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21. “The little-known secret is that nowadays
the vast majority of venture capital exits
are the sale of the company to another,
larger company. IPOs happen... but not
very commonly.”
-John Mullins & Randy Komisar
Getting to Plan B
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22. # of Venture-Backed IPOs vs. Acquisitions: U.S.
450
400
350
300
250
200
150
100
50
Source: National Venture Capital Association
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12
72
272
427
0
2009 2010
Venture-backed IPOs
Venture-backed
acquisitions

23. what VCs look for
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industry of focus
Exceptional
team
and/or
Exceptional
technology
Traction/
momentum

24. Investments by Stage: U.S.
Source: Robert Wiltbank & Warren Boeker, Returns to Angel Investors in Groups, Angel Capital Education Foundation; PWC Moneytree Report
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25. Choosing a VC Firm
1. Do we meet their investment criteria?
 What stage of growth do they focus on?
 Industry focus?
 Investment size range?
 Geographic focus?
2. Expected ROI & time horizon?
3. Involvement level?
4. Chemistry & fit (values & vision)?
5. Reputation?
6. Mechanics: who will serve on our board? how many
other boards serving on? Other VCs to work with
on this deal?
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26. Business plan
submission
Preliminary
decision
Company
visit/meeting
VC Steps
LETTER OF INTENT
TERM SHEET
CONTRACT & FINANCING
Source: McKinsey, Starting Up, modified version of Scheidegger et al., Swiss Venture Capital Guide, 1998-99
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Analysis & discussions
Due diligence
Contract
negotiations
Support & monitoring
EXIT

30. common VC deal terms
liquidation preference
first claim to all assets & technology if the venture fails (100% preference
over common shares)
blocking
disproportional voting rights over key decisions (e.g., sale, IPO timing)
antidilution clauses (ratchets)
protect against equity dilution is subsequent financing rounds occur at
lower values
warrants
form of investment security which gives owners the right to purchase a #
of shares of stock at a set price before the expiration date
Preferred Stock vs Common Stock
preferred stock usually doesn't carry the same voting rights as common stock, it
does have priority when it comes to dividends and bankruptcy
Bob Zider,”How Venture Capital Works,” Harvard Business Review, Nov-Dec 1998
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