Lecture Notes: Finance for Entrepreneurial Ventures

Early Stage Valuation

• Nature of Valuation: More art than science; determined by what the market will bear.
• Factors Influencing Valuation:
  • Recent industry exits.
  • Soundness of the idea.
  • Management team's track record.
  • Presence of a working prototype or existing sales.
  • Size of potential exit.
• Calculation: No single method; guesswork is common.
• Market Influence:
  • Up markets = Higher valuations.
  • Down markets = Lower valuations.
  • Industry cycles affect valuations (e.g., biotech).
• Valuation Expectations:
  • Early stage companies with just an idea may be valued under $1 million.
  • Media often showcases outliers with high valuations.

Valuation Equation for Funding

• Post-money Valuation = Pre-money Valuation + Investment.
• Example:
  • Pre-money worth: $500,000.
  • Investment: $500,000.
  • Post-money Valuation = $1 million.
  • Investor's ownership: 50%.

Concept of Dilution

• Ownership Stake: Decreases as more money is brought in.
• Goal: Overall company value should grow, increasing actual value despite lower percentage ownership.
• Example Provided: A cap table example in a separate presentation.

Funding Options

Crowdfunding

• Platforms: Kickstarter example (e.g., Exploding Kittens game).
• Process: Pre-selling products/services to raise funds without diluting ownership.

Incubators and Accelerators

• Purpose: Support early-stage companies with mentoring, space, and sometimes capital.
• Examples: Tech Stars, Y Combinator, and Generator.
• G Beta Program: Offers free mentoring without equity stake.

Convertible Debt

• Definition: Debt note convertible into equity.
• Use: Effective when valuation is uncertain.
• Protection: Protects investors from downside situations.
• Example: Conversion into equity in a high-value exit or fundraising.

Exit Strategies

• Types of Exits:
  • Sale of business/assets/technologies.
  • Mergers.
  • Bankruptcy.
  • Initial Public Offering (IPO).
• Reality Check:
  • IPOs are rare (e.g., 159 IPOs out of 600,000 new businesses in 2019).

Resource Highlight: Pitchbook

• Description: Database tracking venture capital deals.
• Usage:
  • Research comparable deals.
  • Analyze company financing histories.
  • Accessible to UW students via Wisc.edu email.
• Example Companies: Detailed history can be found for many companies.

Conclusion

• Further Reading: Recommended for deeper understanding of finance and entrepreneurial ventures.
• Practical Application: Use insights for personal entrepreneurial endeavors.