Lecture Entrepreneurship: Chapter 10 - Zacharakis, Bygrave, Corbett

Chapter 10 - Financing entrepreneurial ventures worldwide. You’ve developed your business idea and written a business plan in which you have forecast how much money you’ll need for your new venture. Now you’re wondering where you will get the initial money to start your business and the follow-on capital to grow it. In this chapter, we discuss the mechanics of raising money from investors, including business angels, venture capitalists, and public stock markets.

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FI NANCI NG ENTREPRENEURI AL

VENTURES WORLDWI DE

Chapt e r 10

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Bygrave & Zacharakis, Entrepreneurship, New York: Wiley, 2017

MI CROFI NANCI NG & MI CROCREDI T

Growth in the implementation of microcredit, 1997-2012

Year Number of Institutions Reporting Total Number of Clients Reached Number of 'poorest' clients reported

Source: Maes, J.P and Reed, L.R State of the Microcredit Summit Campaign Report 2014

Microfinancing by region, 2010 (in millions)

Asia Africa/ Middle East Latin America/ Caribbean Eastern Europe & Central Asia

Number Reached by Microfinance 125.5 8.9 2.9 0.13

Source: Maes, J.P and Reed, L.R State of the Microcredit Summit Campaign Report 2012 Microcredit Summit Campaign, 2012 Page 39

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I NFORMAL I NVESTORS

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Informal Investor Prevalence Rate, 2014

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ANNUAL AMOUNT PER

I NFORMAL I NVESTOR

4

Annual amount per informal investor vs GDP per capita (US$)

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SEED FUNDI NG PER COMPANY

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Startup funding per company vs GDP per capita (US$)

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RELATI ONSHI P OF I NFORMAL

I NVESTOR TO I NVESTEE

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Relationship:

Investor-Investee

Percent Total Mean Amount

Invested US$ Payback Time Median Median X Return

Close family 49.4% 23,190 2 years 1 x

Other relative 9.4% 12,345 2 years 1 x

Work colleague 7.9% 39,032 2 years 1 x

Friend, neighbor 26.4% 15,548 2 years 1 x

Stranger 6.9% 67,672 2-5 years 1.5 x

100.0% 24,202 2 years 1 x

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Expe c t e d I RR f or e nt r e pr e ne ur s a nd i nf or ma l i nve s t or s

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FI NANCI AL RETURNS ON

I NFORMAL I NVESTMENT

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SUPPLY AND DEMAND FOR

STARTUP FI NANCI NG

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Percentage of nascent businesses that could be funded by available informal investment

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SUPPLY AND DEMAND FOR STARTUP FI NANCI NG

9

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Global Crowdfunding

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I NFORMAL I NVESTMENT VS VENTURE CAPI TAL

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CLASSI C VENTURE CAPI TAL

I NVESTMENT

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FI NANCI NG ENTREPRENEURI AL VENTURES

Financing entrepreneurial ventures in the United States, 2014

Constrained Glamorous

Informal

investments by

family, friends, and

foolhardy strangers

$199 billion to

million of ventures

Superstars

Classic Venture Capital

$49.3 billion

to 3,662 ventures

High

Low Innovation

Low High

Growth

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ECONOMI C BENEFI TS OF VENTURE CAPI TAL BACKED COMPANI ES

2000 2010 Annual Growth 2000-2010 Jobs 8.7 Million 11.9 Million 2.9%

Sales $1.5 Trillion $3.08 Trillion 6.8%

Top 5 States by Employment at

Venture-Capital-Backed

Companies Headquartered in the State in

2010

California 2,887,063 Texas 1,129,551 Pennsylvania 783,527 Washington 778,579 Massachusetts 775,151

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FLOW OF VENTURE CAPI TAL

TAKEDOW N

INVESTO RS

VENTURE CAPITAL FIRMS

PORTFOLIO COMPANIES

Money Money

Limited Partners

• Pension Funds

• Insurance Companies

• Corporations

• Foreign Endowments

• Individuals

• Funds of Funds

Return of Principal &

80% of Capital Gains

DISTRIBUTIO N

Entrepreneurs

Equity

IPOs/Mergers /Acquisitions

2-3% Annual

Fee

General Partners

20% of Capital Gains

Unrealize d

RESIDUA

L

Gatekeepers 1% Annual Fee

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FI NANCI AL RETURNS ON

VENTURE CAPI TAL

Fund Type 1 Year 3 Years 5 Years 10 Years 20 Years Seed/Early

Stage 23.1 19.3 16.8 9.8 56.7 Later/Expansio

n Stage 8.9 14.2 16.6 12.8 11.3 Multi Stage 22.9 17.4 14.8 10.3 13.8 All Venture

Funds 21.5 18.0 16.1 10.3 35.4 NASDAQ 13.4 22.1 15.9 8.1 9.6 S&P 500 13.7 20.4 15.5 7.7 9.9

Source: Cambridge Associates LLC U.S Venture Capital Index® and Selected Benchmark Statistics

Venture capital IRRs and NASDAQ and S&P 500 Returns through Dec 31,

2014

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FI NANCI AL RETURNS ON VENTURE CAPI TAL

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