M3-S7 - Session notes

Risk / Return triangle

• Probability of loss
• Expected return
• Investor(s), Entrepreneur(s), Combination, Fit, Agreement

Debt financing: Debts (& factoring)

• Repayment plus interest income
• Provider's upside return
  • Usually agreed upon percentage
• Provider's downside risk
  • Everything

Positives:

• Retain control
• Greater ange of flexibility
• Lower cost than Equity financing
• Simpler for both parties to exit

Negatives

• Interest payment
• Cash flow implications
• Assets encumbered
• Personal surety
• Potential personal liquidation

Equity financing:

• Value of equity stake plus divident income
• Provider's upside return
• Provider's downside risk
• Multiple solutions possible:
  • Combination of debt + equity
  • Possibilities to convert it later

Positives:

• Low/no cash flow implications
• Lower personal risk
• Potential non-financial contribution of investors

Negatives:

• Loss of control
• Costly in long term
• Difficult / costly to exit
• M&A risks

Finance and business stage:

The American way (no debt financing)

VC Rates of return

• In the 25% range over 5-8 years

Split of the spoils:

• 80% to limited partners, 20% ROI
• 20% to general partners - $6Mover5years$

Evaluation process:

• Universal independent market analysis, Opportunities evaluation
• Technical due diligence
• Team due diligence

What characteristics desired in the team?

• Strong technologist, engineering vision & execution, attention to the minutae
• Seperate person to drive sales, finance, recruitmet
• Ware of individuals wedded to a particular role
• Willingness to step aside for a new CEO, professinoal managers
• A CEO to take it to glory
• The quality of people the CEO can attract