CHAPTER 16
Funding a Rapidly Growing Venture
SUMMARY AND AUTHOR’S NOTE
Although growth is the natural by-product of a successful business, it is costly and usually puts a
strain on the resources of the business. In most cases, funding in excess of internal cash flows
venture capital. The chapter also discusses the initial public offering and how it is used to rapidly
grow a company. Strategic partners are another great way to grow some companies, especially
those where tapping into the partner’s manufacturing and distribution capabilities is critical.
Valuation is a tricky subject. When looking at how to value a business, students usually fall back
on the formulas they learned in finance, in particular discounted cash flow and earnings
CHAPTER OBJECTIVES
After reading this chapter, students will be able to:
• Discuss the cost and process of raising capital.
Chapter 176: Funding a Rapidly Growing Venture 67
CHAPTER OUTLINE
OPENING CASE: Raising Money Can Land an Entrepreneur in the Doghouse
I. The Cost and Process of Raising Capital—raising growth capital
a. It Takes Money to Make Money—costs incurred in seeking growth capital
SOCIAL ENTREPRENERUSHIP: MAKING MEANING: Investing in Ocean Power
II. The Venture Capital Market—securing venture capital
III. The Super Angel Market—filling the gap between the traditional angel market and the
VCs
IV. The Initial Public Offering (IPO)—becoming a public company
a. Advantages and Disadvantages of Going Public—equal advantages and
disadvantages
b. The Public Offering Process—steps in the IPO process
• Figure 16.3—The IPO Process Simplified
c. An Easier IPO—intrastate offerings
c. Discounting Cash Flows—discounted cash flow analysis to determine cash flow
stream
• Table 16.3—Risk Adjustment Factors
• Table 16.4—One Method for Discounting Cash Flows
RELEVANT CASE STUDIES
Case 8 Demand Media
Case 9 The Case of Google, Inc.
68 Chapter 176: Funding a Rapidly Growing Venture
ANSWERS TO QUESTIONS ON KEY ISSUES
1. At what stage of venture development do venture capitalists typically become involved,
and why?
Venture capitalists typically become involved at the second-round financing of high-
2. For what kind of business would soliciting private venture capital be a logical financial
strategy for growth? Why?
High technology businesses with intellectual property such as patents, the ability to scale to
3. How can strategic alliances be used to help grow the business?
Strategic alliances can be used to structure deals with suppliers or customers that will help
4. What are some things that an entrepreneur should do to prepare for a public offering before
the year of “going public”?
To prepare for a public offering, the entrepreneur should spend the year prior to the
Sarbanes-Oxley.
5. In approaching a venture capitalist, how can the entrepreneurial team deal from a position
of strength?
The entrepreneur should approach a VC through a referral from someone who knows
6. What are the key components in valuing a new or growing venture?
The key components are book value, going-concern value, liquidation value, investment
Chapter 176: Funding a Rapidly Growing Venture 69
SUGGESTIONS FOR EXPERIENCING ENTREPRENEURSHIP
1. Interview a partner in a venture capital firm. Ask the partner to describe a recent
investment that the firm completed. What were the critical factors that made the firm
decide to invest? Discuss your findings in a two-page report.
2. Locate a business that was recently sold or had an initial public offering. Talk to a principal
and, if possible, to the buyer or investment banker to learn what was considered when they
valued the company. How much of the decision on valuation was based on negotiation and
nonmonetary factors?
In this situation, students will probably have access to a wealth of information about the