The package features a capital structure with more equity ($600,000) than
debt ($200,000) financing for their long-term needs. They are funding their
capital needs with internal cash flow and short-term borrowing.
Cost or investment
Required Total cost
ﬂows and operating
line of credit Debt
New line $1,100,000 $300,000 $200,000 $ 600,000
Marketing costs 225,000 225,000
Cushion 50,000 50,000
Subtotal $1,575,000 $775,000 $ 200,000 $ 600,000
What New Tech Learned
Stuart and Elizabeth now recognize that:
. There is a range of funding sources open to growing businesses.
. They will have to put together financing from a variety of these sources in
order to meet their funding needs.
. Long-term risk capital financing alternatives include equity and subordin-
ated debt. They prefer to use equity because it allows them to reinve st
earnings into the business.
. Long-term conventional financing alternatives they might consider are
mortgages, leasing and term loans. They will pursue a long-term loan
from their bank.
. They will include cash flow, supplier credit and an extension of their bank
line of credit as part of their short-term risk capital financing.
CASE 3.2 NEW TECH (G): ARE THEY WORTH AN
HE CHALLENGE:ARE THEY WORTH AN INVESTOR’S TIME?
Can New Tech make itself attractive to investors?
Can it prove that it has:
. Growth potential in the marketplace?
. Prospects of exceptional return on investment?
. A way for investors to get their money out?
Alternatives in Venture Financing—Early Stage Equity Capital 105
Grant Argent (New Tech’s financial advisor) stresses that the manage-
ment team must be able to convince investors that New Tech is a fast-
growing business with excellent profit potential. He informs Stuart Chip
(New Tech’s president) and Elizabeth Pratt (New Tech’s accountant) that
this evidence has to be documented in a convincing manner in an investment
proposal. To do this, they must gather critical information that investors will
need to examine before making their decision to invest in New Tech.
Potential investors, not to mention Stuart and his team, will need reliable
. see what the company’s growth opportun ities are and how it will
. put a value on the company’s growth opportunity and expected return
. determine the risk element and expected return on investment the
investors want to earn
. arrive at some parameters for the share of equity the company will offer
Elizabeth can do some of the groundwork on her own, but she asks Grant
for some help with the technical analyses that will be required.
The New Tech management team will have to take on a variety of tasks:
. assess the external environment, including economic and industry-specific
trends, and an analysis of their competitors
. examine their own procedures and processes, and develop plans to opti-
mize them to achieve the growth targeted
. determine what they feel is the value of the company now, at the beginning
of the investment period, based on their financial forecasts
. decide on how the investor would be able to take his or her money out and
calculate a projected value for the end of the investment period
. determine what rates of return an investor might expect given their pro-
posal and forecasts
THE CHALLENGE:HOW DOES NEW TECH STACK UP?
. Are the market condit ions right for New Tech’s growth?
. How does New Tech compare to its competitors?
New Tech in Context
Elizabeth starts by developing background information on New Tech’s
industry and how it is being affected by current economic trends. She tries to
answer these questions:
106 Alternatives in Venture Financing—Early Stage Equity Capital