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The Guide to Entrepreneurship by Michael Szycher Ph.D

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335
Chapter 15
Harvesting
15.1 Introduction
Even before you start your entrepreneurial venture, you must strategize how
you personally intend to exit. An exit strategy is the way in which a venture
capitalist or business owner intends to monetize an investment. An exit strat-
egy is also called a liquidity event.
Planning an exit strategy is one of the most misunderstood considerations
of a business strategy, yet the exit strategy plays a crucial role in determin-
ing the strategic direction. Founders must have a denitive exit strategy
before approaching investors, clearly reected in their business plan. An
entrepreneur’s exit is both a career choice as well as a liquidation of a nan-
cial investment.
1
This is called “harvesting.” Harvesting is the term used to describe a
major monetizing event from the business you created by taking the com-
pany public, selling it, merging with a larger company, outlicensing the
technology, etc. Waking up one day as a multimillionaire and exiting your
baby” is a life-changing event. Are you prepared?
336The Guide to Entrepreneurship: How to Create Wealth for Your Company
15.2 Start at the End
Money is not the only thing in life, but is way ahead of whatever
is second.”
Whether you are prepared, your investors want to know how they will
benet from their investment. Keep in mind that harvest refers to an event
where the venture continues while the entrepreneur exits as both manager
and major investor. Figure15.1 summarizes some of the common strategies
envisioned by founders prior to approaching potential investors.
15.2.1 Who Needs an Exit?
A nickel ain’t worth a dime anymore.” —Yogi Berra
Entrepreneurs are dismayed when venture capitalists install their own CEO
(and a new management team) just prior to going public. VCs generally
consider entrepreneurs as technically qualied, but lacking in business skills.
VCs argue that a public company requires seasoned business managers, not
creative geniuses.
Founder/entrepreneurs exit successful ventures because of four major factors:
1. Facing new organizational performance standards
2. Desiring to cash in on the value created
Harvesting Your Business
Preferred harvesting
method
VCs
Hedge funds
Founder(s)
Alternative
Strategies
• Licensing
• Franchising
• Strategic
partnerships
• Mergers
Founder(s)
leave with:
(1) a chunk
of cash
(2) stock
Taking
company
public
Being
acquired
Buy-out
Your Exit
Strategy
Figure 15.1 Start at the end—How do you personally intend to exit if successful?
Harvesting337
3. Desiring to change lifestyles
4. Desiring to become a serial entrepreneur
15.3 Capitalization Principles
“I have seen that déjà vu before.” —Yogi Berra
In business, capitalization means the following:
1. In accounting terms, it is where costs to acquire an asset are included in
the price of the asset.
2. The sum of a corporations stock, long-term debt, and retained earnings,
also known as “invested capital.
3. A company’s outstanding shares multiplied by its share price, bet-
ter known as “market capitalization.” For example
if a company has
1,000,000 shares and is currently trading at $10 a share, their market
capitalization is $10,000,000.
2
In general, there are six types of capital, as shown in Figure15.2.
15.3.1 How to Capitalize Your StartUp
The founders typically capitalize their “seed capital” activity by any of the
methods shown here:
Sweat equity (bootleg)
SBIR (Small Business Innovation Research grants)
Friends, Family, Fools (the 3 Fs)
e Six Types of Capital
Cash
Equity
Working capital (current assets – current liabilities)
Capital assets (aka fixed assets)
Invested capital (equity + long-term debt)
All assets (aka everything you own)
Figure 15.2 CapitalizationThe capitalization process from seed to IPO as a staged
series of events.
338The Guide to Entrepreneurship: How to Create Wealth for Your Company
Banks
Savings, second mortgage, etc.
Several additional capitalization rounds will be necessary. Figure15.3 is a
visual representation of the expected continuum, from seed to IPO.
Seed round. Earliest stage investment, usually undertaken by founders
or Friends and Family (FF). Typically less than $50,000 in a medical device
startup, or less than $1 million in a software company. Investment made to
validating market size, developing a business model, and producing a proto-
type product, thereby mitigating initial startup risks.
Series A round. The rst substantial public nancing event is usually
undertaken by Angel investors. Typically, it is in the range of $250K to $500K
for medical device companies and less than $5 million for a software com-
pany. Money is used to build working prototype and set up a beta site for
software companies.
Series B round. Often undertaken by venture capital, private equity,
and hedge funds to scale up operations, build up teams, and start sales
(software companies). Represents increased investor condence in the
Capitalization
Increased valuation
Execution
Private equity
Public equity
Seed
Series A
Series B
Mezzanine
Harvest
IPO
Sale
Venture capital
Angels
Founders, FF
Venture capital
Decreased risk
Figure 15.3 Capitalization at a glanceCapitalization “rounds” undertaken as the
entrepreneur executes on the business plan.

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