How A Startup's Equity Value Increased By Millions Through Venture Leasing

How A Startup's Equity Value Increased By Millions Through Venture Leasing

When Craig Berman finished his board presentation, he beamingly smiled. Berman, the CEO of a business that creates defense-related nanotechnology technologies, just completed a $20 million financing round. At an equity valuation that made the entire board blush, Berman closed the round. Just half a year prior, Berman's group encountered a severe technological setback that caused the business to behind three months. With just four months' worth of capital left over from an earlier financing round, the delay would accelerate cash burn for Berman's company and prevent it from meeting a crucial benchmark.
For Berman and his board, the idea of raising more equity sooner than planned and at a considerably lower price than projected was unsettling. As things seemed to be getting worse, the CFO of the company brought up the possibility of getting $1.5 million in venture financing. Of this funding, almost $600,000 would go into financing the current equipment. The remaining funds might be applied to future purchases of servers, software, test equipment, and workstations for computers.

Jerry Sprole had been introduced to the company's CFO, Jamal Waitley, by a coworker. Sprole is the CEO of Leasing Technologies International, a Connecticut-based leasing company that specializes in financing equipment for startups and developing growth businesses backed by venture capital. Waitley was able to get the funding in less than a month. Berman's company was able to function for three more months without requiring further stock thanks to funds from the sale and leaseback of current equipment and a leasing line for the purchase of new equipment. At least $5 million more was pre-money than it would have been when the company eventually closed its $20 million equity round. Berman's shareholders had actually made millions of dollars through venture leasing.
Similar to Berman's company, an increasing number of firms backed by venture capital are utilizing venture leasing to extend their infrastructure and increase equity value more quickly. What is venture leasing, and why is it becoming so appealing to entrepreneurs backed by venture capital? How is venture leasing being used by astute businesspeople to boost shareholder value? Examining this significant source of funding for venture capital-backed firms in greater detail is necessary in order to obtain the answers.
Equipment finance offered by equipment leasing companies to pre-profit, early-stage businesses supported by venture capital investors is referred to as venture leasing. Similar to Berman's company, these businesses require standard business supplies such computers, networking hardware, software, and equipment for R&D and production. These companies typically depend on outside funding until their business ideas are validated or they turn a profit.
In what part of the venture finance mix does venture leasing fit? The tale is revealed by the comparatively elevated expense of venture capital in contrast to venture leasing. Venture capitalists typically obtain significant stock holdings in the firms they finance as compensation for the risk they assume. Typically, they look for five to seven years' worth of investment returns of at least 35%. An IPO or other sale of their equity shares is how they get their rewards. Venture lessors, on the other hand, aim for a 15%–22% return. These transactions are secured by the underlying equipment and amortize over a period of two to four years. Even though venture lessors face a significant risk, they reduce it by arranging amortizing deals and holding a security interest in the leased equipment. Startup businesses have resorted to venture leasing as a major source of funding to support their growth and to accelerate the creation of equity value, taking advantage of the clear cost advantages of venture leasing over venture capital. Venture leasing offers entrepreneurs additional benefits beyond those associated with regular leasing. These benefits include cash conservation for working capital, cash flow management, flexibility, equipment obsolescence management, and supplementing other available resources.
How are transactions assessed by venture leasing companies? Venture lessors consider a number of criteria carefully. The quality of a new business's management team and venture capital backers are two essential components. The two groups appear to locate each other frequently. A strong management team typically has track records of accomplishments in the industry the new business is operating in. The better venture capitalists have shown track records of success and firsthand knowledge of the kinds of businesses they fund. The most successful venture capitalists specialize in particular areas, and many of them hire people who have firsthand expertise running the businesses they fund.
Once the management team and venture investors are deemed of high caliber, a venture lessor proceeds to assess the startup's business plan and prospective market. Throughout this assessment, the lessor takes into account inquiries like: Is there any sense to the business model? Is the good or service required? What is the size of the prospective market and who is the targeted customer? How much do goods and services cost? What are the anticipated earnings? What are the estimated expenses for the other projects and what are the production costs? Do these estimates seem plausible to you? How much cash is available and how long, based on forecasts, will it last the startup? When will the business require its next round of funding? These and similar inquiries assist the lessor in assessing the reasonableness of the company plan and model.
If a leasing company finances a startup, its biggest concern is whether it will have enough cash on hand to fund the business for the majority of the lease term. The lessor may incur losses on the deal if the enterprise is unable to secure further funding and runs out of money. The majority of seasoned venture capitalists demand that a startup have at least nine months' worth of cash on hand before moving forward in order to reduce this risk. Venture lessors often approve firms who have received at least $5 million in venture capital and haven't used up a sizable chunk of it yet.
Where may entrepreneurs go to obtain venture financing? A few national leasing companies that focus on venture leasing make up part of the startup infrastructure. These companies, like the Connecticut-based lessor that Waitley was introduced to, are skilled at structuring, pricing, and documenting contracts, conducting due diligence, and guiding start-up businesses through their ups and downs.
The majority of venture lessors provide startups leases under credit lines so that clients can plan several takedowns during the year. These lease lines normally have a range of up to $5,000,000, based on the venture capital backing level, predicted growth, and start-up needs. Better venture lease companies also help clients find other resources to help them grow, either directly or indirectly. The best venture lessors offer value-added services such as assisting clients in finding better prices on equipment, setting up takeouts of existing equipment, locating temporary CFOs, locating additional working capital funding, and introducing clients to potential strategic partners.
Several venture capital-backed firms are learning that venture leasing may be used to leverage venture capital to increase shareholder value, even though Craig Berman's story is merely an example based on a real transaction. These firms can then use the venture cash they have raised to fund expansion initiatives that create value for the enterprise, such as hiring managerial personnel, developing new products, and increasing marketing campaigns. Numerous astute entrepreneurs are beginning to take notice of venture leasing, which is quickly becoming a popular form of start-up funding. It is more affordable than venture capital, doesn't need board representation or management control to be lost, and typically results in little to no equity dilution.
ZZZZZZ

Location:

Share :