Financing 101 Part 1

Duke The Fuqua School of Business
Duke Entrepreneurship Education Series
November 5, 2009
Financing 101

Rich, currently is the CEO of Advanced Liquid Logic, which is actually his third start-up company where he served as the CEO.  Advanced Liquid Logic, the technology comes from a Duke spinout and it’s exploiting a novel microfluidics technology that the company is applying to medical diagnostics and other markets.

It’s a very interesting thing.  They are taking the concept of a lab on a chip with a big monster-type of machine and putting it on a lab on a chip that you can fit in your pocket.  It really is just a small-type of component that you can carry around basically.

This is interesting for us and specifically for this talk for Financing because Rich, with this company, has raised over $25 million without any type of traditional VC funding involved.  But before Advanced Liquid Logic, Rich was the founder and CEO of TriVirix, which is a medical equipment contract manufacturer.  Again, also a lot of great things going on in the financial side,  with Rich there where he raised over $40 million in private capital and completed three different acquisitions.  But it all started when he was here, back at Duke and he completed his Engineering degree.  He would go on and spend 15 years in aerospace industry and even serving for four years as a commissioned officer in the US Air Force.

An interesting link that, sort of a funny tidbit, I realized when speaking with Rich was that while he was working in aerospace, he worked on a missile, that 202 Bravo that I have actually fired from, when I served during my time in the military.

We will not talk about any missiles or things like that tonight, but we will have Rich come up and we will get some good information that might be able to help you with your start-up company and getting it financed.  Thanks, Rich.

So, the outline of the talk is very basically talk a little bit about how much money do you need, where and how do you get it and then I’ll walk through a couple of the companies I’ve been involved with by way of case study of where did we get our money and how did we get it.

The first is apologies for gross generalizations and wholesale simplifications with things like how does equity financing work?  You know, that’s a course, not a five minutes.  I do have a couple of charts and you know, this is definitely introductory on that and other topics and I do have opinions and I will act like I knew all the answers, I don’t but after a couple semesters teaching over in the MEM program on Entrepreneurship, I have to act like a know it.   Then I was obviously not solely responsible for either raising the money or the success or the failure of the companies that I have been involved in.  It always takes a village to make these things work.

Anyway, I like to think of everything as a process, financial resource development process in this case.  So start here by defining what you need.  Find some alternatives for getting it.  Make a plan and test that with people that know a little bit about it and make it happen.  Then, you go and do something else for a while.  I think, as an entrepreneur, what you find out is there are always too many things to do that you have time for and you sort of, cycle your way through raising money, securing the intellectual property, developing the product, building the team, raising the money and around and around.  Fortunately, raising money usually comes in lumps.  If you’re lucky, big lumps and you don’t have to worry about it for a while, but it’s not something that goes away because generally, people won’t give you all the money you need at one time.  It is an episodic kind of thing.  So that’s the process.

Now, how much do you need?  It varies a lot by the type enterprise that you trying to start.  Minimum investment here for a Mac laptop and several weeks of pizza and Coca-cola, you can develop a Web 2.0 business.  If you want to get in therapeutics, a pharmaceutical in the market, you might be talking about a billion dollars.  In between there, you have everything else.

I’m currently involved in medical diagnostic technology.  We are probably looking at $25 – $30 million to get our product on the market.  It does take capital.  That doesn’t mean that that’s what you need to start.   All you need is guts to start, but it does mean that to get something on the market, you know that you got to need money on this order for these kinds of businesses.

Financing 101 Pt. 1
finance expert witness

Banking and The Financial Markets Pt 4

So now we had  paper money that could not be redeemed into gold anymore and now central banks can produce any liquidity necessary to save the fractional reserve banking system in a recession and in a banking panic. However, there still remains a limit to inflation since not all central banks inflate in the same rhythm.

Some central banks inflate faster than others and when they do this, they inflate faster than others, there is an embarrassing devaluation or depreciation of the currency.  It can harm financial corporations, international corporations.  It is also a clear sign to the population that there is something wrong, that the currency has less value everyday and the population may want to adopt foreign currency.

So the different rhythms in inflation is a problem for central banks.  For example the German bank inflated to additionally less than other central banks such as that of France.  That is the reason why it was then brought under control through the ECB.  This is the logical end of the monetary interventionism in the financial system.  The central bank has an incredible amount of power.  It would be impossible to assume in a free society.  While communism collapsed in 1989-1990, the central piling still continues.  The Fed and the ECB exert total control on the monetary system.  They have the part to create money at their will.  And this is important because the welfare of the state depends on this, on this monopoly.  On money.

So now I would like to do another thought experiment with you.  Imagine that you have the power the federal reserve has.  You would be the only person that can produce money.  Let’s say you can just print it with your computer or more simply you can access your online bank account and you can put any number in it and everybody would have to accept the money you produce.  Then you would have a power that is comparable to the ring in Lord of the Rings.  Would you use this power?  You know the ring is almost irresistible.  Temptation is almost irresistible.  In fact Gandalf didn’t want the ring.

Actually you might want to do something good with it but the result of the setup always  would be a permanent flow of goods and services to you, your friends and your family.  And of course these would lead to a tendency for prices to increase.  For example, if you want to buy a BMW, you just produce new money.  If you had not produced the additional money so prices have built up.  Now you get the BMW, the other person doesn’t and then the dealer has more money and the dealer may want to buy a coat for his wife, bidding up prices of coats and the coat producer’s income is higher and then he starts spending and gradually, as I explained yesterday, the new money extends through the economy increasing prices and changing the stream of goods and services towards the first receivers of the new money.

So the power of the printing press is virtually irresistible but you have to be very careful not to overdo it for several reasons.  People might start to resist the scheme and try to destroy your power when they see that you just have to print money and you get rich and they get poorer all the time, they may revolt.  So before it gets to this point,  you may want to restrict your money production.  What can you do besides?  Well you can try to get important and powerful allies in the establishment.  So let establishments participate in the scheme by channelling some money into their pockets, make them dependent on the system and make them dependent on the continual increase in the money supply.  Then the establishment will always support you and the monetary system in itself, they will use that power and influence also in the media to support the system.

What can you do further?  Well there are other means of diluting the source of unrest and resistance so you could develop a strategy to consider the money creation and create diversions.  So you may transfer the new money through several steps in a very complicated system whose mechanisms are very hard to grasp.  You may also try to convince people that actually this scheme is good for them.  Yeah you may say what you are doing is actually you are stabilizing the price level or you are altruistically trying to spawn employment which by the way are the two official goals of the Federal Reserve – to stabilize the price level and to increase employment.  People may actually start to like you, claim that without you the financial system will collapse.  One point is that in your arguments, you should always concentrate on one effect of your monetary increase in the money supply that is lower interest rates at the reasonable level.

Banking and Financial Markets | Philipp Bagus