Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Chapter 10

Getting Funding or Financing Bruce R. Barringer R. Duane Ireland

Raising Money for a New Venture

GOfor it!

Entrepreneurs tend to go about the task of raising capital haphazardly because they lack experience in this area

it’s all about the

Benjamin’s

• Inventory • Hiring,

Training & Paying Employees

• Other: • Deposits • Advertising

• Product Development Costs.

• Unanticipated Expenses

• Acquiring Real Estate

• Buying

• Leasing

• Equipment.

• Transportation

Cash Flow Challenges

Capital Investment

Lengthy Products

Development Cycles

New Ventures Funding Required

Alternatives for Raising Capital for a New Venture

Equity

Debt

Equity

Family

Yourself

Personal Funds

Equity Capital

Find Stockholders

Find Venture Capitalist

Find Angel

InvestorsFriendsStartup Partners

Creative Sources

Funding through: • Creativity • Ingenuity • Thriftiness • Cost cutting, • Any means

necessaryCrowdfunding

Buying used instead of

new equipment

Coordinating purchases with other businesses

Leasing equipment

instead of buying

Obtaining payments in advance from

customers

Minimizing personal expenses

Avoiding unnecessary

expenses

Buying items cheaply but

prudently via options such as eBay

Sharing office space or employees

with other businesses

Hiring interns

Examples of Bootstrapping Methods

Step 1

Step 2

Step 3

Determine how much money is needed

Determine the type of funding that is most appropriate

Develop a strategy for engaging potential investors and/or bankers

Preparing to Raise Debt or Equity Financing

Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding

• A brief, carefully constructed statement that outlines the merits of a business opportunity.

• Many occasions when elevator speech might come in handy.

• Most elevator speeches are 45 seconds to 2 minutes long.

Elevator Speech

Why limit yourself or imagination to elevators? You need to think of it as your anywhere pitch.

Follow these simple steps:

• Explain how your new business will make a difference, but do it in an entertaining fashion.

• Show off your expertise in a personable way, highlight your experience and your team's strengths, and ground your idea with simple, realistic messages.

• Do not use jargon.

• Most importantly, pitch quickly. You never know – the person you are pitching may have an elevator to catch.

Step 1 Describe the opportunity or problem that needs to be solved. 20 seconds

Step 2Describe how your product meets the opportunity or solves the problem.

20 seconds

Step 3 Describe your qualifications. 10 seconds

Step 4 Describe your market. 10 seconds

Total 60 seconds

Preparing an Elevator (Anytime) Speech

Sources of Equity Funding

Angel Investors

Venture Capitalist

Initial Public Offering (IPO)

provided to early-stage, high-potential, high risk, growth startup companies.

affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time

• Money that is invested by venture capital firms in start-ups & small businesses with exceptional growth potential.

• About 800 venture capital firms in U.S.

• Venture capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms.

• The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.

• The investors who invest in venture capital funds are called limited partners. The venture capitalists are called general partners.

Venture Capital

• Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan.

• VC are looking for the “home run” and so reject the majority of the proposals they consider.

• VC fund between 3,000 and 4,000 companies per year, compared to about 62,000 per year for business angels.

Fund very few entrepreneurial firms in comparison to business angels.

Venture Capitalist

Venture capital investing sets new lows in Florida

Robert Trigaux, Times Business Columnist

Wednesday, January 23, 2013 5:15pm

• Venture capitalists put $26.5 billion in 3,698 U.S. deals in 2012, says the MoneyTree report.

• Florida captured just $203 million in 34 deals whiich was less than 1 percent of the deals and dollars invested nationwide.

• An important part of obtaining venture capital funding is going through the due diligence process.

• Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time.

• Some venture capitalists also specialize in certain “stages” of funding.

Venture Capitalist

SmartQuote:

As a VC (and in general as a human being), I'm looking for someone coachable, humble, ambitious, and filled with vision." -- Josh Linkner, entrepreneur and venture capitalist, writing at Inc. online.

• The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the start-up process.

• The number of angel investors in the U.S. has increased dramatically over the past decade.

Are individuals who invest their personal capital directly in start-ups.

Angel Investors

Median angel funding 1st Q 2013 $680K

• Willingness to make relatively small investments

• Generally between $10,000 & $500,000.

• Seek companies that have the potential to grow between 30% to 40% per year.

Angel Investors

Angels Difficult to Find

Florida Angels

Local Angels

• Company’s first sale of stock to the public.

• Going public when stock is traded on one of the stock exchanges.

• Most entrepreneurial firms go to the NASDAQ

• Typically, a firm is not able to go public until it has demonstrated that it is viable & has a bright future.

Initial Public Offering (IPO

Reason 1

Reason 2

Reason 3

Reason 4

Way to raise equity capital to fund current and future operations.

Raises a firm’s public profile, making it easier to attract high-quality customers and business partners.

Is a liquidity event that provides a means for a company’s investors to recoup their investments.

Creates a form of currency that can be used to grow the company via acquisitions.

Initial Public Offering (IPO)Reasons that Motivate Firms to Go Public

Commercial Banks

SBA Guaranteed

LoansDebt

Financing

Other LoansMicro Loans

Commercial Banks

• Commercial banks NOT practical source start-up financing.

• Banks are risk averse, and financing start-ups is a risky business.Banks interested in firms with: • Strong cash flow • Low leverage • Audited financials • Good management • Healthy balance sheet.

• Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.

• The program operates through private-sector lenders who provide loans that are guaranteed by the SBA.

• The loans are for small businesses that are not able to obtain credit elsewhere.

The SBA Guaranteed Loan Program

Primary Program is the 7(A) Loan Guarantee

• SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000

Size & Types of SBA Loans

• Eligibility Requirements

• SBA guaranteed loan

• Primarily existing small business loans

• Start-ups should examine.

Other Loans

Trade/Vendor Credit

Vendor makes Loan for

Purchase 2/10, n/30

Factoring Selling

Accounts Receivables (AR) to third party for a discount

Credit Cards High Interest

Sources of Debt

Financing

LendingTransactions occur directly

between individuals

Not Really Debt

FinancingPeople pool their money to support a start-up or other initiative, usually in return for some sort of amenity rather than loan

SBIR and STTR Grant

Programs

Leasing

Strategic Partners

Other Grant Programs

Additional Creative Sources of Financing or Funding

Strategic Partners• Share the costs of

product or service development, to gain access to particular resources, or to facilitate new product development and/or speed to market

• Established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.

Capital Access

Sources Grants for Early Stage Funding

for Primarily Technology Firms

SBIR Three-Phase Grant Program

• The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

• Most leases involve a modest down payment and monthly payments during the duration of the lease.

A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

Leasing

Other Grants Program

• Venture Capital • Angels • IPO

• Commercial Bank • Credit Unions • SBA Loan

• Grants • STTR/SBIR • EDC • Other

Grants/Subsidy

Equity

Debt

Need to Make Presentations