abdm4223 lecture week 11 130712

Getting Funding andGetting Funding andFinancingFinancing

Getting Funding andGetting Funding andFinancingFinancing

ABDM4233 ENTREPRENEURSHIPABDM4233 ENTREPRENEURSHIP

byStephen OngStephen Ong

Principal Lecturer (Specialist)Principal Lecturer (Specialist)Visiting Professor, Shenzhen UniversityVisiting Professor, Shenzhen University

FINANCIAL FINANCIAL

MILESTONEMILESTONESS

BUSINESBUSINESS MODELS MODEL

The 360° CUBE PitchThe 360° CUBE Pitch

Six Posters in a 6 minute Investor Pitch

SOCIAL SOCIAL PROBLEMPROBLEM

VISION & VISION & MISSIONMISSION

MARKETINMARKETING & SALESG & SALES

OPERATIONS OPERATIONS TEAM & KEY TEAM & KEY PARTNERSPARTNERS

360° Business CUBE360° Business CUBE1.1. The Problem : How BIG is the problem?The Problem : How BIG is the problem?2.2. The Solution : Our Social Enterprise’s The Solution : Our Social Enterprise’s

Vision & Mission Vision & Mission 3.3. The Business Model : Getting the JOB done The Business Model : Getting the JOB done

for the Customer Segmentsfor the Customer Segments

4.4. Marketing & Sales (and Fundraising)Marketing & Sales (and Fundraising)5.5. The Team & Key PartnersThe Team & Key Partners

6.6. The Financial Plan : Goals The Financial Plan : Goals and objectives, with a and objectives, with a timeline (Milestones)timeline (Milestones)

CUBE : Preparing a Promo VideoCUBE : Preparing a Promo Video

Part 1

Part 2

Part 3

CUBE

Total

60 seconds

60 seconds

60 seconds

180 seconds

360 seconds

Describe the opportunity or problem that needs to be solved.

Describe your mission and how your product meets the opportunity or solves the problem.

Ask your audience for their support.

Describe your organisation, qualifications and future plans

CUBE : Preparing An Elevator SpeechCUBE : Preparing An Elevator Speech1 of 21 of 2

Purpose

• An elevator speech is a brief, carefully constructed statement that outlines the merits of amerits of a business opportunitybusiness opportunity.• There are many occasions when a carefully constructed elevator speech might come in handy.• Most elevator speeches are 45 seconds to 2 minutes 2 minutes long.

Elevator Speech

CUBE : Preparing an Elevator SpeechCUBE : Preparing an Elevator Speech2 of 22 of 2

Step 1

Step 2

Step 3

Step 4

Total

20 seconds

20 seconds

10 seconds

10 seconds

60 seconds

Describe the opportunity or problem that needs to be solved.

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

Describe your qualifications.

Describe your market.

X-Factor Test for X-Factor Test for Venture Capital InvestorVenture Capital Investor

1.1. Quality of Management TeamQuality of Management Team

2.2. Size of marketSize of market

3.3. Product qualities (uniqueness, brands, Product qualities (uniqueness, brands, patents)patents)

4.4. Intensity of competitionIntensity of competition

5.5. Market growth rateMarket growth rate

6.6. Barriers to entryBarriers to entry

7.7. Company’s stage of developmentCompany’s stage of development

8.8. Industry where company isIndustry where company is

Breakeven AnalysisBreakeven Analysis Breakeven point - the level of operation Breakeven point - the level of operation

at which a business neither earns a at which a business neither earns a profit nor incurs a loss. profit nor incurs a loss.

A useful planning tool because it shows A useful planning tool because it shows entrepreneurs minimum level of activity entrepreneurs minimum level of activity required to stay in business.required to stay in business.

With one change in the breakeven With one change in the breakeven calculation, an entrepreneur can also calculation, an entrepreneur can also determine the sales volume required to determine the sales volume required to reach a particular profit target.reach a particular profit target.

Calculating the Breakeven PointCalculating the Breakeven Point

Step 1.Step 1. Determine the expenses the business can Determine the expenses the business can expect to incur.expect to incur.

Step 2.Step 2. Categorize the expenses in step 1 into fixed Categorize the expenses in step 1 into fixed expenses and variable expenses.expenses and variable expenses.

Step 3.Step 3. Calculate the ratio of variable expenses to Calculate the ratio of variable expenses to net sales. Then compute the contribution net sales. Then compute the contribution margin:margin:

Contribution Margin = Contribution Margin = 1 - 1 - Variable ExpensesVariable ExpensesNet Sales EstimateNet Sales Estimate

Step 4.Step 4. Compute the breakeven Compute the breakeven point:point:

Breakeven Point Breakeven Point ($)($)

= = Total Fixed Costs Total Fixed Costs Contribution MarginContribution Margin

Calculating the Breakeven Point:Calculating the Breakeven Point:The Magic ShopThe Magic Shop

Step 1.Step 1. Net Sales estimate is $950,000 with Net Sales estimate is $950,000 with Cost of Goods Sold of $646,000 and total Cost of Goods Sold of $646,000 and total expenses expenses of $236,500. of $236,500.

Step 2.Step 2. Variable Expenses: $705,125 Variable Expenses: $705,125Fixed Expenses: $177,375Fixed Expenses: $177,375

Step 3.Step 3. Contribution margin: Contribution margin:

Contribution Margin = Contribution Margin = 1 - 1 - $705,125$705,125$950,000$950,000

StepStep 4. 4. Breakeven Point:Breakeven Point:

Breakeven PointBreakeven Point$$

= = $177,375$177,375

.26.26

= .26= .26

= $682,212= $682,212

FIGURE 11.8 Break-Even Chart for the Magic Shop

Raising CapitalRaising Capital

Raising capital to launch or expand Raising capital to launch or expand a business is a challenge.a business is a challenge.

Many entrepreneurs are caught in a Many entrepreneurs are caught in a “credit crunch.”“credit crunch.”

Financing needs in the Financing needs in the $100,000 to $3 million $100,000 to $3 million range may be the most range may be the most challenging to fill.challenging to fill.

The “Secrets” to The “Secrets” to Successful FinancingSuccessful Financing

1.1. Choosing the right sources of capital is a Choosing the right sources of capital is a decision that will influence a company for decision that will influence a company for a lifetime.a lifetime.

2.2. The money is out there; the key is The money is out there; the key is knowing where to look.knowing where to look.

3.3. Raising money takes time and effort. Raising money takes time and effort.

4.4. Creativity counts. Entrepreneurs have to Creativity counts. Entrepreneurs have to be as creative in their searches for capital be as creative in their searches for capital as they are in developing their business as they are in developing their business ideasideas. .

The “Secrets” to The “Secrets” to Successful FinancingSuccessful Financing

5.5. The Internet puts at entrepreneur’s The Internet puts at entrepreneur’s fingertips vast resources of information fingertips vast resources of information that can lead to financing. that can lead to financing.

6.6. Be thoroughly prepared before Be thoroughly prepared before approaching lenders and investors. approaching lenders and investors.

7.7. Entrepreneurs should not underestimate Entrepreneurs should not underestimate the importance of making sure that the the importance of making sure that the “chemistry” among themselves, their “chemistry” among themselves, their companies, and their funding sources companies, and their funding sources is good. is good.

(continued)

The Importance of Getting Financing or The Importance of Getting Financing or FundingFunding

The Nature of the Funding and Financing ProcessThe Nature of the Funding and Financing Process Few people deal with the process of raising investment Few people deal with the process of raising investment

capital until they need to raise capital for their own capital until they need to raise capital for their own firm.firm.

As a result, many entrepreneurs go about the task of raising As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area.capital haphazardly because they lack experience in this area.

Why Most New Ventures Need FundingWhy Most New Ventures Need Funding There are three reasons most new ventures need to There are three reasons most new ventures need to

raise money during their early life.raise money during their early life. The three reasons are shown on the following slide.The three reasons are shown on the following slide.

Why Most New Ventures Need Why Most New Ventures Need Financing or FundingFinancing or Funding

Alternatives for Raising Money for a Alternatives for Raising Money for a New VentureNew Venture

Personal Funds Equity Capital

Debt Financing Creative Sources

Financing a BusinessFinancing a Business

Entrepreneurs must cast a Entrepreneurs must cast a wide net to capture the wide net to capture the financing they need to financing they need to launch their businesses.launch their businesses.

Layered financing – piecing Layered financing – piecing together capital from together capital from multiple sources. multiple sources.

Three Types of CapitalThree Types of Capital

1.1. FixedFixed - Used to purchase the permanent - Used to purchase the permanent or fixed assets of the business (e.g., or fixed assets of the business (e.g., buildings, land, equipment, and others).buildings, land, equipment, and others).

2.2. WorkingWorking - Used to support the small - Used to support the small company's normal short-term operations company's normal short-term operations (e.g., buy inventory, pay bills, wages, or (e.g., buy inventory, pay bills, wages, or salaries, and others).salaries, and others).

3.3. GrowthGrowth - Used to help the small business - Used to help the small business expand or change its primary direction.expand or change its primary direction.

Capital is any form of wealth employed Capital is any form of wealth employed to produce more wealth for a firm.to produce more wealth for a firm.

Equity CapitalEquity Capital Represents the personal investment of Represents the personal investment of

the owner(s) in the business.the owner(s) in the business. Is called Is called risk capital risk capital because investors because investors

assume the risk of losing their money if assume the risk of losing their money if the business fails.the business fails.

Does Does notnot have to be repaid have to be repaid with interest like a loan does.with interest like a loan does.

Means that an entrepreneur Means that an entrepreneur must give up some ownership must give up some ownership in the company to outside investors.in the company to outside investors.

Debt CapitalDebt Capital

Must be repaid with interest.Must be repaid with interest. Is carried as a liability on the Is carried as a liability on the

company’s balance sheet.company’s balance sheet. Can be just as difficult to secure as equity Can be just as difficult to secure as equity

financing, even though sources of debt financing, even though sources of debt financing are more numerous.financing are more numerous.

Can be expensive, especially for small Can be expensive, especially for small companies, because of the risk/return companies, because of the risk/return tradeoff.tradeoff.

Sources of Equity FinancingSources of Equity Financing

Personal savingsPersonal savings Friends and family membersFriends and family members AngelsAngels PartnersPartners Venture capital companiesVenture capital companies Corporate venture capitalCorporate venture capital Public stock sale – “going public” Public stock sale – “going public” Simplified registrations and exemptionsSimplified registrations and exemptions

(continued)

Sources of Personal FinancingSources of Personal Financing1 of 21 of 2

Personal FundsPersonal Funds The vast majority of founders The vast majority of founders

contribute personal funds, along contribute personal funds, along with sweat equity, to their ventures.with sweat equity, to their ventures.

Sweat equity represents the value of Sweat equity represents the value of the time and effort that a founder puts the time and effort that a founder puts into a new venture.into a new venture.

Friends and FamilyFriends and Family Friends and family are the second Friends and family are the second

source of funds for many new source of funds for many new ventures.ventures.

Personal SavingsPersonal Savings

The The firstfirst place an entrepreneur should place an entrepreneur should look for money. look for money.

The most common source The most common source of equity capital for starting of equity capital for starting a business.a business.

Outside investors and lenders expect Outside investors and lenders expect entrepreneurs to put some of their entrepreneurs to put some of their own capital into the business own capital into the business beforebefore investing theirs.investing theirs.

Friends and Family MembersFriends and Family Members

After emptying their own pockets, After emptying their own pockets, entrepreneurs should turn to entrepreneurs should turn to those most likely to invest in the those most likely to invest in the business: friends and family business: friends and family members.members.

Be careful! Inherent dangers Be careful! Inherent dangers lurk in family/friendly business lurk in family/friendly business deals, deals, especiallyespecially those that flop. those that flop.

Friends and Family MembersFriends and Family MembersGuidelines for family and friendship financing:Guidelines for family and friendship financing: Consider the impact of the investment on everyone Consider the impact of the investment on everyone

involved.involved. Keep the arrangement “strictly business.”Keep the arrangement “strictly business.” Prepare a business plan. Prepare a business plan. Settle the details up front.Settle the details up front. Never accept more than investors Never accept more than investors

can afford to lose. can afford to lose. Create a written contract.Create a written contract. Treat the money as “bridge financing.” Treat the money as “bridge financing.” Develop a payment schedule that suits both parties. Develop a payment schedule that suits both parties. Have an exit plan. Have an exit plan.

Sources of Personal FinancingSources of Personal Financing2 of 22 of 2

BootstrappingBootstrapping A third source of seed money for a A third source of seed money for a

new venture is referred to as new venture is referred to as bootstrapping.bootstrapping.

Bootstrapping is finding ways to avoid Bootstrapping is finding ways to avoid the need for external financing or the need for external financing or funding through creativity, ingenuity, funding through creativity, ingenuity, thriftiness, cost cutting, or any means thriftiness, cost cutting, or any means necessary.necessary.

Many entrepreneurs bootstrap out of Many entrepreneurs bootstrap out of necessity.necessity.

Examples of Bootstrapping MethodsExamples of Bootstrapping Methods

Buying used instead ofnew equipment

Coordinating purchaseswith other businesses

Leasing equipment instead of buying

Obtaining payments inadvance from

customers

Minimizing personalexpenses

Avoiding unnecessaryexpenses

Buying items cheaply butprudently via options

such as eBay

Sharing office spaceSharing office space or employees with or employees with Other businessesOther businesses

HiringHiring internsinterns

Preparing to Raise Debt or Equity Preparing to Raise Debt or Equity FinancingFinancing

1 of 31 of 3

Equity Funding Debt Financing

Means exchanging partial ownership in a

firm, usually in the form of stock, for

funding

Is getting a loan

Preparing to Raise Debt or Equity Preparing to Raise Debt or Equity FinancingFinancing

2 of 32 of 3Two Most Common Alternatives

10-30

Preparing to Raise Debt or Equity FinancingPreparing to Raise Debt or Equity Financing3 of 33 of 3

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

Sources of Equity FundingSources of Equity Funding

Venture Venture CapitalCapital

Business Business AngelsAngels

Initial Public Initial Public OfferingsOfferings

Business AngelsBusiness Angels1 of 21 of 2

Business AngelsBusiness Angels Are individuals who invest their Are individuals who invest their

personal capital directly in start-ups. personal capital directly in start-ups. The prototypical business angel is The prototypical business angel is

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

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

Business AngelsBusiness Angels2 of 22 of 2

Business Angels (continued)Business Angels (continued) Business angels are valuable because of their Business angels are valuable because of their

willingness to make relatively small investments. willingness to make relatively small investments. These investors generally invest between $10,000 These investors generally invest between $10,000

and $500,000 in a single company.and $500,000 in a single company. Are looking for companies that have the potential to Are looking for companies that have the potential to

grow between grow between 30% to 40% per year30% to 40% per year.. Business angels are difficult to find. Business angels are difficult to find.

Business AngelsBusiness Angels Wealthy individuals who invest in emerging Wealthy individuals who invest in emerging

entrepreneurial companies in exchange for entrepreneurial companies in exchange for equity )ownership) stakes.equity )ownership) stakes.

An excellent source of “patient money” for An excellent source of “patient money” for investors needing relatively small amounts of investors needing relatively small amounts of capital typically ranging from capital typically ranging from

$100,000 $100,000 (sometimes less) to as (sometimes less) to as

much as $5 million.much as $5 million. Willing to invest in the early stages of a Willing to invest in the early stages of a

business. business.

Business AngelsBusiness Angels An estimated 258,000 angels across the U.S. An estimated 258,000 angels across the U.S.

invest $26 billion a year in 57,000 small invest $26 billion a year in 57,000 small companies. companies.

Their investments exceed those of venture Their investments exceed those of venture capital firms, providing more capital to 15 capital firms, providing more capital to 15 times as times as many small companies.many small companies.

Angels fill a gap in the seed capital market, Angels fill a gap in the seed capital market, specifically in the $10,000 to $2 million range.specifically in the $10,000 to $2 million range.

Business AngelsBusiness Angels

Average angel investment = Average angel investment = $50,000$50,000..

Typical angel invests in 1 company per year, Typical angel invests in 1 company per year, and the average time to close a deal is 67 and the average time to close a deal is 67 days. days.

52% of angels’ investments lose money, but 52% of angels’ investments lose money, but 7% produce a return more than 10 times their 7% produce a return more than 10 times their original investment. original investment.

Angels can be an excellent source of Angels can be an excellent source of “patient” money. “patient” money.

Business AngelsBusiness Angels

The Challenge: Finding Them! The Challenge: Finding Them! NetworkNetwork Look nearby: within a 50- to 100-mile Look nearby: within a 50- to 100-mile

radiusradius 7 out of 10 angels invest in companies that 7 out of 10 angels invest in companies that

are within 50 miles of their homes or are within 50 miles of their homes or offices. offices.

Informal angel “clusters” and networksInformal angel “clusters” and networks 265 angel groups across the U.S. 265 angel groups across the U.S. Internet Internet

FIGURE 13.1 Angel Financing Source: Center for Venture Financing, Whittemore School of Business, University of New Hampshire, www.unh.edu/cvr.

Venture CapitalVenture Capital1 of 31 of 3

Venture CapitalVenture Capital Is money that is invested by venture capital firms in Is money that is invested by venture capital firms in

start-ups and small businesses with exceptional growth start-ups and small businesses with exceptional growth potential. potential.

There are about 800 venture capital firms in the U.S.There are about 800 venture capital firms in the U.S. Venture capital firms are limited partnerships of money Venture capital firms are limited partnerships of money

managers who raise money in “funds” to invest in start-ups managers who raise money in “funds” to invest in start-ups and growing firms. and growing firms.

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

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


Venture Capital (continued)Venture Capital (continued) Venture capital firms fund very few Venture capital firms fund very few

entrepreneurial firms in comparison to business entrepreneurial firms in comparison to business angels. angels.

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

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

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


Venture Capital (continued)Venture Capital (continued) An important part of obtaining An important part of obtaining

venture capital funding is going venture capital funding is going through the due diligence through the due diligence process.process.

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

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

FIGURE 13.2 Venture Capital FundingSource: Based on PriceWaterhouseCoopers

http:/www.pwcmoneytree.com.

Venture Capital CompaniesVenture Capital Companies More than 740 venture capital firms More than 740 venture capital firms

operate across the U.S. operate across the U.S. Most venture capitalists seek Most venture capitalists seek

investments in the $3 million to $10 investments in the $3 million to $10 million range million range

Target companies with high-growth and Target companies with high-growth and high-profit potential. high-profit potential.

Business plans are subjected to an Business plans are subjected to an extremelyextremely rigorous review - less than 1% rigorous review - less than 1% accepted.accepted.

Venture Capital CompaniesVenture Capital Companies

Most often, venture capitalists invest in Most often, venture capitalists invest in a company across several stages.a company across several stages.

On average, 98% of venture capital goes On average, 98% of venture capital goes to:to: Early stage investments (companies in Early stage investments (companies in

the early stages of development).the early stages of development). Expansion stage investments (companies Expansion stage investments (companies

in the rapid growth phase).in the rapid growth phase). Only 2% of venture capital goes to Only 2% of venture capital goes to

businesses in the startup or seed phase. businesses in the startup or seed phase.

(continued)

Corporate Venture CapitalCorporate Venture Capital

About 300 large corporations across About 300 large corporations across the globe invest in start-up companies.the globe invest in start-up companies.

Approximately 6 to 8% of all venture Approximately 6 to 8% of all venture capital invested is from corporations. capital invested is from corporations.

Capital infusions are just one benefit; Capital infusions are just one benefit; corporate partners may share corporate partners may share marketing and technical expertise. marketing and technical expertise.

FIGURE 13.4FIGURE 13.4 Angel Investing and Venture Angel Investing and Venture Capital InvestingCapital Investing

Source:Source: Robert Wiltbank and Warren Bocker, Robert Wiltbank and Warren Bocker, Returns to Angel Investors in Returns to Angel Investors in GroupsGroups, Angel Capital Education , Angel Capital Education Foundation, Foundation, http://www.kauffman.org/Details.aspx?id=1032http://www.kauffman.org/Details.aspx?id=1032, ,

and PWC Moneytree Report, Pricewaterhouse and PWC Moneytree Report, Pricewaterhouse Coopers, Coopers, https://www.pwcmonnneytree.com/MTPublic/nc/indes.jsphttps://www.pwcmonnneytree.com/MTPublic/nc/indes.jsp..

What Do Venture CapitalWhat Do Venture CapitalCompanies Look For?Companies Look For?

Competent managementCompetent management Competitive edgeCompetitive edge Growth industryGrowth industry Viable exit strategyViable exit strategy Intangibles factorsIntangibles factors

FIGURE 13.5Which Factors Are Most Important Which Factors Are Most Important to Venture Capitalists?to Venture Capitalists?Source: Dee Powers and Brian E. Hill, Venture Capital Survey, The

Capital Connection, http//www.capital-connection.com/survey-value.html.

Initial Public OfferingInitial Public Offering1 of 31 of 3

Initial Public OfferingInitial Public Offering An initial public offering (IPO) is a company’s An initial public offering (IPO) is a company’s

first sale of stock to the public. When a company first sale of stock to the public. When a company goes public, its stock is traded on one of the major goes public, its stock is traded on one of the major stock exchanges.stock exchanges.

Most entrepreneurial firms that go public trade on Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks. technology, biotech, and small-company stocks.

An IPO is an important milestone for a firm. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has Typically, a firm is not able to go public until it has demonstrated that it demonstrated that it is viable and has a bright is viable and has a bright future.future.

Going PublicGoing Public Initial public offering Initial public offering

(IPO) - when a (IPO) - when a company raises capital company raises capital by selling shares of its by selling shares of its stock to the public for stock to the public for the first time. the first time.

Since 2000, the average Since 2000, the average number of companies number of companies making IPOs each year making IPOs each year is 173.is 173.

Few companies with Few companies with less than $25 million in less than $25 million in annual sales make annual sales make IPOs. IPOs.

FIGURE 13.6 Initial Public Offerings (IPOs) Initial Public Offerings (IPOs) Source: Thompson Financial Securities Data.

Reason 1Reason 1 Reason 2Reason 2

Is a way to Is a way to raise equity raise equity

capital to fund capital to fund current and current and

future future operations.operations.

Raises a firm’s Raises a firm’s public profile, public profile,

making it easier to making it easier to attract high-quality attract high-quality

customers and customers and business partners. business partners.


Reasons that Motivate Firms to Go PublicReasons that Motivate Firms to Go Public

Reason 3Reason 3 Reason 4Reason 4

Is a liquidity event Is a liquidity event that provides a that provides a

means for a means for a company’s company’s

investors to recoup investors to recoup their investments.their investments.

Creates a form Creates a form of currency that of currency that can be used to can be used to

grow the grow the company via company via acquisitions. acquisitions.


Reasons that Motivate Firms to Go PublicReasons that Motivate Firms to Go Public

Successful IPO Candidates Successful IPO Candidates Have…Have…

Consistently high growth ratesConsistently high growth rates Strong record of earningsStrong record of earnings 3 to 5 years of audited financial statements 3 to 5 years of audited financial statements

that meet or exceed SEC standardsthat meet or exceed SEC standards Solid position in a rapidly-growing industry: Solid position in a rapidly-growing industry:

Average company age is 14 yearsAverage company age is 14 years Sound management team with experience Sound management team with experience

and a strong board of directorsand a strong board of directors

Advantages of Advantages of “Going Public”“Going Public”

Ability to raise large amounts of capitalAbility to raise large amounts of capital Improved corporate imageImproved corporate image Improved access to future financingImproved access to future financing Attracting and retaining key employeesAttracting and retaining key employees Using stock for acquisitionsUsing stock for acquisitions Listing on a stock exchangeListing on a stock exchange

Disadvantages of Disadvantages of “Going Public”“Going Public”

Dilution of founder’s ownershipDilution of founder’s ownership Loss of controlLoss of control Loss of privacyLoss of privacy Reporting to the SECReporting to the SEC Filing expensesFiling expenses Accountability to shareholdersAccountability to shareholders Pressure for short-term performancePressure for short-term performance Timing Timing

Sources of Debt FinancingSources of Debt Financing

Commercial Commercial BanksBanks

SME SME Guaranteed Guaranteed

LoansLoans

Commercial BanksCommercial Banks

BanksBanks Historically, commercial banks have not been Historically, commercial banks have not been

viewed as a practical source of financing for viewed as a practical source of financing for start-up firms. start-up firms.

This sentiment is not a knock against banks; it This sentiment is not a knock against banks; it is just that banks are risk averse, and financing is just that banks are risk averse, and financing start-ups is a risky business.start-ups is a risky business.

Banks are interested in firms that have a strong cash Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good flow, low leverage, audited financials, good management, and a healthy balance sheet. management, and a healthy balance sheet.

Sources of Debt CapitalSources of Debt Capital

Commercial banksCommercial banks Lenders of first resort for small Lenders of first resort for small

businessesbusinesses Average micro-business loan = $7,400Average micro-business loan = $7,400 Average small business loan = $181,000Average small business loan = $181,000 Study: 12% of entrepreneurs receive bank Study: 12% of entrepreneurs receive bank

loans to start their businesses. loans to start their businesses.

Sources of Debt Capital Sources of Debt Capital From Commercial BanksFrom Commercial Banks

Short-term loans Short-term loans Home Equity LoansHome Equity Loans Commercial LoansCommercial Loans Lines of CreditLines of Credit Floor planningFloor planning

Immediate and Long-Term LoansImmediate and Long-Term Loans Installment LoansInstallment Loans Term LoansTerm Loans

Six Common Reasons Bankers Six Common Reasons Bankers Reject Small Business LoansReject Small Business Loans

1.1. ““Our bank doesn’t make small business Our bank doesn’t make small business loans.” loans.”

Cure: Before applying for a loan, Cure: Before applying for a loan, research banks to find out which ones research banks to find out which ones seek the seek the type of loan type of loan you need. you need.

2.2. ““I don’t know enough about you or your I don’t know enough about you or your business.”business.”

Cure: Develop a Cure: Develop a detailed business detailed business plan plan to present to the banker. to present to the banker.

3.3. “You haven’t told me why you need the “You haven’t told me why you need the money.” money.”

Cure: Your Cure: Your business planbusiness plan should should explain explain how much money you need and how much money you need and how you how you plan to use it. plan to use it.

4.4. “Your numbers don’t support your loan “Your numbers don’t support your loan request.”request.”

Cure: Include a Cure: Include a cash flow forecast cash flow forecast in in your business plan. your business plan.

(continued)(continued)


5.5. “You don’t have enough collateral.” “You don’t have enough collateral.” Cure: Be prepared to pledge your Cure: Be prepared to pledge your

company’s assets – and perhaps your company’s assets – and perhaps your personal assets personal assets – as collateral for the – as collateral for the loan. loan.

6.6. “Your business does not support the loan “Your business does not support the loan on its own.”on its own.”

Cure: Be prepared to provide a Cure: Be prepared to provide a personal personal guarantee guarantee on the loan. on the loan.

(continued)(continued)


Asset-Based LendersAsset-Based Lenders

Businesses can borrow money by Businesses can borrow money by pledging as collateral otherwise idle pledging as collateral otherwise idle assets – accounts receivable, assets – accounts receivable, inventory, and othersinventory, and others

Advance rateAdvance rate – the percentage of an – the percentage of an asset’s value that a lender will lend. asset’s value that a lender will lend.

Asset-Based BorrowingAsset-Based Borrowing

Discounting accounts receivableDiscounting accounts receivable

Inventory financingInventory financing

Other Sources of Debt CapitalOther Sources of Debt Capital

Vendor financing (trade credit)Vendor financing (trade credit)

Equipment suppliersEquipment suppliers

Commercial finance companiesCommercial finance companies

Saving and loan associationsSaving and loan associations

Stock brokersStock brokers

Other Sources of Debt CapitalOther Sources of Debt Capital Credit unionsCredit unions

Private placementsPrivate placements

Small Business Investment Small Business Investment Companies (SBIC)Companies (SBIC)

Small Business Lending Companies Small Business Lending Companies (SBLCs) (SBLCs)

(continued)

Other Sources of Debt FinancingOther Sources of Debt Financing2 of 22 of 2

Peer-to-Peer LendingPeer-to-Peer Lending Is a financial transaction that occurs directly between Is a financial transaction that occurs directly between

individuals or peers.individuals or peers. Prosper is the best known peer-to-peer lending networkProsper is the best known peer-to-peer lending network..

CrowdfundingCrowdfunding A form of raising money that takes place, usually via the A form of raising money that takes place, usually via the

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

Kickstarter is a popular online crowdfunding platform. Kickstarter is a popular online crowdfunding platform.

Creative Sources of Financing or Creative Sources of Financing or FundingFunding

Vendor Credit/ Factoring/ Credit Cards

Leasing

Strategic Strategic PartnersPartners

Grant Programs

Internal Methods of FinancingInternal Methods of Financing

Factoring Accounts Receivable – Factoring Accounts Receivable – selling accounts receivable outrightselling accounts receivable outright

Leasing – Leasing – assets rather than buying themassets rather than buying them

Credit cardsCredit cards

Other Sources of Debt FinancingOther Sources of Debt Financing1 of 21 of 2

Vendor CreditVendor Credit Also known as trade credit, is when a vendor Also known as trade credit, is when a vendor

extends credit to a business in order to allow the extends credit to a business in order to allow the business to buy its products and/or services up business to buy its products and/or services up front but defer payment until later.front but defer payment until later.

FactoringFactoring Is a financial transaction whereby a business sells Is a financial transaction whereby a business sells

its accounts receivable to a third party, called a its accounts receivable to a third party, called a factor, at a discount in exchange for cash.factor, at a discount in exchange for cash.

LeasingLeasing1 of 21 of 2

LeasingLeasing A lease is a written agreement in A lease is a written agreement in

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

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

LeasingLeasing2 of 22 of 2

Leasing (continued)Leasing (continued) Most leases involve a modest down Most leases involve a modest down

payment and monthly payments during payment and monthly payments during the duration of the lease.the duration of the lease.

At the end of an equipment lease, the At the end of an equipment lease, the new venture typically has the option to new venture typically has the option to stop using the equipment, purchase it stop using the equipment, purchase it for fair market value, or renew the lease. for fair market value, or renew the lease.

Leasing is almost always more expensive Leasing is almost always more expensive than paying cash for an item, so most than paying cash for an item, so most entrepreneurs think of leasing as an entrepreneurs think of leasing as an alternative to equity or debt financing.alternative to equity or debt financing.

Grant ProgramsGrant Programs Private GrantsPrivate Grants

There are a limited number of grant There are a limited number of grant programs available.programs available.

Getting grants takes a little detective Getting grants takes a little detective work.work.

Granting agencies are low key, and Granting agencies are low key, and must be sought out.must be sought out.

Government GrantsGovernment Grants The federal government has grant The federal government has grant

programs.programs. The full spectrum of grants The full spectrum of grants

available is listed at available is listed at www.mof.gov.mywww.mof.gov.my

Be careful of grant-related scams.Be careful of grant-related scams.

Strategic PartnersStrategic Partners

Strategic PartnersStrategic Partners Strategic partners are another Strategic partners are another

source of capital for new ventures.source of capital for new ventures. Many partnerships are formed to Many partnerships are formed to

share the costs of product or share the costs of product or service development, to gain service development, to gain access to particular resources, or access to particular resources, or to facilitate speed to market.to facilitate speed to market.

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


Giving up personal controlGiving up personal control Diluting ownershipDiluting ownership Sharing profitsSharing profits ““For every penny you get in the door, For every penny you get in the door,

you have to give something up.”you have to give something up.”


• Biotech firms often partner with large drug companies to conduct clinical trials and bring new products to market.• The biotech firms benefit by obtaining funding from their partners, and the partners benefit by having additional products to sell.

FIGURE 13.8 Where Do Small Businesses Get Where Do Small Businesses Get Their Financing?Their Financing?

Source: Based on 2008 Survey of Small and Mid-Sized Businesses, National Small Business Association, Washington, DC, 2009.

ConclusionConclusion Capital is key for entrepreneurs. Capital is key for entrepreneurs. In the face of a capital crunch, business’s In the face of a capital crunch, business’s

need for capital has never been greater. need for capital has never been greater. Sources of capital may include: Sources of capital may include:

Family and FriendsFamily and Friends Angel InvestorsAngel Investors Initial Public OfferingInitial Public Offering Traditional Bank LoanTraditional Bank Loan Asset-based BorrowingAsset-based Borrowing Federal, SME Loans, and others Federal, SME Loans, and others

Appendix 1 : Appendix 1 : Fundraising from Fundraising from

DonorsDonors

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The Donorschoose.org caseThe Donorschoose.org case

Donorschoose.org matches donors with Donorschoose.org matches donors with nonprofits seeking supportnonprofits seeking support

It specializes in grants that are too small for It specializes in grants that are too small for most funders to continuemost funders to continue

In addition to matching, it provides feedback In addition to matching, it provides feedback and reports to donors on the use of their and reports to donors on the use of their fundsfunds

This is an example of entrepreneurial This is an example of entrepreneurial fundraisingfundraising

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Five types of fundraising activity Five types of fundraising activity (1)(1) Fundraising is a major activity for nonprofit managersFundraising is a major activity for nonprofit managers

1. Personal relationships1. Personal relationships Get others on board with personal contactGet others on board with personal contact Letters may not be sufficient to convey that visionLetters may not be sufficient to convey that vision Conversations, tours, and events with direct contact Conversations, tours, and events with direct contact

with individualswith individuals 2. Direct mail2. Direct mail

Although it seems antiquated, it is profitableAlthough it seems antiquated, it is profitable Some fundraising firms conduct direct mail for Some fundraising firms conduct direct mail for

nonprofits, e.g., Easter Seals, St. Jude’s Children’s nonprofits, e.g., Easter Seals, St. Jude’s Children’s HospitalHospital

Few (1 – 3%) of recipients respond to initial asksFew (1 – 3%) of recipients respond to initial asks More (e.g., 20%) of prior givers donate later timesMore (e.g., 20%) of prior givers donate later times It may not work for early stage social venturesIt may not work for early stage social ventures

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Five types of fundraising activity Five types of fundraising activity (2)(2)

3. Telemarketing, calling lists of donors and 3. Telemarketing, calling lists of donors and non-donorsnon-donors

There is resistance from call recipientsThere is resistance from call recipients It helps with small donations, member renewalIt helps with small donations, member renewal Impractical for some early-stage social venturesImpractical for some early-stage social ventures Because it needs equipment and expertise, it is Because it needs equipment and expertise, it is

often delivered by fundraising firmsoften delivered by fundraising firms 4. Traditional media4. Traditional media

Newspapers, magazines, television, radioNewspapers, magazines, television, radio Fundraising using broadcasting has been effective Fundraising using broadcasting has been effective

for many Christian organizationsfor many Christian organizations Social ventures can buy advertising and other Social ventures can buy advertising and other

placements in such mediaplacements in such media

8 - 86

Five types of fundraising activity Five types of fundraising activity (3)(3)

5. Virtual means5. Virtual means Raising revenue over the web is not a Raising revenue over the web is not a

cure-all cure-all Social entrepreneurs should be carefulSocial entrepreneurs should be careful

Donors are still adapting to e-givingDonors are still adapting to e-giving E-mail solicitations are treated as spamE-mail solicitations are treated as spam No guarantees of Web site trafficNo guarantees of Web site traffic Nonprofit have been slow to adapt Nonprofit have been slow to adapt

technologiestechnologies

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Spending fundraising dollarsSpending fundraising dollars Building fundraising over timeBuilding fundraising over time

Personal relationships at first, then direct mailPersonal relationships at first, then direct mail Virtual fundraising for organizations with capacityVirtual fundraising for organizations with capacity Traditional media can be costlyTraditional media can be costly

Tradeoffs between purposes and targetsTradeoffs between purposes and targets Between number of donors and size of giftBetween number of donors and size of gift

Figure 8.1 illustrates this tradeoffFigure 8.1 illustrates this tradeoff Between purposes and focus:Between purposes and focus:

Purposes: raise money or raise visibilityPurposes: raise money or raise visibility Focus of targets: new or established donorsFocus of targets: new or established donors Table 8.2 shows the strategies from each Table 8.2 shows the strategies from each

choicechoice

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Figure 8.1 Spending tradeoffs in Figure 8.1 Spending tradeoffs in fundraisingfundraising

Avera

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nn

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Number of donors per year

Relatively few “angels”

Relatively numerous small donors

Avera

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don

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Avera

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nn

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Relatively numerous small donors

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Table 8.2 Choosing a fundraising Table 8.2 Choosing a fundraising strategystrategy

Focus: new donors

Focus:Established donors

Purpose: Raise money

Strategy: mix of large and small gifts

Strategy: larger, fewer donations

Purpose: Raise visibility

Strategy: smaller, more numerous donations

Strategy: mix of large and small gifts

8 - 90

The Easter Seals caseThe Easter Seals case

A long-established nonprofit that helps A long-established nonprofit that helps individuals with special needs and individuals with special needs and disabilitiesdisabilities

Dozens have contributed amounts over Dozens have contributed amounts over $100,000$100,000

3,800 have contributed over $1,0003,800 have contributed over $1,000 But millions have contributed amounts less But millions have contributed amounts less

than $1,000 – even penniesthan $1,000 – even pennies Small donations make up the majority of Small donations make up the majority of

Easter Seals revenueEaster Seals revenue

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Differentiating donorsDifferentiating donors There are different kinds of donorsThere are different kinds of donors

Potential donorsPotential donors New donorsNew donors Transition – give a second timeTransition – give a second time Core – three or more donorsCore – three or more donors Lapsed – have stopped givingLapsed – have stopped giving Lapsed but reactivatedLapsed but reactivated

Most donors – as much as 80% – are inactiveMost donors – as much as 80% – are inactive Active donors can be in any of the other Active donors can be in any of the other

typestypes Core donors are the most productiveCore donors are the most productive Figures 8.2 and 8.3 illustrate these typesFigures 8.2 and 8.3 illustrate these types

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Figure 8.2 The dimensions of a Figure 8.2 The dimensions of a typical list of active donorstypical list of active donors

Percentage of active donors Percentage of revenues

Core30%

Transition18%Lapsed but

reactivated19%

New33%

Core50%

Transition17%

Lapsed but reactivated

14%

New19%

Percentage of active donors Percentage of revenues

Core30%

Transition18%Lapsed but

reactivated19%

New33%

Core50%

Transition17%

Lapsed but reactivated

14%

New19%

8 - 93

Figure 8.3 Gift size among active Figure 8.3 Gift size among active donors to a sample of social service donors to a sample of social service

organizationsorganizations$128

$81

$60

$51$46

$42 $43

$37

$0

$20

$40

$60

$80

$100

$120

$140

Core Transition Lapsed butreactivated

New

Average annual dollars given

Average gift

8 - 94

Fundraising strategiesFundraising strategies Win: gain new donors or regain lapsed Win: gain new donors or regain lapsed

donorsdonors Example: Habitat for Humanity soliciting volunteers and Example: Habitat for Humanity soliciting volunteers and

donors through churchesdonors through churches Keep: maintain donors in the coreKeep: maintain donors in the core

Example: World Vision targets donors for retentionExample: World Vision targets donors for retention Lift: Obtain larger gifts from core donorsLift: Obtain larger gifts from core donors

Example: MAP targeting the best prospects from donors Example: MAP targeting the best prospects from donors to increase gift averagesto increase gift averages

Figure 8.4 illustrates donor retentionFigure 8.4 illustrates donor retention Figure 8.5 illustrates the fundraising Figure 8.5 illustrates the fundraising

ecosystemecosystem

8 - 95

Figure 8.4 The percentage of donors Figure 8.4 The percentage of donors retained from one year to the nextretained from one year to the next

69%

38%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Core Transition Lapsed but reactivated

Source: Merkle-Domain

8 - 96

Figure 8.5 The fundraising Figure 8.5 The fundraising ecosystem ecosystem

New donors Lapsed donors

Transition donors

Core donors

Win Win

Keep

KeepLift

8 - 97

Figure 8.6 Average number of Figure 8.6 Average number of donations by different donor typesdonations by different donor types

2.8

1.9

1.4 1.4

0

0.5

1

1.5

2

2.5

3

Core Transition Lapsed butreactivated

New

8 - 98

Losing donorsLosing donorsWhy do donors lapse:Why do donors lapse:

Fatigue from too many requests is a mythFatigue from too many requests is a mythOther organizations are more deservingOther organizations are more deservingCan’t afford to supportCan’t afford to supportFailure of organization to establish a relationshipFailure of organization to establish a relationshipDonors are not asked a second timeDonors are not asked a second time

Research suggests that fundraising expenses Research suggests that fundraising expenses increase donations but administrative increase donations but administrative expenditures don’t reduce donations expenditures don’t reduce donations So, nonprofits should not fear responsible So, nonprofits should not fear responsible spending to build donations, including spending to build donations, including administrative capacityadministrative capacityFigure 8.6 illustrates donations by donor Figure 8.6 illustrates donations by donor categorycategoryFigure 8.7 illustrates reasons for donor lapseFigure 8.7 illustrates reasons for donor lapse

8 - 99

Figure 8.7 The main reasons donors Figure 8.7 The main reasons donors lapselapse

27%

22%

11%7%

3% 2% 2% 2% 1%0%

5%

10%

15%

20%

25%

30%

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8 - 100

The United Way caseThe United Way case UW fundraising was very UW fundraising was very

successful in the 1970s and 1980ssuccessful in the 1970s and 1980s In the 1990s, it faltered even when In the 1990s, it faltered even when

the economy was doing well, for the economy was doing well, for two reasonstwo reasons Scandal based on the CEO’s fraudScandal based on the CEO’s fraud Corporate downsizing and declines Corporate downsizing and declines

in union membership changed giving in union membership changed giving patternspatterns

8 - 101

Volunteer recruitment and attritionVolunteer recruitment and attrition Donations of time must also be won, Donations of time must also be won,

kept, and liftedkept, and lifted Three main types of appeals to Three main types of appeals to

volunteersvolunteers ““Warm body,” i.e., no special skill neededWarm body,” i.e., no special skill needed Targeted recruitment for specific skillsTargeted recruitment for specific skills Concentric circles, when volunteers recruit Concentric circles, when volunteers recruit

other volunteersother volunteers Help the Hospices built volunteering by Help the Hospices built volunteering by

gaining publicity for its mission gaining publicity for its mission

8 - 102

Avoiding volunteer attritionAvoiding volunteer attrition

Understand that volunteers recognize Understand that volunteers recognize the value of their time – it is not freethe value of their time – it is not free

What are the elements of time valuationWhat are the elements of time valuation Compared to the value of market workCompared to the value of market work Compared to other volunteer opportunitiesCompared to other volunteer opportunities Compared to leisure timeCompared to leisure time

8 - 103

The CARE International caseThe CARE International case CARE’s programs address underlying causes of CARE’s programs address underlying causes of

poverty, but it is still seen primarily as a poverty, but it is still seen primarily as a distributor of food reliefdistributor of food relief

CARE changed its logo to reduce the mismatch CARE changed its logo to reduce the mismatch between perception and reality, and also uses between perception and reality, and also uses newsletters to inform donorsnewsletters to inform donors

Old logo New logo

8 - 104

Social enterprise messagesSocial enterprise messages

Targeted marketing emphasizes social enterprise Targeted marketing emphasizes social enterprise benefits important to specific groupsbenefits important to specific groups

Messages can be devised to address underlying Messages can be devised to address underlying reasons why some people don’t givereasons why some people don’t give

Appeals can be abstract, concrete, promotional, or Appeals can be abstract, concrete, promotional, or refutational refutational

Table 8.3 shows appeals that were significant to Table 8.3 shows appeals that were significant to some demographic groups in a survey of Atlanta some demographic groups in a survey of Atlanta residentsresidents

Table 8.4 shows which issues nonprofits in Spain Table 8.4 shows which issues nonprofits in Spain need to address to build contributionsneed to address to build contributions

Table 8.5 shows types of messagesTable 8.5 shows types of messages

8 - 105

Table 8.3 Targeting demographicsTable 8.3 Targeting demographicsDEMOGRAPHICS DEMOGRAPHICS

TO TARGETTO TARGET FUNDRAISING FOCUSFUNDRAISING FOCUSSENSE OF SENSE OF COMMUNICOMMUNI

TYTY

CHARITIES CHARITIES ARE MORE ARE MORE EFFECTIVE EFFECTIVE

THAN GOV’TTHAN GOV’T

SENSENSE SE OF OF

DUTDUTYY

HELPEHELPED YOU D YOU

IN IN TIMES TIMES

OF OF NEEDNEED

TAX TAX BENEFBENEF

ITSITS

RELIGIORELIGIOUSUS

REASONREASON

SS

HIGH INCOMEHIGH INCOME X

LOW INCOMELOW INCOME X X

YOUNGERYOUNGER X

PRACTICING PRACTICING FAITHFAITH

X X

MARRIEDMARRIED X

SINGLESINGLE

NONWHITENONWHITE X X

WOMENWOMEN X X X X

CONSERVATIVESCONSERVATIVES X

VOLUNTEERVOLUNTEER X X X X X

8 - 106

Table 8.4 Using negative Table 8.4 Using negative information in marketinginformation in marketing

StrategyStrategy

Target groupTarget group Show how Show how aid helps aid helps those in those in

needneed

Show that Show that aid aid

reaches reaches those in those in

needneed

Show that Show that even even

small gifts small gifts can be can be usefuluseful

Improve Improve awareness of awareness of organizationorganization

YoungYoung X

OlderOlder X

MenMen X

UnmarriedUnmarried X

Low educationLow education X X

Small familySmall family X

No religionNo religion X X

Big cityBig city X

Table 8.5 Types of messagesTable 8.5 Types of messages

Source: Clary, et. a., (1994)Source: Clary, et. a., (1994)

Concrete/promotional and abstract/refutational Concrete/promotional and abstract/refutational are especially effectiveare especially effective

PromotionalPromotional RefutationalRefutationalAbstractAbstract ““Giving is vital for Giving is vital for

society”society”““Your gift might be small, Your gift might be small, but you are doing your but you are doing your part”*part”*

ConcreteConcrete ““Your $10 gift will feed a Your $10 gift will feed a child for 10 days”*child for 10 days”*

““$10 might seem like a $10 might seem like a pittance, but it will feed a pittance, but it will feed a child for 10 days”child for 10 days”

8 - 108

Pricing: Alternative approachesPricing: Alternative approaches

Maximize profit (e.g., net revenues)Maximize profit (e.g., net revenues) Like a business, but inconsistent with Like a business, but inconsistent with

nonprofit objectivesnonprofit objectives Sliding scale or price discrimination, Sliding scale or price discrimination,

e.g.,e.g., Charge some clients more to cross-Charge some clients more to cross-

subsidize desirable programssubsidize desirable programs Voluntary price discrimination, when Voluntary price discrimination, when

clients make voluntary donationsclients make voluntary donations Charge different prices at different timesCharge different prices at different times

8 - 109

Table 8.6 Pricing optionsTable 8.6 Pricing options

StrategyStrategy DescriptionDescription

Profit Profit maximizationmaximization

Maximize net revenuesMaximize net revenues

Mixed pricingMixed pricing Cross subsidize favored clients with fees Cross subsidize favored clients with fees from othersfrom others

Classical price Classical price discriminationdiscrimination

Charge prices that vary by client Charge prices that vary by client characteristics (age, race, income, etc.)characteristics (age, race, income, etc.)

Voluntary price Voluntary price discriminationdiscrimination

Charge a low price but augment with Charge a low price but augment with voluntary donations elicited at time of salevoluntary donations elicited at time of sale

Classical price Classical price discriminationdiscrimination

Charge according to time or dayCharge according to time or day

Appendix 2 : Other Appendix 2 : Other Financing SourcesFinancing Sources

Based on US RegulationsBased on US Regulations

Sources of Equity FinancingSources of Equity Financing

Public stock sale – “going public” Public stock sale – “going public” Simplified registrations and exemptionsSimplified registrations and exemptions

(continued)

TimeTime ActionAction

Week 1Week 1 Conduct organizational meeting with IPO team, including underwriter, attorneys, accountants, and others. Begin drafting registration statement.

Week 5Week 5 Distribute first draft of registration statement to IPO team and make revisions.

Week 6Week 6 Distribute second draft of registration statement and make revisions.

Week 7Week 7 Distribute third draft of registration statement and make revisions.

Week 8Week 8 File registration statement with the SEC. Begin preparing presentations for road show to attract other investment bankers to the syndicate. Comply with Blue Sky laws in states where offering will be sold.

Week 12Week 12 Receive comment letter on registration statement from SEC. Amend registration statement to satisfy SEC comments.

Week 13Week 13 File amended registration statement with SEC. Prepare and distribute preliminary offering prospectus (called a “red herring”) to members of underwriting syndicate. Begin road show meetings.

Week 15Week 15 Receive approval for offering from SEC (unless further amendments are required). Issuing company and lead underwriter agree on final offering price. Prepare, file, and distribute final offering prospectus.

Week 16Week 16 Company and underwriter sign the final agreement. Underwriter issues stock, collects the proceeds from the sale, and delivers proceeds to company.

Timetable for an IPOTimetable for an IPO

The Registration ProcessThe Registration Process

Choose the underwriterChoose the underwriter Negotiate a letter of intentNegotiate a letter of intent Prepare the registration statementPrepare the registration statement File with the SECFile with the SEC Wait to “go effective” and road showWait to “go effective” and road show Meet all state requirementsMeet all state requirements

Simplified RegistrationsSimplified Registrationsand Exemptionsand Exemptions

Goal: Goal:

To give small companies easy To give small companies easy access to capital markets with access to capital markets with simplified registration simplified registration requirements requirements

Simplified RegistrationsSimplified Registrationsand Exemptionsand Exemptions

Regulation S-BRegulation S-B Regulation D (Rule 504): Small Company Regulation D (Rule 504): Small Company

Offering Registration (SCOR)Offering Registration (SCOR) Regulation D (Rule 505 and 506): Private Regulation D (Rule 505 and 506): Private

PlacementsPlacements Section 4 (6) Private PlacementsSection 4 (6) Private Placements Intrastate Offerings (Rule 147)Intrastate Offerings (Rule 147) Regulation ARegulation A

Federally Sponsored ProgramsFederally Sponsored Programs

Economic Development Administration (EDA)Economic Development Administration (EDA) Department of Housing and Urban Department of Housing and Urban

Development (HUD)Development (HUD) U.S. Department of Agriculture’s Rural U.S. Department of Agriculture’s Rural

Business (USDA) - Cooperative ServiceBusiness (USDA) - Cooperative Service Small Business Innovation Research (SBIR) Small Business Innovation Research (SBIR) Small Business Technology Transfer Small Business Technology Transfer

programs (STTR)programs (STTR) Small Business Administration (SBA) Small Business Administration (SBA)

SBA Loan ProgramsSBA Loan Programs

Patriot Express ProgramPatriot Express Program

CommunityCommunityExpress Express ProgramProgram

7(A) Loan Guaranty Program7(A) Loan Guaranty Program

Average 7(a) loan = $183,000 Average 7(a) loan = $183,000

FIGURE 13.7 SBA 7(A) Guaranteed Loans Source: U.S Small Business Administration.


Patriot Express ProgramPatriot Express Program

CommunityCommunityExpress Express ProgramProgram

7(A) Loan Guaranty Program7(A) Loan Guaranty Program

Average 7(a) loan = $183,000 Average 7(a) loan = $183,000

Section 504 Certified Development Company Section 504 Certified Development Company ProgramProgram

Microloan ProgramMicroloan Program

Average microloan = $13,000Average microloan = $13,000


The Capline ProgramThe Capline Program Loans involving international tradeLoans involving international trade

Export Working CapitalExport Working Capital International Trade ProgramInternational Trade Program

Disaster LoansDisaster Loans

(continued)

State and Local Loan ProgramsState and Local Loan Programs

Capital Access Programs (CAPs)Capital Access Programs (CAPs) – –Designed to encourage lenders to make Designed to encourage lenders to make loans to businesses that do not qualify for loans to businesses that do not qualify for traditional financing traditional financing

Revolving Loan Fund (RLFs)Revolving Loan Fund (RLFs) – – Combine private and public funds to make Combine private and public funds to make small business loans small business loans

SBA Guaranteed LoansSBA Guaranteed Loans1 of 21 of 2

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

participate in the SBA Guaranteed Loan Program.participate in the SBA Guaranteed Loan Program. The program operates through private-sector lenders The program operates through private-sector lenders

who provide loans that are guaranteed by the SBA.who provide loans that are guaranteed by the SBA. The loans are for small businesses that are not able to The loans are for small businesses that are not able to

obtain credit elsewhere.obtain credit elsewhere. The 7(A) Loan Guarantee ProgramThe 7(A) Loan Guarantee Program

The most notable SBA program available to small The most notable SBA program available to small businesses.businesses.

SBA Guaranteed LoansSBA Guaranteed Loans2 of 22 of 2

Size and Types of Loans Size and Types of Loans Almost all small businesses are eligible to apply for an Almost all small businesses are eligible to apply for an

SBA guaranteed loan.SBA guaranteed loan. The SBA can guarantee as much as 85% on loans up to The SBA can guarantee as much as 85% on loans up to

$150,000 and 75% on loans over $150,000.$150,000 and 75% on loans over $150,000. An SBA guaranteed loan can be used for almost any An SBA guaranteed loan can be used for almost any

legitimate business purpose.legitimate business purpose. Although SBA guaranteed loans are utilized more Although SBA guaranteed loans are utilized more

heavily by existing small businesses than start-ups, they heavily by existing small businesses than start-ups, they should not be dismissed as a possible source of should not be dismissed as a possible source of financing. financing.

Creative Sources of Financing or Creative Sources of Financing or FundingFunding

SBIR and STTR Grant Programs

SBIR and STTR GrantsSBIR and STTR Grants1 of 41 of 4

The full spectrum of grants available is listed at The full spectrum of grants available is listed at www.grants.gov

SBIR and STTR ProgramsSBIR and STTR Programs The Small Business Innovation Research (SBIR) and the The Small Business Innovation Research (SBIR) and the

Small Business Technology Transfer (STTR) programs are Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for two important sources of early-stage funding for technology firms. technology firms.

These programs provide cash grants to entrepreneurs who These programs provide cash grants to entrepreneurs who are working on projects in specific areas. are working on projects in specific areas.

The main difference between the SBIR and the STTR programs is The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers that the STTR program requires the participation of researchers working at universities or other research institutions.working at universities or other research institutions.


SBIR ProgramSBIR Program The SBIR Program is a competitive grant program that The SBIR Program is a competitive grant program that

provides over $1 billion per year to small businesses in provides over $1 billion per year to small businesses in early-stage and development projects. early-stage and development projects.

Each year, 11 federal departments and agencies are Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&D required by the SBIR to reserve a portion of their R&D funds for awards to small businesses.funds for awards to small businesses.

Guidelines for how to apply for the grants are provided Guidelines for how to apply for the grants are provided on each agency’s Web site.on each agency’s Web site.


SBIR Program (continued)SBIR Program (continued) The SBIR is a three-phase program, meaning that firms The SBIR is a three-phase program, meaning that firms

that qualify have the potential to receive more than one that qualify have the potential to receive more than one grant to fund a particular proposal.grant to fund a particular proposal.

Historically, less than 15% of all Phase I proposals are Historically, less than 15% of all Phase I proposals are funded. The payoff for successful proposals, however, is funded. The payoff for successful proposals, however, is high.high.

The money is essentially free. It is a grant, meaning that it The money is essentially free. It is a grant, meaning that it doesn’t have to be paid back and no equity in the firm is at stake.doesn’t have to be paid back and no equity in the firm is at stake.

The small business receiving the grant also retains the rights to The small business receiving the grant also retains the rights to any intellectual property generated as the result of the grant any intellectual property generated as the result of the grant initiative.initiative.


SBIR Three-Phase Grant Program

Further ReadingFurther Reading Scarborough, Norman, M. 2011. Scarborough, Norman, M. 2011. Essentials of Essentials of

Entrepreneurship and Small Business Management.Entrepreneurship and Small Business Management. 66thth edition. Pearson. edition. Pearson.

Brooks, Arthur C. (2006) Social Entrepreneurship : A Brooks, Arthur C. (2006) Social Entrepreneurship : A Modern Approach to Social Value Creation. Pearson Modern Approach to Social Value Creation. Pearson

Barringer, Bruce R. & Ireland, R. Duane, 2011 Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new Entrepreneurship – Successfully launching new ventures ventures 44thth edition, Pearson. edition, Pearson.

Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Entrepreneurship and Small Business.Entrepreneurship and Small Business. 3 3rdrd Asia Asia Pacific edition. John Wiley.Pacific edition. John Wiley.

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