chapter 8 stu
TRANSCRIPT
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CHAPTER 8
SOURCES OF EQUITY
FINANCING
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The Secrets to Successful Financing
1. Choosing the right sources of capital is a decision
that will influence a company for a lifetime
2. The money is out there; the key is knowing where
to look
3. Creativity counts. Entrepreneurs have to be as
creative in their searches for capital as they are in
developing their business ideas
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4. The World Wide Web puts at entrepreneurs
fingertips vast resources of information that can
lead to financing5. Be thoroughly prepared before approaching lenders
and investors
6. Looking for smart money is more important than
looking for easy money
The Secrets to Successful Financing
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Three Types of Capital
Fixed - used to purchase the permanent or fixed
assets of the business (e.g. buildings, land,
equipment, etc.) Working - used to support the small company's
normal short-term operations (e.g. buy
inventory, pay bills, wages, or salaries, etc.)
Growth - used to help the small business expand
or change its primary direction
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Equity Capital
Represents the personal investment of theowner(s) in the business
Is called risk capitalbecause investors assume
the risk of losing their money if the businessfails
Does nothave to be repaid with interest like aloan does
Means that an entrepreneur must give up someownership in the company to outside investors
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Sources of Equity Financing
Personal savings
Friends and family members
Angels
Partners
Venture capital companies
Corporations
Public stock sale
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Personal Savings
Thefirstplace an entrepreneur should look
for money
The most common source of equity capitalfor starting a business
GEM study:
Average cost to start a business in U.S. is
$70,200 Typical entrepreneur provides 67.9% of the
initial capital requirement
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Friends and Family Members
After emptying her own pockets, an entrepreneurshould turn to those most likely to invest in the
business - friends and family members
Careful!!! Inherent dangers lurk infamily/friendly business deals, especially thosethat flop
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Guidelines for family and friendshipfinancing deals:
Consider the impact of the investment oneveryone involved
Keep the arrangement strictly business
Educate nave investors
Settle the details up front
Never accept more than the investor can affordto lose
Friends and Family Members
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Guidelines for family and friendship
financing deals:
Create a written contract Treat the money as bridge financing
Develop a payment schedule that suits both
parties
Have an exit plan
Keep everyone informed
Friends and Family Members
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Ideal source of financing for companies
that have outgrown the capacity of
friends and family members but are stilltoo small to attract the interest of venture
capital companies
Friends and Family Members
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Angels
Private investors who invest in emergingbusiness start-ups in exchange for equity
stakes in the company Fastest growing segment of the small
business capital market
Center for Venture Research study:234,000 angels invest $25.6 billion a yearin 51,000 small companies
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Most likely to finance deals in the$10,000 to $2 million range
Key: finding them!Angels almost always invest their money
locally and can be found throughnetworking
Another avenue: Angel capital networkson the World Wide Web
Angels
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Typical angel accepts 12% of theproposals presented and has invested an
average of $80,000 in 3.5 businessesAn excellent source of patient money
for investors needing relatively small
amounts of capital often less than$500,000
Angels
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Corporate Venture Capital
About 300 large corporations across theglobe invest in start-up companies
19% of all venture capital investmentscome from corporations Average CVC investment = $2.97 million
Capital infusions are just one benefit;corporate partners may share marketingand technical expertise
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Venture Capital Companies
More than 1,300 venture capital firms
operate across the U.S.
Most venture capitalists seek investments
in the $3,000,000 to $10,000,000 range
in companies with high-growth and
high-profit potential Average VC investment = $7.4 million
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Venture Capital Companies
Usually take an active role in managing the
companies in which they invest
Focus their investments in specific industrieswith which they are familiar
Invest in a company across several stages Most
common stages:
Expansion
Later-stage
Early-stage
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Start-up/Seed This is the initial stage inwhich companies are just beginning to
develop their ideas into products or services.
Typically, these businesses have been in
existence less than 18 months and are not yet
fully operational.
Early stage These companies are refining
their initial products or services in pilot tests
or in the market. Even though the product or
service is available commercially, it typically
generates little or no revenue. These
companies have been in business less thanthree years.
Expansion stage These companiesproducts or services are commercially
available and are producing strong revenue
growth. Businesses at this stage may not be
generating a profit yet, however.
Later stage These companies products orservices are widely available and are
producing ongoing revenue and, in most cases,
positive cash flow. Businesses at this stage
are more likely to be generating a profit.
Sometimes these businesses are spin-offs of
already established successful privatecompanies.
Venture Capital by Stages
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What Do Venture Capital
Companies Look For?
Competent management
Competitive edgeGrowth industry
Viable exit strategy
Intangibles
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Going Public
Initial public offering (IPO) - when a
company raises capital by selling shares of
its stock to the public for the first time Since 2000, average number of companies
making IPOs is 211
Few companies with annual sales below$25 million make IPOs
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Advantages of "Going Public"
Ability to raise large amounts of capital
Improved corporate image
Improved access to future financing Attracting and retaining key employees
Using stock for acquisitions
Listing on a stock exchange
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Disadvantages of "Going Public"
Dilution of founder's ownership
Loss of control
Loss of privacy
Regulatory requirements and
reporting to the SEC
Filing expenses
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Disadvantages of "Going Public"
Accountability to shareholders
Pressure for short-term
performance Loss of focus
Timing
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End of Chapter 8