outline: chapter 9 financing over the life of a venture common misconceptions about entrepreneurial...

Outline: Chapter 9Financing Over the Life of a Venture Common Misconceptions about

Entrepreneurial FinancingThe Diverse Nature of Business

Financing Financing Smaller Businesses

with Modest Growth PotentialFinancing High Growth, High

Potential Ventures Copyright 2013 Cornwall, Vang & Hartman

Common Misconceptions about Entrepreneurial Financing

Venture Capitalists Fund Most Businesses

Banks Lend to Start-ups SBA lends money directly to

entrepreneurs Entrepreneurs Tend to Rely on

One Single Source of Funding Government Grants are a Good

Source of Money for Small Businesses

Copyright 2013 Cornwall, Vang & Hartman

The Diverse Nature of Business Financing

The Nature of the Business Model

Aspirations of the Entrepreneur The Stage of Development of the

Business Venture Fitting the Pieces of the Financing

Puzzle Together


Financing a Small Business - Modest GrowthFigure 9.1

Pre-launch Start-up Growth Transition

Bootstrapping

Self, friends, and family

Equity financing

Debt financing


Financing a High-Growth, High-Potential VentureFigure 9.2


Bootstrapping

Seed financing from angels

Equity financing from VCs

Debt financing


Outline: Chapter 10Start-up Financing From the Entrepreneur, Friends and Family

Self-financingAdvantages and Disadvantages

of Self-financing Friends and Family FinancingStructure of Funds Invested

◦Loan◦Equity


Most Common Sources of FinancingFigure 10.1



Self, friends, and family

Advantages and Disadvantages of Self-FinancingTable 10.1

Advantages Disadvantages

Relative ease of securing funding

May limit size and scope of start-up

Avoid complexity created by adding partners

May limit ability to grow

Better alignment with entrepreneur’s aspirations

Increases exposure to personal risk from business failure

No dilution of profits or gains Entrepreneur may lack all necessary experience, contacts, skills, and/or knowledge

Eventual exit process is often simpler


Friends and Family FinancingDetermine True Motivations Use a Formal Business PlanProvide Accurate, Objective, and

Full Information about the Business

Keep BoundariesTax Planning


Outline: Chapter 11BootstrappingWhy bootstrap?Bootstrapping Administrative OverheadBootstrapping Employee ExpensesBootstrapping Operating ExpensesBootstrap MarketingThe Ethics of Bootstrapping


Bootstrapping Throughout the Life of a VentureFigure 11.1



Bootstrapping

Bootstrapping

Defined as the “process of finding creative ways exploit opportunities to launch and grow businesses with the limited resources available for most start-up ventures.”

Cornwall, J. (2010). Bootstrapping. Englewood Cliffs, NJ: Pearson/Prentice-Hall.


Why Bootstrap?Often necessary for small

businesses to get startedDifficulty in raising money for

growthPreserves the value and wealth

of a business“Extend the Runway”Reduce risk associated with debt

financing


Rules of BootstrappingRule #1: Overhead mattersRule #2: Employee expenses are

usually the highest single recurring cost

Rule #3: Minimize operating costs

Rule #4: Marketing matters, but know your customers and how they make decisions


Bootstrapping Administrative Overhead

SpaceFurnishings and office

equipment Administrative salaries


Bootstrapping Employee ExpensesIndependent contractors Employee leasing and temporary

employeesStudent interns Equity compensation Non-monetary benefits


Bootstrapping Operating ExpensesOutsourcingJust-in-time inventory

techniquesEffective cost accounting


Bootstrap MarketingKnow your customerFocus on the impact of message,

not “volume”Focus on benefits for customerUnderstand the market nicheSpend your marketing dollars

wiselyMarketing is a process, not an

eventCopyright 2013 Cornwall, Vang & Hartman

The Basic Bootstrap Marketing ToolsWord of MouthBusiness cardsBlogsFacebook and TwitterBrochuresBanners and signs NewslettersDirect mailing/e-mailingPublicity


Word of MouthMotivate customers to talk about

businessCreate incentives to spread the

wordAsk customers to “sell”Create a “buzz” campaignViral marketing


Business CardsDesign is importantInclude needed data about

businessUse quality paperUse colorInclude description and/or sloganUse both side of card


BlogsBe consistent in bloggingDo not blog merely to promote

businessTake time to create quality blogBe patient – blogging takes time

to build followingBe cautious what you write!


Facebook and TwitterReplacing websites for many new

venturesFans more likely to purchaseBuilds on credibility of

recommendations of friendsFind motivational methods for

people to become friends and fans


Outline: Chapter 12External Sources of Funds: Equity

Angel InvestorsStrategic PartnersPrivate PlacementCrowdfundingSBICThe Downside of Equity

FinancingWorking with Outside Investors


Equity FinancingFigure 12.1



Equity financing

Angel InvestorsWealthy individuals who make

direct investment in entrepreneurial firms

Seed and early stage financing$50,000 to $1 million

investmentsAlso work through Angel

NetworksSeek payoff in three to seven

yearsValuation can be difficult


Strategic PartnersLarger corporations in same

industryLower expectations for returnsSeeking closer relationship or

acquisition over time if entrepreneurial firm is successful


Private PlacementLarge funding from many

investorsRegulated by S.E.C.Must be accredited investors

◦National bank◦Corporation or trust with $5 million

assets◦Insider/officer in the business◦Individuals with adequate income

and/or wealthLarge number of stockholders

can create challenges


CrowdfundingBegan with donations through

Kickstarter and other similar websites

Jumpstart Our Business Startup (JOBS) Act of 2012 opened door for equity crowdfunding

Regulated by S.E.C.


Downside of Equity Financing

Dilution of ownershipThe risk of sharks Dynamics of adding on new

partners


Working with Equity Investors Business plan Confidentiality agreement Letter of Intent Modifications of shareholder

agreements Communication with shareholders


Outline: Chapter 13External Sources of Funds: Debt

Short-term debt Long-term debt Forms of debt overlooked by

entrepreneurs SBA backed funding Working with bankersDownside of debtDeveloping a Financing Plan


Debt FinancingFigure 13.1



Debt financing

Short-term Debt

Expected to be paid within one year

Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.


Short-term Debt

Trade debtInstitutional Creditors

◦Banks◦Asset-based lenders◦Factors


Long-term DebtBeyond one yearMost often used to fund fixed

asset purchases


Long-term Debt

Banks: term loansLeasing companiesReal estate lenders


Criteria for Lending by Bankers

Ability of the business to generate enough cash flow to easily make interest and principle payments

Entrepreneur’s ability to personally pay back the loan if the business fails

Assets to serve as collateral


Key Loan Documents

Loan proposal Loan document Personal guarantees


SBA Loans

Funds provided by independent lenders Loan guaranty from SBA transfers risk of

borrower non-payment, up to the amount of the guaranty, from the lender to SBA

SBA loans are commercial bank loans guaranteed by the SBA

http://www.sba.gov/financing/index.html

http://www.sba.gov/financing/index.html

Basic SBA Loan Programs

Basic 7(a) Loan Guaranty SBA’s primary business loan programHelps qualified small businesses obtain

financing when they might not be eligible for business loans through normal lending channels.

504 Loan ProgramProvides long-term, fixed-rate financing to

small businesses to acquire real estate or machinery or equipment for expansion or modernization.

Downside of Debt

Increased risk during economic slowdown

Impact on proceeds from business sale

Restrictive covenantsPersonal guarantees


Example of Assets and Potential Funding GeneratedTable 13.1

Asset Estimated value

Percentage financed

Potential funding generated

Customer Purchase Orders

$50,000 70% $35,000

Accts. Receivable (<60 days)

$80,000 70% $56,000

Inventory $20,000 30% $ 6,000

Leasehold Improvements

$10,000 50% $ 5,000

Building $120,000 70% $84,000

Undeveloped Land

$40,000 40% $16,000

Equipment $15,000 80% $12,000

Total of Business Funding Sources

$335,000 $214,000


Outline: Chapter 14Financing the High Growth Business

What Venture Capitalists and Private Equity Funds Provide – The Four “C’s”

Integrating Profitability into the Business Plan

Stages of the FirmStages of Business FundingThe Dark Side of Venture Capital

FinancingInitial Contact with a Venture

CapitalistInitial Public Offering (IPO)The Process of the IPO


Financing a High Growth VentureFigure 14.1



Venture capital equity financing

The “Four Cs” of Venture CapitalCapitalContactsCounselCredibility


Stages of High Growth Business Funding Initial stageFirst round financing Second round financing Late round financing


Initial Stage FundingFile for incorporationWrite business planFind office and development

spaceCompletion of initial designHire key development personnel Complete prototype unitComplete prototype testing


First Round FinancingSecure key vendors Hire key service or manufacturing

personnelRent or build manufacturing facilityPurchase manufacturing equipmentMarket testingFirst sales contractProduction of first manufactured unitFirst 100, 1000, 10000 units, etc.


Second Round Financing

Break-even level of salesDevelopment of next generation of

product


Late Round FinancingInitial public offering Sale of business


Initial Contact with a Venture Capitalist

Funding amount Duration Summary of the project Use of funding Confirm how the transaction will be

liquidated Existing investment in the project Names of bankers, lawyers,

accountants and consultants Unusual or sensitive information


Venture Capital Term SheetAmount the venture capitalist wishes to invest.Percentage of ownership to the venture

capitalist.The nature of the investment such as loan,

stock, warrants, etc.Governance rights of the venture capitalist.Right to eventually register shares for a public

offering.Remaining conditions to be met by the

entrepreneur such as periodic reports, financial statements, etc.

An estimate of valuation of the company. Specific requirements on what the money is to

be used for or specific assets that must be purchased with the funds.


Initial Public OfferingAdvantages Disadvantages

Diversification and liquidity

Reporting costs

Ability to raise new cash

Disclosure of information

Valuation Maintenance of control

Future business deals

Publicity


Process of the IPO

1. Selecting an investment banking firm

2. The decision to underwrite or not underwrite

3. Getting the paperwork in order and certifying the price of the offering

4. The road show 5. Determine the size of the book 6. The first day of trading Copyright 2013 Cornwall, Vang & Hartman

outline: chapter 9 financing over the life of a venture common misconceptions about entrepreneurial...

Documents

vang hartman slide

startup financing

financing puzzle

family slide

vcs debt financing copyright

angels equity financing

simpler copyright

business venture