Questions and Answers
What are sources of new venture financing?
Bootstrap Financing, Angel Investors, Venture Capital, Asset-Based Lenders, Venture Leasing, Corporate Venturing, Government Programs, Trade Credit, Factoring.
Which of the following is NOT a source of new venture financing?
Angel investors usually invest in large amounts in late-stage ventures.
False
What do asset-based lenders rely on for debt servicing?
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Venture capital funds are organized as __________ partnerships.
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What percentage of bootstrap financing is typically attributed to personal savings?
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What are the two types of factoring?
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Corporate venturing can only be externally managed.
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Which government agency in the US funds entrepreneurship through loan guarantee programs?
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What is the largest source of external short-term financing for firms in the US?
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Study Notes
Financing Sources for New Ventures
- Bootstrap financing relies on the entrepreneur's own resources, friends, and family, avoiding external investor assessments.
- Common bootstrap resources include personal savings (90%), credit cards/personal loans (28%), loans from family and friends (7%), and equity investment from family and friends (5%).
Angel Investors
- Angel investors are individuals who invest smaller amounts ($25,000 - $500,000) in early-stage ventures.
- They often possess significant industry experience, are willing to invest over long periods, and may take an active role in the business.
Venture Capital
- Venture capital (VC) is organized as limited partnerships consisting of limited partners (LPs) who provide capital and general partners (GPs) who manage investments.
- VC funds target high-risk ventures with the potential for large returns, focusing on equity investments.
Asset-Based Lending
- Asset-based lenders, or secured lenders, provide debt capital to ventures that have collateralizable assets.
- They rely more on the liquidation of business assets than on cash flow for debt servicing, with the U.S. market estimated at $590 billion in 2008.
Venture Leasing
- Entrepreneurs can lease essential tangible assets instead of purchasing them, often benefiting from tax advantages.
- The lessor's return might be linked to the venture's financial performance.
Corporate Venturing
- Corporate venturing can be internally or externally managed, depending on the company's innovation strategy.
- Internally managed investments seek to keep valuable ideas within the company, while externally managed focuses on either financial returns or strategic interests.
Government Programs
- Various government programs support small business growth, including loan guarantees and innovation grants.
- The U.S. Small Business Administration (SBA) facilitates programs such as Small Business Investment Companies (SBIC) and the Small Business Innovation Research Program (SBIR).
Trade Credit
- Trade credit, or vendor financing, occurs when suppliers offer payment terms for purchases, becoming a vital source of short-term financing.
- It is particularly crucial in emerging economies where risk capital is less accessible.
Factoring
- Factoring involves selling accounts receivable to a factor, who then manages the collection process.
- There are two types of factoring: with recourse (where the seller retains some risk) and without recourse (where the factor assumes full risk).
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Description
Explore key financing sources for new ventures, from bootstrap financing to angel investors and venture capital. Understand how each financing option works, its risks, and its potential benefits for entrepreneurs. This quiz covers various funding strategies that can make or break a startup.
