Class_05_CH10.pptx

Entrepreneurship: Successfully Launching New Ventures Sixth Edition Chapter 10 Getting Financing or Funding Copyright © 2019, 2016, 2012 Pearson Education, In...

Entrepreneurship: Successfully Launching New Ventures Sixth Edition Chapter 10 Getting Financing or Funding Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Learning Objectives (1 of 2) 10.1 Describe the importance of financing for entrepreneurial success. 10.2 Explain why most entrepreneurial ventures need to raise money during their early life. 10.3 Identify and describe the three sources of personal financing available to entrepreneurs. 10.4 Identify and explain the three steps involved in properly preparing to raise debt or equity financing. 10.5 Explain the three most important sources of equity funding that are available to the entrepreneurial firm. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Learning Objectives (2 of 2) 10.6 Describe common sources of debt financing entrepreneurial firms use. 10.7 Describe several creative sources of financing entrepreneurial firms may choose to use. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. The Importance of Getting Financing or Funding The Nature of the Funding and Financing Process – Few people deal with the process of raising investment capital until they need to raise capital for their own firm.  As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area. Why Most New Ventures Need Funding – There are three reasons most new ventures need to raise money during their early life.  The three reasons are shown on the following slide. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Why Most New Ventures Need Financing or Funding Figure 10.1 Three Reasons Start-Ups Need Funding Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Alternatives for Raising Money for a New Venture Personal Funds Debt Financing Equity Capital Creative Sources Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Sources of Personal Financing (1 of 2) Personal Funds – The vast majority of founders contribute personal funds, along with sweat equity, to their ventures.  Sweat equity represents the value of the time and effort that a founder puts into a new venture. Friends and Family – Friends and family are the second source of funds for many new ventures. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Sources of Personal Financing (2 of 2) Bootstrapping – A third source of seed money for a new venture is referred to as bootstrapping. – Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary. – Many entrepreneurs bootstrap out of necessity. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Examples of Bootstrapping Methods (1 of 2) Buy used instead of new equipment. Coordinate purchases with other businesses. Lease equipment rather than buying. Obtain payments in advance from customers. Minimize personal expenses. Avoid unnecessary expenses, such as lavish office space or furniture. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Examples of Bootstrapping Methods (2 of 2) Buy items cheaply, but prudently, through discount outlets or online auctions such as eBay, rather than at full-price stores. Share office space or employees with other businesses. Hire interns. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Preparing to Raise Debt or Equity Financing (1 of 3) Figure 10.3 Preparation for Debt or Equity Financing Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Preparing to Raise Debt or Equity Financing (2 of 3) Two Most Common Alternatives Equity Funding Debt Financing Means exchanging partial Is getting a loan. ownership in a firm, usually in the form of stock, for funding. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Preparing to Raise Debt or Equity Financing (3 of 3) Table 10.2 Matching an Entrepreneurial Venture’s Characteristics with the Appropriate Form of Financing or Funding Characteristics of the Venture Appropriate Source of Financing or Funding The business has high risk with an uncertain return: Personal funds, friends, family, and other forms of Weak cash flow bootstrapping High leverage Low-to-moderate growth Unproven management The business has low risk with a more predictable return: Debt financing Strong cash flow Low leverage Audited financials Good management Healthy balance sheet The business offers a high return: Equity Unique business idea High growth Niche market Proven management Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Preparing an Elevator Speech (1 of 2) Purpose An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. There are many occasions when a carefully constructed elevator speech might come in handy. Most elevator speeches are around 60 seconds long. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Preparing an Elevator Speech (2 of 2) Table 10.3 Guidelines for Preparing an Elevator Speech Describe the opportunity or problem Step 1 that needs to be solved. 20 seconds Describe how your product meets the Step 2 opportunity or solves the problem. 20 seconds Step 3 Describe your qualifications. 10 seconds Step 4 Describe your market. 10 seconds Total blank 60 seconds Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Sources of Equity Funding Business Angels Venture Capital Initial Public Offerings Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Business Angels (1 of 4) Are individuals who invest their personal capital directly in start-ups. The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives. Angel investors generally invest between $10,000 and $500,000 in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Business Angels (2 of 4) Many well-known companies, including Apple and Google, received their initial investment from one or more angel investors. The number of angel investors in the United States, which is estimated to be around 304,900, has increased dramatically over the past decade. Many angels are motivated by more than financial returns: they enjoy the process of mentoring a new start-up. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Business Angels (3 of 4) Most angel investors remain fairly anonymous and are matched up with entrepreneurs via referrals. – To find a business angel, an entrepreneur should discreetly work his/her network of acquaintances to see if anyone can make an appropriate introduction. – An advantage that college students have in regard to finding business angels is that many judge college or university-sponsored business plan or business model competitions. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Business Angels (4 of 4) There are organized groups of business angels. These groups typically consist of 10 to 150 angel investors in a local area that meet regularly to listen to business plan presentations. – An example of an angel group is the Central Texas Angel Network (CTAN) located in Austin, TX. – It is a relatively large angel group, with 165 angel investors with expertise in multiple sectors. – The process the network follows to vet investment opportunities is explained on its Web site. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (1 of 6) Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. A distinct difference between angel investors and venture capital firms is that angels tend to invest earlier in the life of a company, whereas venture capitalists come in later. The majority of venture capital money goes to follow-on funding for businesses that were originally funding by angel investors, government programs, or by some other means. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (2 of 6) Venture capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. The funds, or pools of money, are raised from high-net-worth individuals, pension plans, university endowments, foreign investors, and similar sources. The investors who invest in venture capital funds are called limited partners. The venture capitalists are called general partners. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (3 of 6) Because in the past venture capitalists have funded high- profile successes such as Google, Facebook, Snap, and Twitter, the industry receives a great deal of attention. In fact, venture capitalists fund less than 1 percent of new firms. Many entrepreneurs become discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. Venture capitalists are looking for the “home run.” The result is that they do not fund the majority of the business plans they receive and review. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (4 of 6) Still, for firms that qualify, venture capital is a viable alternative to equity funding. An advantage to obtaining this funding is that venture capitalists are extremely well-connected in the business world and can offer a firm considerable assistance beyond funding. An important part of obtaining venture capital funding is going through the due diligence process, which refers to the process of investigating the merits of a potential venture and verifying the key claims made in the business plan. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (5 of 6) Firms that prove to be suitable for venture capital funding should conduct their own due diligence to make sure they end up with a venture capital firm that is a good fit. They should ask the following questions before accepting funds from a particular venture capital firm. – Do the venture capitalists have experience in our industry? – Do they take a highly active or passive management role? – Are the personalities on both sides of the table compatible? Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Venture Capital (6 of 6) They should ask the following questions before accepting funds from a particular venture capital firm (continued): – Does the firm have deep enough pockets or sufficient contacts within the venture capital industry to provide follow-on rounds of financing? – Is the firm negotiating in good faith in regard to the percentage of our firm they want in exchange for their investment? Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Initial Public Offering (1 of 3) An initial public offering (IPO) is a company’s first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small- company stocks. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Initial Public Offering (2 of 3) Reasons that Motivate Firms to Go Public Reason 1 Reason 2 Is a way to raise equity Raises a firm’s public profile, capital to fund current and making it easier to attract future operations. high-quality customers and business partners. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Initial Public Offering (3 of 3) Reasons that Motivate Firms to Go Public Reason 3 Reason 4 Is a liquidity event that Creates a form of currency provides a means for a that can be used to grow the company’s investors to company via acquisitions. recoup their investments. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Sources of Debt Financing Commercial Banks SBA Guaranteed Loans Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Commercial Banks (1 of 2) Historically, commercial banks have not been viewed as a practical source of financing for start-up firms. – This sentiment is not a knock against banks; it is just that banks are risk averse, and financing start-ups is a risky business.  Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.  Although many new ventures have good management, few have the other characteristics, at least initially. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Commercial Banks (2 of 2) The good news is that despite these historical precedents, some banks are starting to engage start-up entrepreneurs. When it comes to start-ups, some banks are rethinking their lending standards and are beginning to focus on cash flow and the strength of the management team rather than on collateral and the strength of the balance sheet. Entrepreneurs should follow developments in this area closely. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBA Guaranteed Loans (1 of 2) The SBA Guaranteed Loan Program – The most notable SBA program available to small businesses is the 7(A) Guaranty Program. – The program operates through private-sector lenders who provide loans that are guaranteed by the SBA. – The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. – Almost all businesses are eligible to apply for and SBA loan. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBA Guaranteed Loans (2 of 2) Size and Types of Loans – The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans for more than $150,000. – An SBA guaranteed loan can be used for almost any legitimate business purpose. – Although SBA guaranteed loans are utilized more heavily by existing small businesses than start-ups, they should not be dismissed as a possible source of financing. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Other Sources of Debt Financing (1 of 3) Online Lenders – There is a group of online lenders, including OnDeck, Kabbage, and BlueVine that provide loans to businesses. – Depending on the company, loans are available from $2,000 to $2 million. – Interest rates are normally higher than charged by a commercial bank, so it is advisable to check the terms carefully. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Other Sources of Debt Financing (2 of 3) Peer-to-Peer Lenders – Peer-to-peer lenders underwrite borrowers but don’t fund the loans directly. – Instead, they act as intermediaries between borrowers and individuals or borrowers and institutional investors. – Funding Circle and Lending Club are examples of peer-to-peer lenders. – The thing to watch when considering peer-to-peer loans is the annual percentage rate, which in many cases is high. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Other Sources of Debt Financing (3 of 3) Vendor Credit – Also known as trade credit, is when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later. Factoring – Is a financial transaction whereby a business sells its accounts receivable to a third party, called a factor, at a discount in exchange for cash. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Creative Sources of Financing or Funding Crowdfunding Leasing SBIR and STTR Grant Programs – Small Business Innovation Research (SBIR) – Small Business Technology Transfer (STTR) Other Grant Programs Strategic Partners Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Crowdfunding (1 of 2) Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people (the “crowd”) typically via the Internet. Two Types of Crowdfunding Programs – Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward. – Kickstarter and Indiegogo are the most popular rewards-based crowdfunding sites. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Crowdfunding (2 of 2) – Equity-based crowdfunding helps businesses raise money by tapping individuals and investors who provide funding in exchange for equity in the business. – The catalyst for the advent of equity-based crowdfunding was the JOBS Act, which was passed in April 2012. – Four of the most popular equity-based crowdfunding sites are MicroVentures, Fundable, Crowdfunder, and CircleUp. – Equity-based crowdfunding is gaining momentum. Over $85 million has been invested through MicroVentures since 2009. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Leasing (1 of 2) A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment. Leases for facilities and leases for equipment are the two most common types of leases that entrepreneurial ventures undertake. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Leasing (2 of 2) Most leases involve a modest down payment and monthly payments during the duration of the lease. At the end of an equipment lease, the new venture typically has the option to stop using the equipment, purchase it for fair market value, or renew the lease. Leasing is almost always more expensive than paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or debt financing. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBIR and STTR Grants (1 of 5) SBIR and STTR Programs – The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. – These programs provide cash grants to entrepreneurs who are working on projects in specific areas.  The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers working at universities or other research institutions. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBIR and STTR Grants (2 of 5) SBIR Program – The SBIR Program is a competitive grant program that provides over $2.5 billion per year to small businesses for early-stage and development projects. – Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&D funds for awards to small businesses. – Guidelines for how to apply for the grants are provided on each agency’s Web site. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBIR and STTR Grants (3 of 5) SBIR Program (continued) – The SBIR is a three-phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal. – Historically, less than 15% of all Phase I proposals are funded. The payoff for successful proposals, however, is high.  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.  The small business receiving the grant also retains the rights to any intellectual property generated as the result of the grant initiative. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBIR and STTR Grants (4 of 5) SBIR Three-Phase Grant Program Table 10.5 Small Business Innovation Research: Three-Phase Program Phase Purpose of Phase Duration Funding Available (Varies by Agency) Phase I To demonstrate the proposed Up to 6 Up to $150,000 innovation’s technical feasibility. months Phase II Available to successful Phase I Up to 2 Up to $1 million companies. The purpose of a years Phase II grant is to develop and test a prototype of the innovation validated in Phase I. Phase III Period in which Phase II innovations Open No SBIR funding available; however, move from the research and federal agencies may award non-SBIR- development lab to the marketplace. funded follow-on grants or contracts for products or processes that meet the mission needs of those agencies, or for further R&D. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. SBIR and STTR Grants (5 of 5) STTR Program – Is a variation of the SBIR for collaborative research projects that involve small businesses and research organizations, such as universities or federal labs. – The STTR program requires the company to have a partnering research institution. – More information about the SBIR and STTR can be obtained at www.sbir.gov. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Other Grant Programs Private Grants – There are a limited number of grant programs available to entrepreneurs. – Getting grants takes a little detective work. – Granting agencies are low key, and must be sought out. Other Government Grants – The federal government has grant programs beyond the SBIR and STTR programs. – The full spectrum of grants available is listed at www.grants.gov. – Be careful of grant-related scams. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Strategic Partners Strategic partners are another source of capital for new ventures. Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market. Strategic partnerships that capture these types of benefits can help new ventures lessen their need for funding or financing. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Copyright Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.