Unit 7 Getting Funding or Financing PDF

Unit 7 Getting Funding or Financing  UNIT OBJECTIVES 1. Describe the importance of financing for entrepreneurial success. 2. Explain why most entrepreneurial ventures need to raise money during their early life. 3. Identify and describe the three sources of personal f...

Unit 7 Getting Funding or Financing  UNIT OBJECTIVES 1. Describe the importance of financing for entrepreneurial success. 2. Explain why most entrepreneurial ventures need to raise money during their early life. 3. Identify and describe the three sources of personal financing available to entrepreneurs. 4. Identify and explain the three steps involved in properly preparing to raise debt or equity financing. 5. Explain the three most important sources of equity funding that are available to the entrepreneurial firm. 6. Describe common sources of debt financing entrepreneurial firms use. 7. Describe several creative sources of financing entrepreneurial firms may choose to use.  THE IMPORTANCE OF GETTING FINANCING OR FUNDING 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. There is a variety of funding methods available to entrepreneurs but not every funding method is suitable or available for every business. Choosing the right mix of funding options is an important strategic decision for entrepreneurs, as it can have a major impact on the future success or otherwise of their venture. WHY MOST NEW VENTURES NEED FINANCING OR FUNDING ALTERNATIVES FOR RAISING MONEY FOR A NEW VENTURE Personal Funds Equity Capital Debt Financing Creative Sources  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.  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.  EXAMPLES OF BOOTSTRAPPING METHODS Buy used instead of Coordinate purchases Lease equipment new equipment. with other businesses. instead of buying. Obtain payments in Minimize personal Avoid unnecessary advance from expenses. expenses. customers. Buy items cheaply but Share office space or prudently via options employees with other Hire interns. such as eBay. businesses.  EXAMPLE Honest Tea Started byGoldman & Nalebuff Financed with help from friends and family. In year 2, sales over US$1 million, they raised money with an angel round. PREPARING TO RAISE DEBT OR EQUITY FINANCING 1 OF 3 PREPARING TO RAISE DEBT OR EQUITY FINANCING 2 OF 3 Two Most Common Alternatives Equity Funding Debt Financing Means exchanging Is getting a loan. partial ownership in a firm, usually in the form of stock, for funding. PREPARING TO RAISE DEBT OR EQUITY FINANCING 3 OF 3 Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding SOURCES OF EQUITY FUNDING Venture Capital Business Angels Initial Public Offerings  BUSINESS ANGELS 1 OF 2 Business Angels 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 is interested in the start-up process. The number of angel investors in the U.S. has increased dramatically over the past decade.  BUSINESS ANGELS 2 OF 2 Business Angels (continued) Business angels are valuable because of their willingness to make relatively small investments. These investors generally invest between $10,000 and $500,000 in a single company. Are looking for companies that have the potential to grow between 30% to 40% per year. Business angels are difficult to find.  VENTURE CAPITAL 1 OF 3 Venture Capital Is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. 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 pool of money, are raised from wealthy 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.  VENTURE CAPITAL 2 OF 3 Venture Capital (continued) Venture capital firms fund very few entrepreneurial firms in comparison to business angels. Many entrepreneurs get 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” and so reject the majority of the proposals they consider. 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.  VENTURE CAPITAL 3 OF 3 Venture Capital (continued) An important part of obtaining venture capital funding is going through the due diligence process. Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time. Some venture capitalists also specialize in certain “stages” of funding.  INITIAL PUBLIC OFFERING 1 OF 3 Initial Public Offering 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.  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 capital to fund current profile, making it easier and future operations. to attract high-quality customers and business partners.  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 provides a means for a currency that can be company’s investors to used to grow the recoup their company via investments. acquisitions. SOURCES OF DEBT FINANCING Commercial Government Banks Loans  COMMERCIAL BANKS Banks 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. OTHER SOURCES OF DEBT FINANCING 1 OF 2 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. OTHER SOURCES OF DEBT FINANCING 2 OF 2 Merchant Cash Advance Type of loan in which the lender provides a business a lump sum of money in exchange for a share of future sales that covers the payment plus fees. These types of loan are arranged by online firms at an escalated interest rate. Peer-to-Peer Lending Is a financial transaction that occurs directly between individuals or peers. CREATIVE SOURCES OF FINANCING OR FUNDING Crowdfunding Leasing Other Grant Strategic Partners Programs  CROWDFUNDING 1 OF 2 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. How Moleculin used Facebook to raise capital, and how you r company can too  CROWDFUNDING 2 OF 2 Two Types of Crowdfunding Programs Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward. Kickstarter, Indiegogo, and RocketHub. Equity-based crowdfunding helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business. It appears that equity-based crowdfunding will be confined to entrepreneurs raising money from accredited investors. FundersClub, Crowdfunder.com, and Circle Up.  LEASING 1 OF 2 Leasing 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.  LEASING 2 OF 2 Leasing (continued) 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.  STRATEGIC PARTNERS 1 OF 2 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. Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit. STRATEGIC PARTNERS 2 OF 2 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.