1. Entrepreneurship and SMEs Sergey Anokhin, Ph.D. Kent State University January 16, 2009

2. Presentation highlights Approaches to entrepreneurial financing Sources of funds –Personal funds –Family and friends –Commercial banks –SBA loans and government grants –R&D partnerships –Business angels and venture capital Valuing your company

3. Approaches to entrepreneurial financing Debt financing Equity financing Internal funds External funds Important considerations: –Length of time –Cost –Control (what you give up)

4. Personal funds Demonstrate commitment Amount less important: rather, it is percentage of total assets available to the entrepreneur Cheapest, long-term source of capital

5. Family and friends Relationship financing Often includes equity and unwanted input into the operations of the new venture More patient than other investors Relations with friends at stake Put everything in writing to keep business and social life separate

6. Commercial banks Most common source of financing Requires collateral –Business assets –Personal assets –Cosigner’s assets Types of bank loans: –Accounts receivable (up to 80% of the value) –Inventory loans (50%) –Equipment loans –Real estate loans (75%)

7. Conventional cash flow financing Lines of credit (use as needed; involves commitment fee) Installment loans (seasonal financing of working capital for 30-40 days) Straight commercial loans (seasonal financing, inventory build-up, 30-90 days) Long-term loans (up to 10 years) Character loans (personal loans – used when the business does not have track record)

8. Understanding bank lending decisions 5 C’s of lending: –Character –Capacity (capability) –Capital –Collateral –Conditions

9. Government help SBA guaranty loans –Short- and long-term (up to 20 years) –Additional reporting requirements –Effective limit of $1 million (but no limit technically) –Definition of small business varies by industry Government grants –SBIR grants program (11 federal agencies)

10. R&D partnerships Limited partnerships essentially –Entrepreneurs as general partners –Investors as limited partners

11. Bootstrap financing Factoring Trade credit Customers (obtaining letter of credit helps you purchase materials without own cash) Real estate Leasing

12. Informal and formal risk capital Stages of business development funding –Early-stage financing Seed capital Start-up –Expansion or development funding Second stage (initial growth stage) Third stage (rapid sales growth/breakeven point) Fourth stage (preparation for IPO) –Acquisitions and LBO financing Traditional acquisitions LBOs Going private

13. Informal risk capital market Business angels Over 100,000 business angels in the US $10k-$500k (average under $200k), 1-2 deals/year Investment preferences: –Manufacturing (industrial/commercial) –Energy/natural resources –Service –Retail/wholesale trade 5-year returns: 10 times for startups, 3 times for established firms Importance of referrals

14. Venture capital Long-term commitment All 3 stages of financing; over half goes to expansion stage Contribute money, connections and skills Investment preferences: –IT –Life sciences –Nontechnology California (36%) and Massachusetts (11%)

15. Types of VCs Independent Captive –Government –Pension funds/financial institutions –Corporate

16. Expectations and process 50% ROI for early-stage ventures 40% ROI for development financing 30% ROI for LBOs VC process: –Preliminary screening –Agreement on principal terms –Due diligence –Final approval

17. Valuing your company Nature and history of the business Industry outlook Book value (owner’s equity) Future earning capacity Dividend-paying capacity Goodwill and other intangibles Previous sale of stock Market price of the stocks of comparable companies

18. Questions?