2 What you’ll learn…Resources available to entrepreneurs to start their businessCompare/Contrast sources of financing for start-up venturesImportance of financial planningInformation needed to obtain financingTypes of growth financing available to entrepreneursHow to calculate start-up requirements
3 Entrepreneurial Resources Finding the resources to launch a business is a creative process. It requires understanding of short-term and long-term needs.Short-Term: Activities that are not part of normal operationsSeasonal increase in sales that requires purchasing more inventory than normalLong-Term: Preparation for future growthAcquiring a larger facility or buying new/additional equipment
4 Bootstrapping The most common way businesses get off the ground! Involves operating as frugally as possible and cutting all un-necessary expensesInvolves borrowing, leasing and partnering to acquire resourcesYou can accomplish this in a few ways:Hire as few employees as possibleLeasing anything you canBeing creative
5 Start-Up MoneyNew businesses have no track record to prove it will survive. For this reason, it’s hard to get investors.The main resources for start-up money is usually personal resources.Friends, Family, OthersSavings, Credit Cards, Loans, InvestmentsTo finance a new business, entrepreneurs can use banks, financial companies, investment companies, and government grants. There are 2 broad types of financing for new venturesEquity FinancingDebt Financing
6 Sources of Equity Financing Equity Capital: Cash raised for a business in exchange for ownership stake in that businessEx: Investor might invest $50k for a 25% ownership stakeEquity funding, AKA: Risk CapitalBecause of the financial risk involvedSuccessful Business: Investor makes a return on investmentBusiness Fails: Investor loses money
7 Types of Equity Funding Personal Savings#1 Source of $. 67% of businesses are started this way, without borrowing moneyFriends/FamilyWhat happens to your relationship with these people if the business fails?Private InvestorsAngel: Private investor who funds start-up companies. Nonprofessional financing source.PartnersRemember the partnership agreement we talked about in Ch. 7Share responsibilities and costsVenture CapitalistsIndividual investors or investment firms that invest capital professionally. Provide managerial as well as technical expertise.State Sponsored Venture Capital FundsLocal economic development corporations help fund new businesses to create jobs.
8 Sources of Debt Financing Money is raised by taking out loans. Not only do you borrow money, but you pay it back with interest.The entrepreneur retains ownership of the business, however must record the liability on the business’ accounting books.Make sure you are certain the business can generate enough cash flow to repay the loan.Compare and contrast long-term vs. short term financing.Do you want a loan out for 30 years, or for 3,5 or 10 years?
9 Types of Debt Funding Banks Trade Credit Usually only lend to well-established businessesTrade CreditCredit that one business will grant to another for the purchase of goods or services.Minority Enterprise Development ProgramsFunded by the private sector & SBA. Owners must be at least 51% ethnic minority, female, or disabled. Also helps secure government contracts & find strategic partnersCommercial Finance CompaniesMore expensive alternate to commercial banks. Less conservative than banks, and more willing to take risks. Form of security or collateral is required, such as your home.SBA LoanSmall Business Administration. Uses a commercial bank, but guarantees repayment to the lender up to 90% should your business fail. You and anyone with more than 20% ownership in the business must guarantee the loan with personal assets. (Home, Cars, etc)SBIC’sSmall Business Investment Companies. Privately managed venture capital companies. Licensed by the SBA to provide equity and debt financing to young, established businesses.
11 How To Get Financed!Once you’ve figured out which method your company will use (Equity vs. Debt), you must create pro forma financial statementsPro Forma: Proposed or Estimated financial statements based on predictions of how the operations of the business will turn out.Income Statements, Balance Sheets, Cash Flow, etc.This will give potential investors and other sources of funds a sense of confidence that you know what your doing!
12 What Venture Capitalists Expect Venture Capitalists rarely invest in start up companies, but when they do, they look for high-growth firms with BIG potential.Venture Capitalists typically want a 30-70% ROI for a growing company, and a 50% or more for an early stage venture because of the risk involved.Ex: If they give you $2 million for 5 years. They will want their original investment within those 5 years, as well as an additional $600,000-$1 Million on top of that.Your business must generate enough money to pay them off.
13 What Private Investors Expect Remember from 19.1, called “Angels”.Unlike Venture Capitalists, they enjoy being involved in the business.Typically invest in the business because they are familiar or understand that industry.Most private investors put between $10-500k into a new business.On average, they aim to get 10x’s their investment at the end of five years.A strong management team will attract private investors
14 What Bankers ExpectBanks must invest conservatively and follow strict rules about how to invest the bank’s money.Very different from that of a venture capitalistBecause of that, they are MUCH MORE interested in how you plan, and your ability to repay that loanCash Flow is a big concern to themYou’ve got to be able to cover the business’ monthly expenses AND the loan paymentBankers rely on the 5 C’s to determine your loan applicationCharacter-Reputation for business practicesCapacity-Ability to pay a loan (Cash Flow)Capital-Net worth of a businessCollateral-Security for the loan should you not be able to repayConditions-Growth, Competition, Economy, etc.
15 Growth FinancingThis is financing for an already established business looking to grow! Not start up funding!VC (Venture Capital) CompaniesExpect returns of 30-70%May require significant ownership, or a seat on the board of directorsRequires Due Dilligence-Investigation & analysis by an investorPrivate PlacementsRaises capital by selling ownershipPrivate offering or sale of securities (ownership)Investors must meet certain standards, must be “sophisticated”Investors must have a net worth of at least a million dollarsIPOs (Initial Public Offerings)Sale of stock in a company on a public exchange5 steps to becoming a public company with stock on pg List them.
16 Calculating Start-Up Needs Start-Up CostsThose that you incur prior to the business opening it’s doorsFig on pg. 420, good example of costsEquipment, furniture, fixtures, etc.Operating CostsAKA working capitalAmount of cash needed to carry out daily operationsCovers the time between selling your product/service and receiving payment from the customerContingency FundExtra amount of money used only when absolutely necessary“Emergency Fund”Some businesses keep enough money in here to operate for 2 or more months.