1. FUNDING A START-UP
CHAPTER Sixteen

2. Resource Strategy Categories of necessary resources – Value Chain
Human capital
Social capital
Physical capital
Financial capital
Quantified through Pro Formas

3. Focus of Informal Capital Compared with That of Venture Capital

4. States of Financing for Ventures
Strategic Planning

5. Financial Strategy Framework
Opportunity
Opportunity
Financial
Strategy
Degrees of
strategic freedom:
Time to OOC
Time to close
Future alternatives
Risk/reward
Personal concerns
Financial
Strategy
Degrees of
strategic freedom:
Time to OOC
Time to close
Future alternatives
Risk/reward
Personal concerns
Sources and
Deal Structure
Debt
Equity
Other
Sources and
Deal Structure
Debt
Equity
Other
Business
Strategy
Marketing
Operations
Finance
Value creation
Business
Strategy
Marketing
Operations
Finance
Value creation
Financial
Requirements
Driven by:
Burn rate
Operating needs
Working capital
Asset requirements and sales
Financial
Requirements
Driven by:
Burn rate
Operating needs
Working capital
Asset requirements and sales

6. Critical Financing Variables
Factors that affect the availability of various types of financing include:
Investor’s required rate of return or
internal rate of return.
Amount of capital required and prior
valuations of the venture
Founders’ goals regarding growth,
control, liquidity, and harvesting.
Relative bargaining positions.
Investor’s required terms and
covenants.
Accomplishments and performance
to date.
Investor’s perceived risk.
Industry and technology.
Venture upside potential and
anticipated exit timing.
Venture anticipated growth rate
Venture age and stage of
development.

7. Central Issues in Entrepreneurial Finance
Value creation
Slicing the value pie
Covering risk
Shareholders
Customers
Employees
Allocating risks and returns
Cash-Risk-Time
Debt: Take control
Equity: Staged commitments
Shareholders
Value creation
Customers
Employees
Allocating risks and returns
Slicing the value pie
Cash-Risk-Time
Debt: Take control
Covering risk
Equity: Staged commitments

8. Entrepreneurial Finance
Three core principles of entrepreneurial finance
More cash is preferred to less cash
Cash sooner is preferred to cash later
Less risky cash is preferred to more risky cash

9. Entrepreneur - Self Financing
Start up capital structure includes
Savings
Credit cards
Mortgages
Stock market accounts
Customer financing

10. Bootstrapping DOING MORE WITH LESS
Technique for getting by on as few resources as possible and using other people’s resources whenever feasible
Bootstrapping tips:
Hire as few employees as possible
Lease or share everything
Use other people’s money

11. Financing With Equity Equity from friends and family
The most expensive long term funding
The entrepreneur is more likely to lose control of the business
Private investors-Angels
Angels are informal risk-capital sources
Funding is between $10k-$500k
Tend to invest within a short distance from home
Angels take an active role in the company

12. Angel Investors Who are angel investors?
Most are self-made entrepreneur millionaires
Many are in their 40s and 50s
Most are well educated
Ninety-five percent have college degrees from four-year colleges
Fifty-one percent have graduate degrees (Forty-four percent are in a technical field and thirty-percent percent are in business or economics)
Ninety-six percent are men

13. Informal Investors
What type of ventures lends themselves to the use of informal investors?
Ventures with capital requirements of between $50,000 and $500,000
Ventures with sales potential of between $2 million and $20 million within 5 to 10 years
Small, established, privately held ventures with sales and profit growth of 10% to 20% per year

14. Financing With Equity (continued)
Strategic Alliances
Formal/informal partnerships with other businesses
Small Business Investment Companies-SBIC
Privately managed venture capital firms licensed by the Small Business Administration
Grants
Venture Capital Institutes and Networks

15. Financing With Debt Commercial banks Basis of loans Character Capacity
Capital
Collateral
Condition

16. Financing With Debt (continued)
Small Business Administration loan
Entrepreneur applies for up to $2M loan from his personal bank; BA guarantees that it will repay up to 75% of the loan to the commercial lender should the business default
Micro loans exist for companies to use nonprofit community development corporations rather than banks

17. Presenting Information to Possible Investors
A concise presentation should include the following:
What is the market opportunity?
Why is it compelling?
How will/does the business make money?
Why is this the right team at the right time?
How does an investor exit the investment?
Four Anchors

18. What to Look for in Investors
Seek investors who:
Are considering new financing proposals and can provide the required level of capital
Are interested in companies at the particular stage of growth
Understand and have a preference for investments in the particular industry

19. What to Look for in Investors
Seek investors who:
Can provide good business advice, moral support, and has contacts in the business and financial community
Are reputable, fair, and ethical and with whom the entrepreneur gets along
Have successful track records of 10 years or more advising and building smaller companies

20. What to Look Out for in Investors
Avoid investors who exhibit these warning signs:
Attitude
Be wary if getting through to a general partner in the investment firm is an ordeal
Be wary if the investor thinks he or she can run the business better than the lead entrepreneur or the management team
Overcommitment
Be wary of lead investors who indicate they will be active directors but who also sit on the boards of six to eight other startup and early0stage companies or are in the midst of raising money for a new fund

21. What to Look Out for in Investors
Avoid investors who exhibit these warning signs:
Inexperience
Be wary of dealing with venture capitalists who are under 30 years of age and have:
An MBA
Only worked on Wall Street or as a consultant
No operating, hands-on experience in new and growing companies
A predominantly financial focus

22. What to Look Out for in Investors
Avoid investors who exhibit these warning signs:
Unfavorable reputation
Be wary of funds that have a reputation for early and frequent replacement of the founders
Be wary of those where more than one-fourth or the portfolio companies are in trouble or failing to meet projections in their business plans
Predatory pricing
Be wary of investors who unduly exploit conditions during adverse capital markets by forcing large share price decreases in the new firms and punishing terms on prior investors

23. Minimizing Surprises Tips to consider when raising capital:
Raise money when you do not need it
Learn as much about the process and how to manage it as you can
Know your relative bargaining position
If all you get is money, you are not getting much
Assume the deal will never close
Always have a backup source of capital
The legal and other experts can blow it—
sweat the details yourself

24. END

25. Financing With Equity Private placement
Private investments obtained by selling securities in a private corporation/partnership
SEC Regulation D covers memorandum details
Advantages
Few prior assets or credit references are needed
No SEC filing needed for entrepreneurs

26. Dominant Venture Modes

27. Financing With Debt (continued)
Commercial finance companies
Less regulated than banks
High finance charges
Factoring
Receivable financing in which the factor takes ownership of a receivable at a discount and then collects against it