1. Outline: Chapter 9 Financing Over the Life of a Venture Common Misconceptions about Entrepreneurial Financing The Diverse Nature of Business Financing Financing Smaller Businesses with Modest Growth Potential Financing High Growth, High Potential Ventures Copyright 2013 Cornwall, Vang & Hartman

2. Common Misconceptions about Entrepreneurial Financing Venture Capitalists Fund Most Businesses Banks Lend to Start-ups SBA lends money directly to entrepreneurs Entrepreneurs Tend to Rely on One Single Source of Funding Government Grants are a Good Source of Money for Small Businesses Copyright 2013 Cornwall, Vang & Hartman

3. The Diverse Nature of Business Financing The Nature of the Business Model Aspirations of the Entrepreneur The Stage of Development of the Business Venture Fitting the Pieces of the Financing Puzzle Together Copyright 2013 Cornwall, Vang & Hartman

4. Financing a Small Business - Modest Growth Figure 9.1 Pre-launch Start-upGrowthTransition Bootstrapping Self, friends, and family Equity financing Debt financing Copyright 2013 Cornwall, Vang & Hartman

5. Financing a High-Growth, High-Potential Venture Figure 9.2 Pre-launchStart-upGrowthTransition Bootstrapping Seed financing from angels Equity financing from VCs Debt financing Copyright 2013 Cornwall, Vang & Hartman

6. Outline: Chapter 10 Start-up Financing From the Entrepreneur, Friends and Family Self-financing Advantages and Disadvantages of Self- financing Friends and Family Financing Structure of Funds Invested ◦ Loan ◦ Equity Copyright 2013 Cornwall, Vang & Hartman

7. Most Common Sources of Financing Figure 10.1 Copyright 2013 Cornwall, Vang & Hartman Pre-launchStart-upGrowthTransition Self, friends, and family

8. Advantages and Disadvantages of Self-Financing Table 10.1 AdvantagesDisadvantages Relative ease of securing fundingMay limit size and scope of start-up Avoid complexity created by adding partners May limit ability to grow Better alignment with entrepreneur’s aspirations Increases exposure to personal risk from business failure No dilution of profits or gains Entrepreneur may lack all necessary experience, contacts, skills, and/or knowledge Eventual exit process is often simpler Copyright 2013 Cornwall, Vang & Hartman

9. Friends and Family Financing Determine True Motivations Use a Formal Business Plan Provide Accurate, Objective, and Full Information about the Business Keep Boundaries Tax Planning Copyright 2013 Cornwall, Vang & Hartman

10. Outline: Chapter 11 Bootstrapping Why bootstrap? Bootstrapping Administrative Overhead Bootstrapping Employee Expenses Bootstrapping Operating Expenses Bootstrap Marketing The Ethics of Bootstrapping Copyright 2013 Cornwall, Vang & Hartman

11. Bootstrapping Throughout the Life of a Venture Figure 11.1 Copyright 2013 Cornwall, Vang & Hartman Pre-launchStart-upGrowthTransition Bootstrapping

12. Bootstrapping Defined as the “process of finding creative ways exploit opportunities to launch and grow businesses with the limited resources available for most start-up ventures.” Cornwall, J. (2010). Bootstrapping. Englewood Cliffs, NJ: Pearson/Prentice-Hall. Copyright 2013 Cornwall, Vang & Hartman

13. Why Bootstrap? Often necessary for small businesses to get started Difficulty in raising money for growth Preserves the value and wealth of a business “Extend the Runway” Reduce risk associated with debt financing Copyright 2013 Cornwall, Vang & Hartman

14. Rules of Bootstrapping Rule #1: Overhead matters Rule #2: Employee expenses are usually the highest single recurring cost Rule #3: Minimize operating costs Rule #4: Marketing matters, but know your customers and how they make decisions Copyright 2013 Cornwall, Vang & Hartman

15. Bootstrapping Administrative Overhead Space Furnishings and office equipment Administrative salaries Copyright 2013 Cornwall, Vang & Hartman

16. Bootstrapping Employee Expenses Independent contractors Employee leasing and temporary employees Student interns Equity compensation Non-monetary benefits Copyright 2013 Cornwall, Vang & Hartman

17. Bootstrapping Operating Expenses Outsourcing Just-in-time inventory techniques Effective cost accounting Copyright 2013 Cornwall, Vang & Hartman

18. Bootstrap Marketing Know your customer Focus on the impact of message, not “volume” Focus on benefits for customer Understand the market niche Spend your marketing dollars wisely Marketing is a process, not an event Copyright 2013 Cornwall, Vang & Hartman

19. The Basic Bootstrap Marketing Tools Word of Mouth Business cards Blogs Facebook and Twitter Brochures Banners and signs Newsletters Direct mailing/e-mailing Publicity Copyright 2013 Cornwall, Vang & Hartman

20. Word of Mouth Motivate customers to talk about business Create incentives to spread the word Ask customers to “sell” Create a “buzz” campaign Viral marketing Copyright 2013 Cornwall, Vang & Hartman

21. Business Cards Design is important Include needed data about business Use quality paper Use color Include description and/or slogan Use both side of card Copyright 2013 Cornwall, Vang & Hartman

22. Blogs Be consistent in blogging Do not blog merely to promote business Take time to create quality blog Be patient – blogging takes time to build following Be cautious what you write! Copyright 2013 Cornwall, Vang & Hartman

23. Facebook and Twitter Replacing websites for many new ventures Fans more likely to purchase Builds on credibility of recommendations of friends Find motivational methods for people to become friends and fans Copyright 2013 Cornwall, Vang & Hartman

24. Outline: Chapter 12 External Sources of Funds: Equity Angel Investors Strategic Partners Private Placement Crowdfunding SBIC The Downside of Equity Financing Working with Outside Investors Copyright 2013 Cornwall, Vang & Hartman

25. Equity Financing Figure 12.1 Copyright 2013 Cornwall, Vang & Hartman Pre-launchStart-upGrowthTransition Equity financing

26. Angel Investors Wealthy individuals who make direct investment in entrepreneurial firms Seed and early stage financing $50,000 to $1 million investments Also work through Angel Networks Seek payoff in three to seven years Valuation can be difficult Copyright 2013 Cornwall, Vang & Hartman

27. Strategic Partners Larger corporations in same industry Lower expectations for returns Seeking closer relationship or acquisition over time if entrepreneurial firm is successful Copyright 2013 Cornwall, Vang & Hartman

28. Private Placement Large funding from many investors Regulated by S.E.C. Must be accredited investors ◦ National bank ◦ Corporation or trust with $5 million assets ◦ Insider/officer in the business ◦ Individuals with adequate income and/or wealth Large number of stockholders can create challenges Copyright 2013 Cornwall, Vang & Hartman

29. Crowdfunding Began with donations through Kickstarter and other similar websites Jumpstart Our Business Startup (JOBS) Act of 2012 opened door for equity crowdfunding Regulated by S.E.C. Copyright 2013 Cornwall, Vang & Hartman

30. Downside of Equity Financing Dilution of ownership The risk of sharks Dynamics of adding on new partners Copyright 2013 Cornwall, Vang & Hartman

31. Working with Equity Investors Business plan Confidentiality agreement Letter of Intent Modifications of shareholder agreements Communication with shareholders Copyright 2013 Cornwall, Vang & Hartman

32. Outline: Chapter 13 External Sources of Funds: Debt Short-term debt Long-term debt Forms of debt overlooked by entrepreneurs SBA backed funding Working with bankers Downside of debt Developing a Financing Plan Copyright 2013 Cornwall, Vang & Hartman

33. Debt Financing Figure 13.1 Copyright 2013 Cornwall, Vang & Hartman Pre-launchStart-upGrowthTransition Debt financing

34. Short-term Debt Expected to be paid within one year Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc. Copyright 2013 Cornwall, Vang & Hartman

35. Short-term Debt Trade debt Institutional Creditors ◦ Banks ◦ Asset-based lenders ◦ Factors Copyright 2013 Cornwall, Vang & Hartman

36. Long-term Debt Beyond one year Most often used to fund fixed asset purchases Copyright 2013 Cornwall, Vang & Hartman

37. Long-term Debt Banks: term loans Leasing companies Real estate lenders Copyright 2013 Cornwall, Vang & Hartman

38. Criteria for Lending by Bankers Ability of the business to generate enough cash flow to easily make interest and principle payments Entrepreneur’s ability to personally pay back the loan if the business fails Assets to serve as collateral Copyright 2013 Cornwall, Vang & Hartman

39. Key Loan Documents Loan proposal Loan document Personal guarantees Copyright 2013 Cornwall, Vang & Hartman

40. SBA Loans Funds provided by independent lenders Loan guaranty from SBA transfers risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA SBA loans are commercial bank loans guaranteed by the SBA http://www.sba.gov/financing/index.html

41. Basic SBA Loan Programs Basic 7(a) Loan Guaranty SBA’s primary business loan program Helps qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. 504 Loan Program Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization.

42. Downside of Debt Increased risk during economic slowdown Impact on proceeds from business sale Restrictive covenants Personal guarantees Copyright 2013 Cornwall, Vang & Hartman

43. Example of Assets and Potential Funding Generated Table 13.1 Asset Estimated value Percentage financed Potential funding generated Customer Purchase Orders $50,00070%$35,000 Accts. Receivable (<60 days) $80,00070%$56,000 Inventory$20,00030%$ 6,000 Leasehold Improvements $10,00050%$ 5,000 Building$120,00070%$84,000 Undeveloped Land$40,00040%$16,000 Equipment$15,00080%$12,000 Total of Business Funding Sources $335,000$214,000 Copyright 2013 Cornwall, Vang & Hartman

44. Outline: Chapter 14 Financing the High Growth Business What Venture Capitalists and Private Equity Funds Provide – The Four “C’s” Integrating Profitability into the Business Plan Stages of the Firm Stages of Business Funding The Dark Side of Venture Capital Financing Initial Contact with a Venture Capitalist Initial Public Offering (IPO) The Process of the IPO Copyright 2013 Cornwall, Vang & Hartman

45. Financing a High Growth Venture Figure 14.1 Copyright 2013 Cornwall, Vang & Hartman Pre-launchStart-upGrowthTransition Venture capital equity financing

46. The “Four Cs” of Venture Capital Capital Contacts Counsel Credibility Copyright 2013 Cornwall, Vang & Hartman

47. Stages of High Growth Business Funding Initial stage First round financing Second round financing Late round financing Copyright 2013 Cornwall, Vang & Hartman

48. Initial Stage Funding File for incorporation Write business plan Find office and development space Completion of initial design Hire key development personnel Complete prototype unit Complete prototype testing Copyright 2013 Cornwall, Vang & Hartman

49. First Round Financing Secure key vendors Hire key service or manufacturing personnel Rent or build manufacturing facility Purchase manufacturing equipment Market testing First sales contract Production of first manufactured unit First 100, 1000, 10000 units, etc. Copyright 2013 Cornwall, Vang & Hartman

50. Second Round Financing Break-even level of sales Development of next generation of product Copyright 2013 Cornwall, Vang & Hartman

51. Late Round Financing Initial public offering Sale of business Copyright 2013 Cornwall, Vang & Hartman

52. Initial Contact with a Venture Capitalist Funding amount Duration Summary of the project Use of funding Confirm how the transaction will be liquidated Existing investment in the project Names of bankers, lawyers, accountants and consultants Unusual or sensitive information Copyright 2013 Cornwall, Vang & Hartman

53. Venture Capital Term Sheet Amount the venture capitalist wishes to invest. Percentage of ownership to the venture capitalist. The nature of the investment such as loan, stock, warrants, etc. Governance rights of the venture capitalist. Right to eventually register shares for a public offering. Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc. An estimate of valuation of the company. Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds. Copyright 2013 Cornwall, Vang & Hartman

54. Initial Public Offering AdvantagesDisadvantages Diversification and liquidityReporting costs Ability to raise new cashDisclosure of information ValuationMaintenance of control Future business deals Publicity Copyright 2013 Cornwall, Vang & Hartman

55. Process of the IPO 1. Selecting an investment banking firm 2. The decision to underwrite or not underwrite 3. Getting the paperwork in order and certifying the price of the offering 4. The road show 5. Determine the size of the book 6. The first day of trading Copyright 2013 Cornwall, Vang & Hartman