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© 2006 G. Yelle. All rights reserved. Why Do Ventures Need Financing
© 2006 G. Yelle. All rights reserved. Financing – Debt or Equity DEBT – Funds obtained from a LOAN. Loans require repayment with Interest EQUITY - Funds obtained from the sale of Ownership in the company, or the addition of value of the business.
© 2006 G. Yelle. All rights reserved. Financing Alternatives Personal FundsEquity Capital Debt FinancingOther (Creative) Sources
© 2006 G. Yelle. All rights reserved. What Financing is Most Applicable?
© 2006 G. Yelle. All rights reserved. Creative Financing Bootstrapping Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary. Examples: Buying Used Equipment, Sharing Office Space, Leasing instead of Buying, Cost Reduction, Customer Deposits, etc.
© 2006 G. Yelle. All rights reserved. Sources of Financing DEBTEQUITY Banks (Loans) SBA (Loan Guarantees) People (Loans) Government Agencies (Loans) Franchisor (Loans) Suppliers (Loans) Venture Capital (Loans) Cash - (Self) Corp. Shares – (Corporation) Corp. Shares - (Venture Capital) Corp. Shares – (Private Placement) Corp. Shares – (IPO) Cash or Stock – (Angel Investor) LP Shares – (Limited Partnership) Cash (Grants)
© 2006 G. Yelle. All rights reserved. Banks as a Financing Source Amount Required Use of Financing Loan Terms Collateral Borrower Credit History Business Plan
© 2006 G. Yelle. All rights reserved. SBA Loan Guarantees U.S. Small Business Administration provides a Loan Guarantee through the U.S. Government Small Business Administration. Banks obtain Loan Guarantees of up to 85% SBA Loan Guarantees make possible loans that might otherwise not be approved by a bank.
© 2006 G. Yelle. All rights reserved. Bank Financing – Approval Issues (4 c’s of Credit) Character - Attributes of the borrower (including Credit History). Cash Flow- Positive cash flow that covers the debt. Collateral-Assets pledged to secure the loan. Contribution -The borrower’s financial contribution.
© 2006 G. Yelle. All rights reserved. Credit Bureaus & Credit Reports Three Major Credit Reporting Agencies Equifax Trans Union Experian (TRW) Credit Scoring Experian - Fair Isaac Score: 365-870
© 2006 G. Yelle. All rights reserved.
Government Agencies as Lenders Economic Development Loans are available through Economic Development Agencies, or Community Loan Funds. Usually tied to Job Creation. May have specific loan use restrictions.
© 2006 G. Yelle. All rights reserved. Venture Capital Companies Often Based on Attractiveness of the Deal Skilled Management ot Management Team High Potential Return On Investment (ROI) Ownership & Possibly Board Seats Short Exit Horizon for the VC Firm Equity – Stock Shares (Usually Preferred Shares) Debt – Convertible Debt (Secured by Company Assets)
© 2006 G. Yelle. All rights reserved. Angel Investors High Net Worth Individuals More Likely to Fund Early-Stage of a Business Possible Ownership Stake/Board Seat More Likely to be in <$1 Million Range Seek High ROI
IPO & Private Placement Initial Public Offering (IPO) For General Public. Strict SEC Regulations. Will become Publicly Traded Stock. Private Placement For More Sophisticated Investors. Governed by Regulation D. Rule 505 permits $5 Million unregistered securities to be sold in 12 month period, and can be sold to “any” 35 Investors & UNLIMITED Accredited Investors. Remains Privately-Held Stock.
© 2006 G. Yelle. All rights reserved. Grants Overview Small Business Innovation Research (SBIR) Grants (Federal) HUD Grants (Federal) Empire State Development Grants (NY State) Government Set asides - 8A Program (Federal) Specialized - Examples: -VESID (NY State) -NYSERDA (NY State) -DEPT OF AGRICULTURE (Federal)
© 2006 G. Yelle. All rights reserved. SBIR & STTR PROGRAMS Small Business Innovation Research (SBIR) Grants Small Business Technology Transfer (STTR) Grants Available through 10 Federal Agencies Available through 5 Federal Agencies Requires partnering with a U.S. Research Institution. Objective: To move a project from R&D to commercialization. (See Table 11.3)
© 2006 G. Yelle. All rights reserved. Grants
© 2006 G. Yelle. All rights reserved. Grants
INTRO GROWTH MATURITY & DECLINE 2ND STAGE FINANCING (SERIES B) Cash XXX X BanksXX X StockXX X VCX X AngelXXX X PRE MARKET 1ST Stage Seed Capital 3RD & 4TH STAGE (Bridge Loans or Mezzanine Financing* TYPE Initial Start- up, Prototypes, etc. Type of Financing by Stage of Business Temporary Funding– for expansion or - IPO * Backed by Stock LATE STAGE FINANCING Acquisition & Buyout SalesProfits Asset Purchases, Inventory, Working Capital
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