1. Early Stage Funding
Patterns of Entrepreneurship
Chapter 6
Funding Sources

2. copyright 2003 Jack M. Kaplan
 Personal and self Funding
 Angel Financing
 Friends and Family
 Bank Loans
 Programs of SBA and Government Loans
 Where to Find Funding
Early Stage Funding

3. copyright 2003 Jack M. Kaplan
Personal Funding
 Investing your own money - sweat equity
for stock
– Offers greatest return, if successful
– Investors and venture capital sources
usually require it
– Your personal funds can be treated as
equity or debt

4. copyright 2003 Jack M. Kaplan
Moonlighting
Founder still working a regular job
Income used to support the entrepreneur
during needed cash flow
When the venture begins paying as well or
better- entrepreneur leaves job

5. copyright 2003 Jack M. Kaplan
Bootstrapping
• Often applied to a current business that can
reduce costs from current operation
• Usually overlooked as a source to
entrepreneurs
• The entrepreneur becomes more efficient
and cost conscious

6. copyright 2003 Jack M. Kaplan
Protect your Investment
 Specify in writing if it is a loan to the company,
how the loan is payable, conversion rights or
equity
 Specify if the loan is payable in full upon the
company receiving venture funding
Personal Funds

7. copyright 2003 Jack M. Kaplan
 Second mortgage, credit cards or sell your
car
OR
 Get an investor to use a bank deposit or
stock holdings as collateral
–
Use of Personal Assets

8. copyright 2003 Jack M. Kaplan
 Well-off individuals with money to invest
 Good prospects get funded
 Need good contacts - contact Columbia
Business School- Lang fund.
 Angel Networks. Fees range from $150-
$300
 garage.com assists startups.Call (800) 577-
3838 (lists 20 networks nationwide)
Angels

9. copyright 2003 Jack M. Kaplan
Friends And Family
• The most popular source of funds for
startup capital
• Friends and family are not as worried about
quick profits as professional investors
• Usually they do not investigate the business
and are not familiar with all the risks
• The best method is to provide the same
disclosure to a friend as you would a
investor

10. copyright 2003 Jack M. Kaplan
SOURCES OF CAPITAL USED IN
START-UP
73%
31%
18%
16%
10%
4%
2%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Personal Savings
Bank Loans
Family
Mortgaged Property
Friends
State/Federal Guaranteed Loans
Venture Capital

11. copyright 2003 Jack M. Kaplan
Accredited Investors
• Accredited investor is defined as having
income in excess of $200,000 in each of the
two most recent years or joint income of
$300,000 or
• Individual net worth or joint worth exceeds
$1,000,000

12. copyright 2003 Jack M. Kaplan
 Common Stock - Purest form of equity
–No fixed or guaranteed return
–Greatest risk and greatest return
–Voting stock versus non-voting stock
 Preferred Stock
–Guaranteed dividends
–Rights are prior to common stock rights
Equity Investments

13. copyright 2003 Jack M. Kaplan
 New York Venture Group 212-832-nyvg
 Mid-Atlantic Investment Network 301-681-0163
 See Stanley Pratt’s Directory for lists of Venture
Capital firms - $300
 Contact Venture Economics
Wellesley Hills, Massachusetts
(617) 431-8780
OR
 Contact National Venture Capital Corp.
Arlington, Virginia
(703) 528-4370
Investor Networks and Contacts

14. copyright 2003 Jack M. Kaplan
Bank Loans
Prepare a loan Proposal
Summary Page
Management team Profiles
Business Description
Financial Projections
Purpose of Loan and how spent
Amount required
Repayment Plan

15. copyright 2003 Jack M. Kaplan
How to Apply for a Bank Loan
Prepare a loan Proposal
The four “C”s of a loan request
Character
Cash Flow
Collateral
Contribution

16. copyright 2003 Jack M. Kaplan
Programs of the SBA
Most of the SBA loans are made by
lenders( commercial Banks, savings and
loans, Insurance companies)
Guaranteed by the SBA
Average loan is $100,000 plus-with a
maturity of 10 years

17. copyright 2003 Jack M. Kaplan
 The program allocates in excess of 50 million
annually for scientific innovation
 Phase 1-awards up to $100,000 for the purpose
of investigating the feasibility of an innovation
 Phase 11 –The report is reviewed and if
feasible, an award up to $1,000,000
 Phase 111- Funding for commercialization must
come from private sources
SBIR Program

18. copyright 2003 Jack M. Kaplan
 Licensed by the SBA - Invest locally and
have industry preferences
 Limited to companies under $2 million in
earnings and less than $6 million in net
worth
 Have both debt and equity investments
 Do not take a majority position in the
company
Small Business Investment Companies

19. copyright 2003 Jack M. Kaplan
 State programs
– Most states target funds:
Penn. Ben Franklin Technology Centers make
grants up to $100,00
N.J. New Jersey Economic Development Agency,
loans and royalty agreements
– Advantages:
No repayment unless the project succeeds and no
equity requirements
– Disadvantages:
Pay royalties on sales
State Development programs