Ch 10 funding

1. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
Chapter
10
Getting Funding
or Financing
Bruce R. Barringer
R. Duane Ireland
Raising Money
for a New
Venture
GO
for it!
Entrepreneurs
tend to go
about the task
of raising
capital
haphazardly
because they
lack
experience in
this area
it’s all about the
Benjamin’s
• Inventory
• Hiring,
Training &
Paying
Employees
• Other:
• Deposits
• Advertising
• Product
Development
Costs.
• Unanticipated
Expenses
• Acquiring Real
Estate
• Buying
• Leasing
• Equipment.
• Transportation
Cash Flow
Challenges
Capital
Investment
Lengthy
Products
Development Cycles
New Ventures
Funding Required

2. Alternatives for Raising
Capital for a New Venture
Equity
Debt
Equity
Family
Yourself
Personal
Funds
Equity
Capital
Find
Stockholders
Find Venture
Capitalist
Find
Angel
InvestorsFriends
Startup Partners
Creative Sources
Funding
through:
• Creativity
• Ingenuity
• Thriftiness
• Cost cutting,
• Any means
necessary
Crowdfunding

3. Buying used
instead of
new equipment
Coordinating
purchases
with other
businesses
Leasing
equipment
instead of buying
Obtaining
payments in
advance from
customers
Minimizing
personal
expenses
Avoiding
unnecessary
expenses
Buying items
cheaply but
prudently via options
such as eBay
Sharing office
space or employees
with other
businesses
Hiring
interns
Examples of Bootstrapping Methods
Step 1
Step 2
Step 3
Determine how much money is
needed
Determine the type of funding
that is most appropriate
Develop a strategy for engaging
potential investors and/or
bankers
Preparing to Raise
Debt or Equity Financing
Matching a New Venture’s Characteristics
with the Appropriate Form of Financing or Funding

4. • A brief, carefully constructed statement
that outlines the merits of a business
opportunity.
• Many occasions when elevator speech
might come in handy.
• Most elevator speeches are 45 seconds to
2 minutes long.
Elevator Speech
Why limit yourself or imagination
to elevators?
You need to think of it as your
anywhere pitch.
Follow these simple steps:
• Explain how your new business will make a difference,
but do it in an entertaining fashion.
• Show off your expertise in a personable way, highlight
your experience and your team's strengths, and
ground your idea with simple, realistic messages.
• Do not use jargon.
• Most importantly, pitch quickly. You never know – the
person you are pitching may have an elevator to catch.
Step 1
Describe the opportunity or
problem that needs to be solved.
20 seconds
Step 2
Describe how your product meets
the opportunity or solves the
problem.
20 seconds
Step 3 Describe your qualifications. 10 seconds
Step 4 Describe your market. 10 seconds
Total 60 seconds
Preparing an Elevator
(Anytime) Speech

5. Sources of Equity Funding
Angel Investors
Venture
Capitalist
Initial Public
Offering (IPO)
provided to early-stage, high-potential,
high risk, growth startup companies.
affluent individual who provides capital for
a business start-up, usually in exchange for
convertible debt or ownership equity.
type of public offering where shares of stock
in a company are sold to the general public,
on a securities exchange, for the first time
• Money that is invested by venture capital
firms in start-ups & small businesses with
exceptional growth potential.
• About 800 venture capital firms in U.S.
• Venture capital firms are limited partnerships of
money managers who raise money in “funds” to
invest in start-ups and growing firms.
• The funds, or pool of money, are raised from
wealthy individuals, pension plans, university
endowments, foreign investors, and similar
sources.
• The investors who invest in venture capital
funds are called limited partners. The venture
capitalists are called general partners.
Venture Capital
• Many entrepreneurs get discouraged when they are
repeatedly rejected for venture capital funding, even
though they may have an excellent business plan.
• VC are looking for the “home run” and so reject the
majority of the proposals they consider.
• VC fund between 3,000 and 4,000 companies per year,
compared to about 62,000 per year for business
angels.
Fund very few
entrepreneurial
firms in
comparison to
business angels.
Venture Capitalist

6. Venture capital investing sets
new lows in Florida
Robert Trigaux, Times Business
Columnist
Wednesday, January 23, 2013
5:15pm
• Venture capitalists put $26.5
billion in 3,698 U.S. deals in
2012, says the MoneyTree
report.
• Florida captured just $203
million in 34 deals whiich was
less than 1 percent of the deals
and dollars invested
nationwide.
• An important part of
obtaining venture capital
funding is going through
the due diligence process.
• Venture capitalists invest
money in start-ups in
“stages,” meaning that not
all the money that is
invested is disbursed at the
same time.
• Some venture capitalists
also specialize in certain
“stages” of funding.
Venture
Capitalist
SmartQuote:
As a VC (and in general as a
human being), I'm looking for
someone coachable, humble,
ambitious, and filled with vision."
-- Josh Linkner, entrepreneur and
venture capitalist, writing at Inc.
online.

7. • The prototypical business angel is about 50 years old,
has high income and wealth, is well educated, has
succeeded as an entrepreneur, and is interested in the
start-up process.
• The number of angel investors in the U.S. has increased
dramatically over the past decade.
Are individuals who
invest their personal
capital directly in start-
ups.
Angel
Investors
Median angel funding
1st Q 2013 $680K
• Willingness to
make relatively
small investments
• Generally between
$10,000 &
$500,000.
• Seek companies
that have the
potential to grow
between 30% to
40% per year.
Angel
Investors
Angels Difficult to Find

8. Florida Angels
Local Angels
• Company’s first sale
of stock to the public.
• Going public when
stock is traded on one
of the stock
exchanges.
• Most entrepreneurial
firms go to the
NASDAQ
• Typically, a firm is not
able to go public until
it has demonstrated
that it is viable & has a
bright future.
Initial Public Offering (IPO

9. Reason
1
Reason
2
Reason
3
Reason
4
Way to raise equity capital to fund
current and future operations.
Raises a firm’s public profile,
making it easier to attract high-
quality customers and business
partners.
Is a liquidity event that provides a
means for a company’s investors
to recoup their investments.
Creates a form of currency that
can be used to grow the company
via acquisitions.
Initial Public Offering (IPO)
Reasons that Motivate Firms to Go Public
Commercial
Banks
SBA
Guaranteed
Loans
Debt
Financing
Other Loans
Micro Loans
Commercial
Banks
• Commercial banks NOT
practical source start-up
financing.
• Banks are risk averse, and
financing start-ups is a risky
business.
Banks interested in firms
with:
• Strong cash flow
• Low leverage
• Audited financials
• Good management
• Healthy balance sheet.

10. • Approximately 50% of the 9,000 banks in the U.S.
participate in the SBA Guaranteed Loan Program.
• The program operates through private-sector
lenders who provide loans that are guaranteed by
the SBA.
• The loans are for small businesses that are not able
to obtain credit elsewhere.
The SBA
Guaranteed
Loan
Program
Primary Program is the 7(A) Loan Guarantee
• SBA can guarantee as much as 85% on loans
up to $150,000 and 75% on loans over
$150,000
Size & Types
of SBA Loans
• Eligibility
Requirements
• SBA guaranteed
loan
• Primarily existing
small business
loans
• Start-ups should
examine.
Other Loans
Trade/Vendor
Credit
Vendor makes
Loan for
Purchase
2/10, n/30
Factoring
Selling
Accounts
Receivables
(AR) to third
party for a
discount
Credit Cards
High Interest

11. Sources
of Debt
Financing
Lending
Transactions
occur directly
between
individuals
Not Really
Debt
Financing
People pool
their money to
support a start-
up or other
initiative,
usually in
return for some
sort of amenity
rather than
loan

12. SBIR and
STTR
Grant
Programs
Leasing
Strategic
Partners
Other Grant
Programs
Additional Creative Sources
of Financing or Funding
Strategic Partners
• Share the costs of
product or service
development, to gain
access to particular
resources, or to
facilitate new product
development and/or
speed to market
• Established firms
benefit by partnering
with young
entrepreneurial firms
by gaining access to
their creative ideas
and entrepreneurial
spirit.
Capital Access

13. Sources Grants
for Early Stage Funding
for Primarily Technology Firms
SBIR Three-Phase Grant Program

14. • The major advantage of leasing is that it
enables a company to acquire the use of assets
with very little or no down payment.
• Most leases involve a modest down payment
and monthly payments during the duration of
the lease.
A lease is a written
agreement in which the
owner of a piece of
property allows an
individual or business to
use the property for a
specified period of time in
exchange for payments.
Leasing
Other Grants Program

16. • Venture Capital
• Angels
• IPO
• Commercial Bank
• Credit Unions
• SBA Loan
• Grants
• STTR/SBIR
• EDC
• Other
Grants/
Subsidy
Equity
Debt
Need to Make
Presentations