ch.10 - getting financing or funding Flashcards
- Nature of Funding and Financing Process: few people deal with the process of raising investment capital.
- Why Most New Ventures need funding: there are* three reasons* most new ventures need to raise money during their early life.
Importance of getting financing or funding
- Cash Flow Challenges
- Capital investments
- Lengthy Product Development Cycles
Three reasons start-up need funding
Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales.
Cash Flow Challenges
The cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firm’s ability to provide funds for these needs on its own.
Capital Investments
Some products are under development for years before they generate earnings. The up-front costs often exceed a firm’s ability to fund these activities on its own.
Lengthy Product Development Cycles
- Personal Funds
- Debt Financing
- Equity Capital
- Creative Sources
Alternatives for raising money for a new venture
- Personal Funds: founders contribute personal funds, sweat equity
- Friends and Family: second source
- Bootstrapping: finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary.
Sources of Personal Financing
Step 1: Determine precisely how much money is needed.
Step 2: Determine the most appropriate type of financing or funding.
Step 3: Develop a strategy for engaging potential investors or bankers.
Preparing to raise debt or equity financing
- Equity Funding: exchanging partial ownership in a firm, usually in the form of stock, for funding.
- Debt Fiancing: is getting a loan.
Two Common Alternatives for preparation to raise debt or equity financing
Business has:
- high risk with uncertain return
- weak cash flow
- high leverage
- low-to-moderate growth
- unproven management
Personal funds, friends, family, and other forms of bootstrapping
Debt Financing
Business has:
- low risk with a more predictable return
- strong cash flow
- low leverage
- audited financials
- good management
- health balance sheet
Business has:
- high return
- unique business idea
- high growth
- niche market
- proven management
Equity
- A brief, carefully constructed statement that outlines the merits of a business opportunity.
- 60 seconds long.
Elevator Speech
Step 1: Describe the opportunity or problem that needs to be solved. (20 seconds long)
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)
Guidelines for Elevator Speech
- Business Angels
- Venture Capital
- Initial Public Offerings
Sources of Equity Funding
Individuals who invest their personal capital directly in start-ups
- typically older in their 50s, high income and wealth, educated
- apple and google get it from them
- has increased around 304,900 in the US
- fairly anonymous and are matched up with entrepreneurs via referrals
- ex: Central Texas Angel Network (CTAN) located in Austin TX
Business Angels
Money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential.
- goes to follow-on funding for businesses that were originally funding by angel investors, government programs, or by some other means.
- limited partnerships: money managers who raise money in “funds”
-
Venture Capital
invest in venture capital funds
Limited Partners
Venture Capitalitists: fund less than 1% of new firms
General Partners
company’s first sale of stock to the public.
IPO: Initial Public Offering
reason 1: way to raise equity capital to fund current and future operations.
reason 2: raise a firm’s public profile, making it easier to attract high-quality customers and business partners.
reason 3: a liquidity event that provides a means for a company’s investors to recoup their investments.
reason 4: creates a form of currency that can be used to grow the company via acquisitions.
reasons to go public
- Commerical Banks
- SBA Guaranteed Loans
Sources of Debt Financing
not viewed as a practical source of financing for start-up firms.
Commercial Banks
Loan Program
- 7(A) Guaranty Program
- operates through private-sector lenders who provide loans that are guaranteed by the SBA.
- almost all businesses are eligible to apply for a loan.
SBA Guaranteed Loans
