Sources of Venture Financing

Question 1

What are the definitions of Debt and Capital (Equity) financing?

Answer 1

1. Debt financing – provision of borrowed funds for startup, involving a certain instrument with interest. Monetary cost of debt financing is finite–ultimately, the loan is paid off. Lenders do not assume risk, the debt must be repaid irrespective of the success of the venture.

Debt financing can place significant short-term stresses on the venture, and these are irrespective of the success or cash flow. Repayment of the loan principal, with interest, often begins immediately upon receiving the loan. During the initial startup phases of a venture (e.g., seed stage), where there is no income, a venture may not be able to meet a lender’s criteria.

Realistically, at the beginning debt financing would not be available–bank loans are not the option.

During the growth stage of development, market reaction to the venture’s offerings is requiring venture to grow - venture qualify for a loan and debt financing may then become available to the venture.

2. Equity financing – provision of funds in exchange for share in venture ownership. An equity
   co-venturer shares proportionately in both the risk and the rewards. Particularly advantageous in the short term - there is no expectation of payments in the short term – flexibility to manage its cash flow. The long-term cost of “equity money” contributed to a successful venture is potentially infinite.

Question 2

What are the types of financing sources?

Answer 2

Funds are also available form internal and external sources.

Internally generated sources are used most commonly. Internally generated revenues may have
several sources inside the enterprise: savings, profit yielded, sales of property, decrease in capital, extension of debt settlement or collecting claims.

Potential sources of external financing are being estimated according to: duration of availability, existing costs and quantity of control lost by engaging.

Question 3

What are the benefits of Personal, FF, and bank loans?

Answer 3

Personal sources
The cheapest source regarding costs and control, unconditionally necessary to attract external sources, especially banks, private investors and risk investors. Total self-financing as a financing form is mostly used by the entrepreneurs highly dedicated to using their own resources for the new startup. Personal investment does not have to be financial only, it may involve time and personal engagement in the startup.

FF
The most common investor due to the relationship with entrepreneur, which is good to overcome uncertainty level with investor and entrepreneur. Loans or investments from family members or friends need to be treated as investments of unknown investors. It is necessary to agree on details in writing– quantity of money invested, rules, rights and obligations of investor, what happens in venture fails

Bank Loans
The most common source of short-term loans, used by entrepreneurs having collateral available. Obtained sources are in the form of debt financing, thus require some sort of guarantee or collateral. Payment is secured by collateral (claims, stock, equipment or real estate) or cash flow inside the company (standard bank loans, short- term, long-term, etc).

Question 4

What are the definitions of Research and Development Partnership (R&D) and Financing from Scratch?

Answer 4

Research and Development Partnership
Source of funds for entrepreneurs in high-tech development field. Typical agreement involves sponsored company developing technology, with the assistance of resources provided by partnership of individual investors. Partnerships limited to research and development often go through three phases: financing, development and exit.

Financing “From Scratch” Method available instead of external capital acquisition. Involves all possible methods to retain money. Discounts from suppliers, grace period for payments, volume discounts, discounts for regular customers, promotional discounts for advertising supplier’s products.

Savings can also be achieved by ordering bulk goods instead of paying for individual packaging or through joint advertising with someone from the same distribution channel, thus sharing costs of advertising. Some suppliers provide for concessional financing.

Question 5

What is the definition of Bootstrap Financing?

Answer 5

Another way that start-up technology ventures finance their growth is through what is often
referred to as bootstrap financing. Company uses its own sales and cash flows to invest in its growth - also known as organic growth - company grows only by virtue of its own ability to sell, control costs, and reinvest profits. Bootstrap financing has the advantage of helping the firm steer clear of the dilutive effects of equity financing and the debt burden effects of debt financing.

The primary disadvantage of this type of financing is that it limits the venture’s ability to grow rapidly.

Question 6

What is the definition and what are the different types of Crowdfunding?

Answer 6

Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.

Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.

Types:
1. Reward-based (Perk reward - Kickstarter and Indiegogo)
2. Equity (e.g. Player Hunter and Strawberry Energy, 1.2m)
3. Debt-based (Lower interests than banks)
4. Donation-based (Social Entrepreneurship