Outline: Chapter 9 Financing Over the Life of a Venture - PowerPoint Presentation

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Outline: Chapter 9 Financing Over the Life of a Venture - PPT Presentation

Common Misconceptions about Entrepreneurial Financing The Diverse Nature of Business Financing Financing Smaller Businesses with Modest Growth Potential Financing High Growth High Potential Ventures ID: 671575

2013 cornwall amp hartman cornwall 2013 hartman amp vang copyright financing business growth venture equity bootstrapping funding debt term

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Slide1

Outline: Chapter 9Financing Over the Life of a Venture

Common Misconceptions about Entrepreneurial FinancingThe Diverse Nature of Business Financing Financing Smaller Businesses with Modest Growth PotentialFinancing High Growth, High Potential Ventures

Cornwall,

Vang

& HartmanSlide2

Common Misconceptions about Entrepreneurial FinancingVenture Capitalists Fund Most Businesses Banks Lend to Start-ups SBA lends money directly to entrepreneurs Entrepreneurs Tend to Rely on One Single Source of Funding Government Grants are a Good Source of Money for Small Businesses

The Diverse Nature of Business Financing The Nature of the Business Model Aspirations of the Entrepreneur The Stage of Development of the Business Venture Fitting the Pieces of the Financing Puzzle Together Copyright 2013 Cornwall,

Vang & HartmanSlide4

Financing a Small Business - Modest GrowthFigure 9.1

Pre-launch

Start-up

Growth

Transition

Bootstrapping

Self, friends, and family

Equity financing

Debt financing

Cornwall,

Vang & HartmanSlide5

Financing a High-Growth, High-Potential VentureFigure 9.2

Pre-launch

Start-up

Growth

Transition

Bootstrapping

Seed financing from angels

Equity financing from VCs

Debt financing

Cornwall,

Vang & HartmanSlide6

Outline: Chapter 10Start-up Financing From the Entrepreneur, Friends and Family

Self-financingAdvantages and Disadvantages of Self-financing Friends and Family FinancingStructure of Funds Invested LoanEquity

Cornwall,

Vang

& HartmanSlide7

Pre-launch

Start-up

Growth

Transition

Self, friends, and familySlide8

Advantages and Disadvantages of Self-FinancingTable 10.1Advantages

Disadvantages

Relative ease of securing funding

May limit size and scope of start-up

Avoid complexity created by adding partners

May limit ability to grow

Better alignment with entrepreneur’s aspirations

Increases exposure to personal risk from business failure

No dilution of profits or gains

Entrepreneur may lack all necessary

experience, contacts, skills, and/or knowledge

Eventual exit process is often simpler

Cornwall,

Vang

& HartmanSlide9

Friends and Family FinancingDetermine True Motivations Use a Formal Business PlanProvide Accurate, Objective, and Full Information about the BusinessKeep BoundariesTax PlanningCopyright 2013 Cornwall, Vang & HartmanSlide10

Outline: Chapter 11Bootstrapping

Why bootstrap?Bootstrapping Administrative OverheadBootstrapping Employee ExpensesBootstrapping Operating ExpensesBootstrap MarketingThe Ethics of Bootstrapping

Cornwall,

Vang

& HartmanSlide11

Pre-launch

Start-up

Growth

Transition

BootstrappingSlide12

BootstrappingDefined as the “process of finding creative ways exploit opportunities to launch and grow businesses with the limited resources available for most start-up ventures.” Cornwall, J. (2010). Bootstrapping. Englewood Cliffs, NJ: Pearson/Prentice-Hall.

Why Bootstrap?Often necessary for small businesses to get startedDifficulty in raising money for growthPreserves the value and wealth of a business“Extend the Runway”Reduce risk associated with debt financing

Rules of BootstrappingRule #1: Overhead mattersRule #2: Employee expenses are usually the highest single recurring costRule #3: Minimize operating costsRule #4: Marketing matters, but know your customers and how they make decisionsCopyright 2013

Cornwall, Vang & HartmanSlide15

Bootstrapping Administrative Overhead SpaceFurnishings and office equipment Administrative salaries

Bootstrapping Employee ExpensesIndependent contractors Employee leasing and temporary employees

Student interns Equity compensation Non-monetary benefits

Cornwall,

Vang

& HartmanSlide17

Bootstrapping Operating ExpensesOutsourcingJust-in-time inventory techniquesEffective cost accounting

Bootstrap MarketingKnow your customerFocus on the impact of message, not “volume”Focus on benefits for customerUnderstand the market nicheSpend your marketing dollars wiselyMarketing is a process, not an event

The Basic Bootstrap Marketing ToolsWord of MouthBusiness cardsBlogsFacebook and Twitter

BrochuresBanners and signs NewslettersDirect mailing/e-mailing

Publicity

Cornwall,

Vang

& HartmanSlide20

BlogsBe consistent in bloggingDo not blog merely to promote businessTake time to create quality blogBe patient – blogging takes time to build followingBe cautious what you write!Copyright 2013 Cornwall, Vang & HartmanSlide23

Facebook and TwitterReplacing websites for many new venturesFans more likely to purchaseBuilds on credibility of recommendations of friendsFind motivational methods for people to become friends and fansCopyright 2013 Cornwall, Vang & HartmanSlide24

Outline: Chapter 12External Sources of Funds: Equity

Angel InvestorsStrategic PartnersPrivate PlacementCrowdfundingSBICThe Downside of Equity Financing

Working with Outside Investors

Cornwall,

Vang

& HartmanSlide25

Pre-launch

Start-up

Growth

Transition

Equity financingSlide26

Angel InvestorsWealthy individuals who make direct investment in entrepreneurial firmsSeed and early stage financing$50,000 to $1 million investmentsAlso work through Angel NetworksSeek payoff in three to seven yearsValuation can be difficultCopyright 2013 Cornwall, Vang & HartmanSlide27

Strategic PartnersLarger corporations in same industryLower expectations for returnsSeeking closer relationship or acquisition over time if entrepreneurial firm is successfulCopyright 2013 Cornwall, Vang & HartmanSlide28

Private PlacementLarge funding from many investorsRegulated by S.E.C.Must be accredited investorsNational bankCorporation or trust with $5 million assetsInsider/officer in the businessIndividuals with adequate income and/or wealthLarge number of stockholders can create challenges

CrowdfundingBegan with donations through Kickstarter and other similar websitesJumpstart Our Business Startup (JOBS) Act of 2012 opened door for equity crowdfundingRegulated by S.E.C.Copyright 2013 Cornwall, Vang & HartmanSlide30

Downside of Equity Financing Dilution of ownershipThe risk of sharks

Working with Equity InvestorsBusiness plan Confidentiality agreement Letter of Intent

Modifications of shareholder agreementsCommunication with shareholders

Cornwall,

Vang

& HartmanSlide32

Outline: Chapter 13External Sources of Funds: Debt

Short-term debt Long-term debt Forms of debt overlooked by entrepreneurs

SBA backed funding

Working with bankers

Downside of debt

Developing a Financing Plan

Cornwall,

Vang

& HartmanSlide33

Pre-launch

Start-up

Growth

Transition

Debt financingSlide34

Cornwall, Vang & HartmanSlide35

Short-term DebtTrade debtInstitutional CreditorsBanksAsset-based lendersFactors

& HartmanSlide37

Cornwall, Vang & HartmanSlide38

Criteria for Lending by Bankers Ability of the business to generate enough cash flow to easily make interest and principle payments Entrepreneur’s ability to personally pay back the loan if the business fails Assets to serve as collateral

Key Loan DocumentsLoan proposal Loan document

SBA LoansFunds provided by independent lenders Loan guaranty from SBA transfers risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA SBA loans are commercial bank loans guaranteed by the SBA

http://www.sba.gov/financing/index.htmlSlide41

Basic SBA Loan ProgramsBasic 7(a) Loan Guaranty SBA’s primary business loan program

Helps qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. 504 Loan Program

Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Slide42

Downside of DebtIncreased risk during economic slowdownImpact on proceeds from business saleRestrictive covenantsPersonal guarantees

Example of Assets and Potential Funding GeneratedTable 13.1Asset

Estimated value

Percentage financed

Potential funding generated

Customer Purchase Orders

$50,000

70%

$35,000

Accts. Receivable (<60 days)

$80,000

70%

$56,000

Inventory

$20,000

30%

$ 6,000

Leasehold Improvements$10,000

50%$ 5,000Building$120,00070%$84,000Undeveloped Land$40,000

40%$16,000Equipment$15,00080%$12,000Total of Business Funding Sources$335,000

Outline: Chapter 14Financing the High Growth BusinessWhat Venture Capitalists and Private Equity Funds Provide – The Four “C’s”

Integrating Profitability into the Business Plan Stages of the FirmStages of Business FundingThe Dark Side of Venture Capital FinancingInitial Contact with a Venture Capitalist

Initial Public Offering (IPO)

The Process of the IPO

Cornwall,

Vang

& HartmanSlide45

Pre-launch

Start-up

Growth

Transition

Venture capital equity financingSlide46

Stages of High Growth Business Funding

Initial stageFirst round financing Second round financing

Late round financing

Cornwall,

Vang

& HartmanSlide48

Initial Stage FundingFile for incorporationWrite business planFind office and development spaceCompletion of initial design

Hire key development personnel Complete prototype unitComplete prototype testing

Cornwall,

Vang

& HartmanSlide49

First Round FinancingSecure key vendors Hire key service or manufacturing personnelRent or build manufacturing facilityPurchase manufacturing equipment

Market testingFirst sales contractProduction of first manufactured unitFirst 100, 1000, 10000 units, etc.

Cornwall,

Vang

& HartmanSlide50

Second Round FinancingBreak-even level of salesDevelopment of next generation of product

Vang & HartmanSlide52

Initial Contact with a Venture Capitalist Funding amount Duration

Summary of the project Use of funding

Confirm how the transaction will be liquidated

Existing investment in the project

Names of bankers, lawyers, accountants and consultants

Unusual or sensitive information

Cornwall,

Vang

& HartmanSlide53

Venture Capital Term SheetAmount the venture capitalist wishes to invest.Percentage of ownership to the venture capitalist.The nature of the investment such as loan, stock, warrants, etc.

Governance rights of the venture capitalist.Right to eventually register shares for a public offering.Remaining conditions to be met by the entrepreneur such as periodic reports, financial statements, etc.

An estimate of valuation of the company.

Specific requirements on what the money is to be used for or specific assets that must be purchased with the funds.

Cornwall,

Vang

& HartmanSlide54

Initial Public OfferingAdvantagesDisadvantagesDiversification and liquidity

Reporting costsAbility to raise new cashDisclosure of information

Valuation

Maintenance

of control

Future business deals

Publicity