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Copyright © Houghton Mifflin Company. All rights reserved. 16 | 2
Learning Objectives
• Develop a resource strategy• Characterize the nature of start-up finance • Explain funding with equity • Discuss how to finance with debt
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Resource Strategy
• Categories of necessary resources– Human capital– Social capital– Physical capital– Financial capital
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Resource Strategy
• Process for constructing a resource base– Identify and specify required resources at
various milestones in the company’s growth– Identify potential suppliers of those
resources– Assess the entrepreneur’s
ability to attract resources– Combine resources to create new, unique
resources– Transform individual resources into
organizational resources.
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Start With A Plan
• The search for money– Glamorous firms
• Growth results from high rates of innovation
– Economic core firms• Growth results from low-innovation
– Ambitious firms• Growth results from simple innovations
– Constrained firms• Growth results from high rates of innovation and limited
resources
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Figure 16.1: Focus of Informal Capital Compared with That of Venture Capital
Source: Gem 2003 Global Report Venture Capital, Global Entrepreneurship Monitor 2003, www.gemconsortium.org., accessed September 2004, p.6.
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Figure 16.2: Where is Informal Capital Invested?
Source: United States Executive report 2003, Global Entrepreneurship Monitor 2003, www.gemconsortium.org, accessed September 2004, p.33.
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Consider Growth Stages
• Start-up funds are required • Capital required to grow on the basis of a
proven concept • Mezzanine financing or bridge financing
required to provide the entrepreneur with the funds the company needs to get through an initial public offering
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Figure 16.3: States of Financing for Ventures
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Unique Issues of High-Tech Ventures
• Early seed funding supports a long period of product development
• Often this early-stage money comes from government grants or foundations
• Risk is too high for venture capital firms• Marketing dollars needed to create awareness
for new adopters
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Funding Start-Ups
• Get traction as quickly as possible• Hire as few employees as possible • Lease or share everything• Other people’s money • Bootstrapping Ethics
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Funding with Equity
• Friends and family• Private investors—angels • Private placement • Strategic alliances • Small business investment companies • Grants • Venture capital institutes and networks
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Financing With Equity
• Equity from friends and family– The most expensive long term funding– The entrepreneur is more likely to lose
control of the business• Private investors-Angels
– Angels are informal risk-capital sources– Funding is between $10k-$500k– Angels are often well educated
entrepreneurs who tend to invest within a short distance from home
– Angels take an active role in the company
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Financing With Equity (continued)
• Private placement– Private investments obtained by selling
securities in a private corporation/partnership– SEC Regulation D covers memorandum
details– Advantages
• Few prior assets or credit references are needed• No SEC filing needed for entrepreneurs
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Financing With Equity (continued)
• Strategic Alliances– Formal/informal partnerships with other businesses
• Small Business Investment Companies-SBIC– Privately managed venture capital firms licensed by
the Small Business Administration• Grants• Venture Capital Institutes and Networks
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Financing with Debt
• Commercial banks• Commercial finance companies• Small Business Administration loan• State-funded venture funding • Incubators• Customers and suppliers
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Financing with Debt
• Commercial banks– Basis of loans
• Character• Capacity• Capital • Collateral• Condition
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Financing With Debt (continued)
• Commercial finance companies– Less regulated than banks– High finance charges– Factoring
• Receivable financing in which the factor takes ownership of a receivable at a discount and then collects against it
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Financing With Debt (continued)
• Small Business Administration loan– Entrepreneur applies for up to $2M loan from
his personal bank; BA guarantees that it will repay up to 75% of the loan to the commercial lender should the business default
– Micro loans exist for companies to use nonprofit community development corporations rather than banks