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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 Copyright 2013 Cornwall, Vang & Hartman
Common Misconceptions about Entrepreneurial Financing
Venture 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
Copyright 2013 Cornwall, Vang & Hartman
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 & Hartman
Financing a Small Business - Modest GrowthFigure 9.1
Pre-launch Start-up Growth Transition
Bootstrapping
Self, friends, and family
Equity financing
Debt financing
Copyright 2013 Cornwall, Vang & Hartman
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
Copyright 2013 Cornwall, Vang & Hartman
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
◦Loan◦Equity
Copyright 2013 Cornwall, Vang & Hartman
Most Common Sources of FinancingFigure 10.1
Copyright 2013 Cornwall, Vang & Hartman
Pre-launch Start-up Growth Transition
Self, friends, and family
Advantages and Disadvantages of Self-FinancingTable 10.1
Advantages 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
Copyright 2013 Cornwall, Vang & Hartman
Friends and Family FinancingDetermine True Motivations Use a Formal Business PlanProvide Accurate, Objective, and
Full Information about the Business
Keep BoundariesTax Planning
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 11BootstrappingWhy bootstrap?Bootstrapping Administrative OverheadBootstrapping Employee ExpensesBootstrapping Operating ExpensesBootstrap MarketingThe Ethics of Bootstrapping
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Throughout the Life of a VentureFigure 11.1
Copyright 2013 Cornwall, Vang & Hartman
Pre-launch Start-up Growth Transition
Bootstrapping
Bootstrapping
Defined 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.
Copyright 2013 Cornwall, Vang & Hartman
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
Copyright 2013 Cornwall, Vang & Hartman
Rules of BootstrappingRule #1: Overhead mattersRule #2: Employee expenses are
usually the highest single recurring cost
Rule #3: Minimize operating costs
Rule #4: Marketing matters, but know your customers and how they make decisions
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Administrative Overhead
SpaceFurnishings and office
equipment Administrative salaries
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Employee ExpensesIndependent contractors Employee leasing and temporary
employeesStudent interns Equity compensation Non-monetary benefits
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Operating ExpensesOutsourcingJust-in-time inventory
techniquesEffective cost accounting
Copyright 2013 Cornwall, Vang & Hartman
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
eventCopyright 2013 Cornwall, Vang & Hartman
The Basic Bootstrap Marketing ToolsWord of MouthBusiness cardsBlogsFacebook and TwitterBrochuresBanners and signs NewslettersDirect mailing/e-mailingPublicity
Copyright 2013 Cornwall, Vang & Hartman
Word of MouthMotivate customers to talk about
businessCreate incentives to spread the
wordAsk customers to “sell”Create a “buzz” campaignViral marketing
Copyright 2013 Cornwall, Vang & Hartman
Business CardsDesign is importantInclude needed data about
businessUse quality paperUse colorInclude description and/or sloganUse both side of card
Copyright 2013 Cornwall, Vang & Hartman
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 & Hartman
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 fans
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 12External Sources of Funds: Equity
Angel InvestorsStrategic PartnersPrivate PlacementCrowdfundingSBICThe Downside of Equity
FinancingWorking with Outside Investors
Copyright 2013 Cornwall, Vang & Hartman
Equity FinancingFigure 12.1
Copyright 2013 Cornwall, Vang & Hartman
Pre-launch Start-up Growth Transition
Equity financing
Angel InvestorsWealthy individuals who make
direct investment in entrepreneurial firms
Seed and early stage financing$50,000 to $1 million
investmentsAlso work through Angel
NetworksSeek payoff in three to seven
yearsValuation can be difficult
Copyright 2013 Cornwall, Vang & Hartman
Strategic PartnersLarger corporations in same
industryLower expectations for returnsSeeking closer relationship or
acquisition over time if entrepreneurial firm is successful
Copyright 2013 Cornwall, Vang & Hartman
Private PlacementLarge funding from many
investorsRegulated by S.E.C.Must be accredited investors
◦National bank◦Corporation or trust with $5 million
assets◦Insider/officer in the business◦Individuals with adequate income
and/or wealthLarge number of stockholders
can create challenges
Copyright 2013 Cornwall, Vang & Hartman
CrowdfundingBegan with donations through
Kickstarter and other similar websites
Jumpstart Our Business Startup (JOBS) Act of 2012 opened door for equity crowdfunding
Regulated by S.E.C.
Copyright 2013 Cornwall, Vang & Hartman
Downside of Equity Financing
Dilution of ownershipThe risk of sharks Dynamics of adding on new
partners
Copyright 2013 Cornwall, Vang & Hartman
Working with Equity Investors Business plan Confidentiality agreement Letter of Intent Modifications of shareholder
agreements Communication with shareholders
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 13External Sources of Funds: Debt
Short-term debt Long-term debt Forms of debt overlooked by
entrepreneurs SBA backed funding Working with bankersDownside of debtDeveloping a Financing Plan
Copyright 2013 Cornwall, Vang & Hartman
Debt FinancingFigure 13.1
Copyright 2013 Cornwall, Vang & Hartman
Pre-launch Start-up Growth Transition
Debt financing
Short-term Debt
Expected to be paid within one year
Most often used to finance short-term expenditures such as inventory, supplies, payroll, etc.
Copyright 2013 Cornwall, Vang & Hartman
Short-term Debt
Trade debtInstitutional Creditors
◦Banks◦Asset-based lenders◦Factors
Copyright 2013 Cornwall, Vang & Hartman
Long-term DebtBeyond one yearMost often used to fund fixed
asset purchases
Copyright 2013 Cornwall, Vang & Hartman
Long-term Debt
Banks: term loansLeasing companiesReal estate lenders
Copyright 2013 Cornwall, Vang & Hartman
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
Copyright 2013 Cornwall, Vang & Hartman
Key Loan Documents
Loan proposal Loan document Personal guarantees
Copyright 2013 Cornwall, Vang & Hartman
SBA Loans
Funds 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.html
Basic SBA Loan Programs
Basic 7(a) Loan Guaranty SBA’s primary business loan programHelps qualified small businesses obtain
financing when they might not be eligible for business loans through normal lending channels.
504 Loan ProgramProvides long-term, fixed-rate financing to
small businesses to acquire real estate or machinery or equipment for expansion or modernization.
Downside of Debt
Increased risk during economic slowdown
Impact on proceeds from business sale
Restrictive covenantsPersonal guarantees
Copyright 2013 Cornwall, Vang & Hartman
Example of Assets and Potential Funding GeneratedTable 13.1
Asset 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% $ 5,000
Building $120,000 70% $84,000
Undeveloped Land
$40,000 40% $16,000
Equipment $15,000 80% $12,000
Total of Business Funding Sources
$335,000 $214,000
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 14Financing the High Growth Business
What 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
CapitalistInitial Public Offering (IPO)The Process of the IPO
Copyright 2013 Cornwall, Vang & Hartman
Financing a High Growth VentureFigure 14.1
Copyright 2013 Cornwall, Vang & Hartman
Pre-launch Start-up Growth Transition
Venture capital equity financing
The “Four Cs” of Venture CapitalCapitalContactsCounselCredibility
Copyright 2013 Cornwall, Vang & Hartman
Stages of High Growth Business Funding Initial stageFirst round financing Second round financing Late round financing
Copyright 2013 Cornwall, Vang & Hartman
Initial Stage FundingFile for incorporationWrite business planFind office and development
spaceCompletion of initial designHire key development personnel Complete prototype unitComplete prototype testing
Copyright 2013 Cornwall, Vang & Hartman
First Round FinancingSecure key vendors Hire key service or manufacturing
personnelRent or build manufacturing facilityPurchase manufacturing equipmentMarket testingFirst sales contractProduction of first manufactured unitFirst 100, 1000, 10000 units, etc.
Copyright 2013 Cornwall, Vang & Hartman
Second Round Financing
Break-even level of salesDevelopment of next generation of
product
Copyright 2013 Cornwall, Vang & Hartman
Late Round FinancingInitial public offering Sale of business
Copyright 2013 Cornwall, Vang & Hartman
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
Copyright 2013 Cornwall, Vang & Hartman
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.
Copyright 2013 Cornwall, Vang & Hartman
Initial Public OfferingAdvantages Disadvantages
Diversification and liquidity
Reporting costs
Ability to raise new cash
Disclosure of information
Valuation Maintenance of control
Future business deals
Publicity
Copyright 2013 Cornwall, Vang & Hartman
Process of the IPO
1. Selecting an investment banking firm
2. The decision to underwrite or not underwrite
3. Getting the paperwork in order and certifying the price of the offering
4. The road show 5. Determine the size of the book 6. The first day of trading Copyright 2013 Cornwall, Vang & Hartman