Getting Financing or Funding

What do we learn?

a.     Importance of financing for entrepreneurial success.

Ø  many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area. ( may cause a business owner to place too much reliance on some sources of capital and not enough on others)

Ø  operating without investment capital or borrowed money is more difficult.

b.    Why most entrepreneurial ventures need to raise money during their early life.

Ø  3 reasons most new ventures need to raise money during their early life:

1.      Cash flow challenges: inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales.

2.      Capital investment: 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.

3.      Lengthy product development cycles: some products are under development for years before thy generate earnings. (the up-front costs often exceed a firm’s ability to fund these activities on its own)

c.       alternatives for raising money for a new venture.

Ø  3 sources of personal financing:

1.      Personal funds: involves both financial resources and sweat equity. (sweat equity represents the value of the time and effort that a founder puts into a firm)

2.      Friends and family: often comes in the form of loans or investments. (but can also involve outright gifts, foregone or delayed compensation, or reduced or free rent)

3.      Bootstrapping: finding ways to avoid the need for external financing through creativity, ingenuity, thriftiness, cost- cutting, obtaining grants, or any other means.

d.    3 steps involved in property preparing to raise debt or equity financing.

Ø  3 steps:

Step 1: determine precisely how much money is needed.

Step 2: determine the most appropriate type of financing or funding.

·         2 most common alternatives:

1.       Equity financing: means exchanging partial ownership in a firm, usually in the form of stock, for funding.

2.      Debt financing: getting a loan.

Step 3: developing a strategy for engaging potential investors or bankers.

·         Preparing an elevator speech: a brief, carefully constructed statement that outlines the merits of a business opportunity. (45 seconds to 2 minutes long)

·         4 steps for preparing an elevator speech:

1.      Describe the opportunity or problem that needs to be sloved. (20 sec)

2.      Describe how your products eets the opportunity or solves the problem. (20 sec)

3.      Describe your qualifications. (10 sec)

4.      Describe your market. (10 sec)

e.      3 most important sources of equity funding.

Ø  Business angels

·         Are individuals who invest their personal capital directly in start-ups. 

·         The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process. 

·         Business angels are valuable because of their willingness to make relatively small investments.

·         Business angels are difficult to find. 

Ø  Venture capital

·         Is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential.

·         Venture capital firms fund very few entrepreneurial firms in comparison to business angels.

·         An important part of obtaining venture-capital funding is going through the due diligence process.

·         Venture capitalists invest money in start-ups in “stages” (means hat not all the money that is invested is disbursed at the same time)

·         Some venture capitalists also specialize in certain “stages” of funding.

Ø  Initial public offering

·         initial public offering (IPO): a company’s first sale of stock to the public.  (when a company goes public, its stock is traded on one of the major stock exchanges)

·         Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks. 

·         An IPO is an important milestone for a firm. (a firm is not able to go public until it has demonstrated that it is viable and has a bright future)

·         4 reasons that motivate firms to go public:

1.      Is a way to raise equity capital to fund current and future operations.

2.      Raises a firm’s public profile, making it easier to attract high-quality customers and business partners.

3.      Is a liquidity event that provides a means for a company’s investors to recoup their investments.

4.      Creates a form of currency that can be used to grow the company via acquisitions. 

f.      Common sources of debt financing.

Ø  Involves getting a loan or selling corporate bonds.

Ø  2 types of loans:

1.      Single purpose loan: specific amount of the money is borrowed that must be repaid in a fixed amount of time with interest.

2.      Line of credit: borrowing “cap” is established and borrowers can use the credit at their discretion. (require periodic interest payments)

Ø  Commercial banks

·         Haven’t  been viewed as a practical sources of financing for start-up firms. 

·         This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start-ups is a risky business.

·         Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet. 

Ø  SBA guaranteed loans

·         The SBA guaranteed loan program.

·         The program operates through private-sector lenders who provide loans that are guaranteed by the SBA.

·         The loans are for small businesses that are not able to obtain credit elsewhere.

·         The 7(A) loan guaranty program. (the most notable SBA program available to small businesses)

·         Size and types of loans. (almost all small businesses are eligible to apply for an SBA guaranteed loan)

Ø  Other sources of debt financing

·         Friends and family

·         Credit cards. (should be used sparingly)

·         Peer-to-Peer lending networks. ( include Propser.com and Zopa.com)

·         Organizations that lend money to specific groups. ( Count Me In)

g.     Several creative sources of financing.

Ø  Crowfunidng:

·         The practice of funding a project or new venture by raising monetary contributions from a large number of people.

·         2 types of crowfunding sites:

1.      Reward-based crowfunding: allows entrepreneurs to raise money in exchange for some type of amenity or reward.

2.      Equity-based crowfunding: helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business.

Ø  Leasing

·         a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

·         The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment. 

·         Most leases involve a modest down payment and monthly payments during the duration of the lease.

Ø  SBIR and STTR grants

·         The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. 

·         These programs provide cash grants to entrepreneurs who are working on projects in specific areas. 

·         The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers working at universities or other research institutions.

·         The small business innovation research (SBIR) program:

o   The SBIR Program is a competitive grant program that provides over $1 billion per year to small businesses in early-stage and development projects. 

o   Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their research and development funds for awards to small businesses.

o   Guidelines for how to apply for the grants are provided on each agency’s Web site.

o   The SBIR is a three phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal.

o   3 phase:

1.      6 moth feasibility study.

2.      Awards for up to $ 1 million are granted for as long as 2 years to successful phase 1 companies.

3.      The period during which pahse 2 innovations move from the research and development lab to the market place.

Ø  Other grants programs

·         Private Grants:

o   There are a limited number of grants programs available.

o   Getting grants takes a little detective work.

o   Granting agencies are low key, and must be sought out.

·         Other Government Grants:

o   The federal government has grant programs beyond the SBIR and STTR programs.

o   Be careful of grant-related scams.

Ø  Strategic partners

·         Strategic partners are another source of capital for new ventures.

·         Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market.

·         Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.