13.1 What is Equity Financing?

Although bootstrapping may be ideal, if not necessary, in the beginning, as the company gains traction and shows evidence of potential, many entrepreneurs begin to look at the possibility of…

Equity Financing

What does equity financing give entrepreneurs?

Capital

In other words, equity financing is a way to…

What is the general rule of thumb?

However, sometimes what will drive you to seek investment as early as you can?

The idea behind equity is similar to…

When you are the only owner of the company, then you own…

When someone invests in your company to enhance growth, then…

As you give away equity in exchange for the investment, then…

However, if the company does well, then…

When does splitting the pie start?

And splitting the pie in an early stage company represents a unique challenge because…

The founders agree to a percentage of ownership of something that doesn’t really exist, and the question becomes…

Who is Mike Moyer?

Moyer says new entrepreneurs make two mistakes:

What does the first mistake lead to?

What does the second mistake lead to?

What does Moyer suggest?

What will this help with?

There are several stages of investment, but for the purposes of this chapter, we focus on the…

Initial Stages of Equity Financing

Seed-stage financing

Startup financing

Early stage financing

One of the most important factors to consider when you are seeking investment is…

What is another factor to consider?

As the business grows and starts to take in more revenue, entrepreneurs may seek…

Even further down the road, a profitable company looking to expand and go public through an initial public offering may seek investment through…

Finally, entrepreneurs may need…

Entrepreneurs looking to raise initial funds tend to turn to…

The 3 F’s

Typically, the 3 Fs either…

However, entrepreneurs looking for more formal financial capital to fund an emerging business may choose to seek…

Angel Investor

Entrepreneurs may also choose to seek a…

Venture Capitalist (VC)

Angel investors and VCs tend to look for similar opportunities, but…

Recall from Chapter 12, though, that equity financing is…

The Differences Between Angels and VCs

Angels	Venture Capitalists
They work alone and are individuals that have a net worth greater than $1 million	VCs are part of companies that manage various funds
Invest from $25,000 to $100,000 in personal funds	Invest from $500,000 upward in VC funding. Average investment size is $7 million
Fund seed or early stage companies	Fund from early to late-stage companies
Carry out informal due diligence	Conduct formal due diligence
Not significantly involved in the business but will offer advice and guidance	Will provide strategic support, recruit senior level executives, and will often assume a board seat
Responsible for own decisions	Decisions made by committee
Exit with returns on personal investment	Exit with returns to fund’s partners

Seed-stage and startup entrepreneurs tend to seek out angel investors when…

VCs also invest in startups, but they are more likely to invest in companies in the…

In both cases, investors want to invest in…

In this case, not all startups are eligible for angel or venture capital investment. True or false?

What Investors Look For

Factor	Key Questions
Product	Does the product stand out relative to the competition? Is there a significant need for what you are offering?
Competition	How will you outperform the competition? Does the industry need another player in the market?
Growth potential	Does your business module support sustained growth over time? How will you accelerate growth? What is the size of the market now, and is it young and growing or mature and stabilizing?
Financial management	What have you accomplished so far with the funds you have, and what will you do with the investment you get?
Team	Does the team have experts in the areas in which the startup is operating? What role does each team member play? What has been done by each member? Who is on the board of advisors?
Value add	How much value can investors bring to your business through their expert advice and guidance?
Exit plan	How will investors receive a return on their investment? Who are potential buyers of the company? What is the potential valuation at the time of exit?

What Investors Look For - Factor

Product

Competition

Growth potential

Financial management

Team

Value add

Exit plan

Product - Key Questions

Does the product stand out relative to the competition? Is there a significant need for what you are offering?

Competition - Key Questions

How will you outperform the competition? Does the industry need another player in the market?

Growth Potential - Key Questions

Financial Management - Key Questions

Team - Key Questions

Value Add - Key Questions

Exit Plan - Key Questions