Chapter 10: Getting Financing or Funding

Inventory must be purchased, employees must be trained and paid, advertising must be paid before cash is generated from sales

Cash-Flow Challenges

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

Capital Investment Challenges

Some products are under development for years before they generate earnings. The up-front costs often exceed a firm’s ability to fund these activities on its own

Lengthy Product Development Cycles

The rate of which a firm spends its capital until it reaches profitability

Burn Rate

Represents the value of the time and effort that a founder puts into a new venture

Sweat Equity

Finding ways to avoid the need for external financing or funding through creative, ingenuity, thriftiness, cost cutting or any means necessary

Bootstrapping

Partnerships are formed to share the costs of product or service development to gain access to particular resources or to facilitate speed to market

Strategic Partners

1. Determine precisely how much money is needed

2. Determine the most appropriate type of financing or funding

3. Develop a strategy for engaging potential investors or bankers

Preparing for a Debt or Equity Financing

Exchanging partial ownership of a firm, usually in the form of stock, in return for funding

Equity Financing

Commercial bank and S B A guaranteed loans are the most common source of debt financing

Debt Financing

A brief carefully constructed statement that outlines the merits of a business opportunity to engage bankers or investors.

Elevator Pitch (speech)

Equity funding that involves individuals who invest their personal capital directly in startups. The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives.

Business Angels

Money that is invested by venture capital firms in startups and small businesses with exceptional growth potential. In exchange for their investment, venture capitalists receive an equity position in the firms in which they invest

Venture Capital

Limited partnerships of money managers who raise money in funds to invest in startups and growing firms. The funds, or pol of money are raised from high net-worth individuals, pension plans, university endowments, foreign investors, and similar sources.

Venture Capital Firm

• Venture capitalists are extremely well connected in the business world and can offer firm considerable assistance beyond funding

Advantages of Venture Capital

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

Initial Public Offering (IPO)

• To raise equity capital to fund current and future operations

• To raise the firm’s public profile, making it easier to attract high-quality customers, alliance partners, and employees.

• To create a liquidity event that provides a mechanism for the company’s stockholders, including its investors, to cash out their investments

• Through going public, a firm creates another form of currency that it can use to grow the company

Reasons why a firm choose to go public

• Hire an investment bank (an institution that acts as an underwriter or agent for a firm issuing securities)

• An investment bank must satisfy several stipulations to assure the SEC that the offer is legitimate

• During the time the SEC is investigating the potential offering, the investment bank issues a preliminary prospectus that describes the public offering

• After the SEC approves the offering, the investment bank issues the final prospectus, which sets a date and issuing price for the offering

Going Public: The Process

A loan that a firm borrows a specific amount of money that must be repaid in a fixed amount of time, with interest. Obtaining a loan allows the entrepreneur to maintain ownership of their firm and deduct interest payments on their loans from their taxes.

Single-purpose loan

A borrowing “cap” and borrowers can use the credit at their discretion

Line of Credit

SBA can garantee as much as 75% on loans up to $5 million and 85% for loans of $150,000 or less. An SBA loan can be used for almost any legitimate business purpose.

SBA Guaranteed Loans

Act as intermediaries between borrowers and individuals or borrowers and institutional investors. Must watch out for annual percentage rate (which is high in most cases)

Peer-to-Peer Lenders

Also known as trade credit, occurs when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later

Vendor Credit

A business sells its accounts receivable to a third party, called a factor, at a discount in exchange for cash

Factoring

The practice of funding a project or new venture by raising monetary contributions from large number of people typically via the internet

Crowdfunding

A type of crowdfunding that allows entrepreneurs to raise money in exchange for some type of amenity or reward

Rewards-based crowdfunding

A type of crowdfunding that helps businesses raise money by tapping individuals and investors who provide funding in exchange for equity in the business.

Equity-based crowdfunding

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

Lease

Leases enable a company to acquire the use of assets with very little or no down payment

Advantages of leasing

An important source of early-stage funding for technology firms that provides cash grants to entrepreneurs who are working on projects in specific areas. SBIR is a competitive grant program that provides $2.5 billion per year to small businesses for early stage and developmental projects

SBIR (Small Business Innovation Research)

An important source of early-stage funding for technology firms that provides cash grants to entrepreneurs who are working on projects in specific areas. The STTR program requires the participation of researchers working at universities or other research institutions. STTR involves small business and research organizations such as universities or federal labs and requires the company to have a partnering research institution.

STTR (Small Business Technology Transfer)

Grants that have a limited number of grant programs available to entrepreneurs, takes a little detective work to get, and keeps a low profile

Private Grants