Summary Chapter 10

Chapter 10

Getting Financing or Funding

Why most new ventures need funding

1.      Cash Flow Challenges : Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash be paid for before cash is generated from sales.

If a firm operates in the red, its negative real time cash flow, usually computed monthly is called its burn rate.

A company burn rate is the rate at which it is spending its capital until it reaches profitability.

2.      Capital Investments: 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 they generate earnings. The up-front costs often exceed a firm’s ability to fund these activities on its own.

Sources of Personal Financing

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

Friends and Family : Often comes in the form of loans or investments, but can also involve outright gifts, foregone or delayed compensation or reduce or free rent.

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

Preparing to Raise Debt or Equity Financing

1.      Determine precisely how much money the company needs.

2.      Determine the most appropriate type of financing or funding.

3.      Developing a strategy for engaging potential investors or bankers.

Sources of Equity Funding

Business Angels : are individuals who invest their personal capital directly in start-ups.

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

The investors who invest in venture capital funds are called limited partners.

The venture capitalists, who manage the fund are called general partners.

The carry is the venture capitalist who manage the fund receive an annual management fee in addition to 20 to 25 percent of the profits earned by the fund.

Initial Public Offering : another source of equity funding is to sell stock to the public by staging.

An investment bank is an institution that acts as an underwriter or agent for a firm issuing securities.

Sources of debt financing

There are 2 common types of loans:

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

2.      Line of credit : in which a borrowing “cap” is establish and borrowers can use the credit at their discretion.

Sources of debt financing includes: commercial banks,  SBA guaranteed loans, and other sources of debt financing as vendor credit(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), factoring( a financial transaction whereby  a business sells its account receivable to a third party), peer-to-peer lending ( a financial transaction that occurs directly between individuals or “peers”.), and merchant cash advances.  

Creative Sources of Financing and Funding

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

There are 2 types of crowdfunding sites:

1.      Rewards based crowdfunding: allows entrepreneurs to raise money in exchange for some type of amenity or reward.

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

Leasing : is a written agreement in which the owner of a piece of property allows an individual or business to use of assets with very little or no down payment.

SBIR and STTR Grant Programs : are two important sources of early stage funding for technology firms.

SBIR program is a competitive grant program that provides over $2.5 billion per year to small businesses for early stage and development projects.

STTR program is a variation of the SBIR for collaborative research projects that involve small businesses and research organizations.

Other Grant Programs

Strategic Partners: another source of capital for new ventures.