FINANCING OR FUNDING

The Importance of Getting Financing or Funding
  • The Nature of the Funding and Financing Process:- Few people deal with the process of raising investment capital until they need to raise capital for their own firm.
  • As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area.
  • Why Most New Ventures Need Funding:- There are three reasons most new ventures need to raise money during their early life.
  • The three reasons are shown on the following slide.
Why Most New Ventures Need Financing or Funding
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Alternatives for Raising Money for a New Venture
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Sources of Personal Financing
  • Personal Funds : -The vast majority of founders contribute personal funds, along with sweat equity, to their ventures.
  • Sweat equity represents the value of the time and effort that a founder puts into a new venture.
  • Friends and Family:- Friends and family are the second source of funds for many new ventures.
Bootstrapping
  • A third source of seed money for a new venture is referred to as bootstrapping.
  • Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.
  • Many entrepreneurs bootstrap out of necessity.
Examples of Bootstrapping Methods
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Preparing to Raise Debt or Equity Financing
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  Two Most Common Alternatives
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Preparing to Raise Debt or Equity Financing
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Sources of Equity Funding
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Venture Capital
  • Is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential.
  • There are about 650 venture-capital firms in the U.S. that provide funding to about 2,600 firms per year.
  • Venture-capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms.
  • The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.
  • A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.
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.
  • The number of angel investors in the U.S. has increased dramatically over the past decade.
  • Business angels are valuable because of their willingness to make relatively small investments.
  • These investors generally invest between $10,000 and $500,000 in a single company.
  • Are looking for companies that have the potential to grow between 30% to 40% per year.
  • Business angels are difficult to find
  • Venture capital firms fund very few entrepreneurial firms in comparison to business angels.
Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan.
Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider.
Still, for the firms that qualify, venture capital is a viable alternative for equity funding
  • An important part of obtaining venture-capital funding is going through the due diligence process:
  • Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time.
  • Some venture capitalists also specialize in certain “stages” of funding.
Initial Public Offering
  • An initial public offering (IPO) is 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. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future
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                                 Reasons that Motivate Firms to Go Public
Sources of Debt Financing
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*Banks
  • Historically, commercial banks have not 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.
SBA Guaranteed Loans
*The SBA Guaranteed Loan Program
  • Approximately 50% of the 9,000 banks in the U.S. participate in 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.
Other Sources of Debt Financing
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Creative Sources of Financing or Funding

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Other Grant Programs
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