CHAPTER 16

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CHAPTER 16

  1. 1. Chapter 16 Funding a Start-up Venture
  2. 2. Learning Objectives <ul><li>Develop a resource strategy </li></ul><ul><li>Characterize the nature of start-up finance </li></ul><ul><li>Explain funding with equity </li></ul><ul><li>Discuss how to finance with debt </li></ul>
  3. 3. Resource Strategy <ul><li>Categories of necessary resources </li></ul><ul><ul><li>Human capital </li></ul></ul><ul><ul><li>Social capital </li></ul></ul><ul><ul><li>Physical capital </li></ul></ul><ul><ul><li>Financial capital </li></ul></ul>
  4. 4. Resource Strategy <ul><li>Process for constructing a resource base </li></ul><ul><ul><li>Identify and specify required resources at various milestones in the company’s growth </li></ul></ul><ul><ul><li>Identify potential suppliers of those resources </li></ul></ul><ul><ul><li>Assess the entrepreneur’s ability to attract resources </li></ul></ul><ul><ul><li>Combine resources to create new, unique resources </li></ul></ul><ul><ul><li>Transform individual resources into organizational resources. </li></ul></ul>
  5. 5. Start With A Plan <ul><li>The search for money </li></ul><ul><ul><li>Glamorous firms </li></ul></ul><ul><ul><ul><li>Growth results from high rates of innovation </li></ul></ul></ul><ul><ul><li>Economic core firms </li></ul></ul><ul><ul><ul><li>Growth results from low-innovation </li></ul></ul></ul><ul><ul><li>Ambitious firms </li></ul></ul><ul><ul><ul><li>Growth results from simple innovations </li></ul></ul></ul><ul><ul><li>Constrained firms </li></ul></ul><ul><ul><ul><li>Growth results from high rates of innovation and limited resources </li></ul></ul></ul>
  6. 6. Figure 16.1: Focus of Informal Capital Compared with That of Venture Capital <ul><li>Source: Gem 2003 Global Report Venture Capital, Global Entrepreneurship Monitor 2003, www.gemconsortium.org., accessed September 2004, p.6. </li></ul>
  7. 7. Figure 16.2: Where is Informal Capital Invested? <ul><li>Source: United States Executive report 2003, Global Entrepreneurship Monitor 2003, www.gemconsortium.org, accessed September 2004, p.33. </li></ul>
  8. 8. Consider Growth Stages <ul><li>Start-up funds are required </li></ul><ul><li>Capital required to grow on the basis of a proven concept </li></ul><ul><li>Mezzanine financing or bridge financing required to provide the entrepreneur with the funds the company needs to get through an initial public offering </li></ul>
  9. 9. Figure 16.3: States of Financing for Ventures
  10. 10. Unique Issues of High-Tech Ventures <ul><li>Early seed funding supports a long period of product development </li></ul><ul><li>Often this early-stage money comes from government grants or foundations </li></ul><ul><li>Risk is too high for venture capital firms </li></ul><ul><li>Marketing dollars needed to create awareness for new adopters </li></ul>
  11. 11. Funding Start-Ups <ul><li>Get traction as quickly as possible </li></ul><ul><li>Hire as few employees as possible </li></ul><ul><li>Lease or share everything </li></ul><ul><li>Other people’s money </li></ul><ul><li>Bootstrapping Ethics </li></ul>
  12. 12. Funding with Equity <ul><li>Friends and family </li></ul><ul><li>Private investors—angels </li></ul><ul><li>Private placement </li></ul><ul><li>Strategic alliances </li></ul><ul><li>Small business investment companies </li></ul><ul><li>Grants </li></ul><ul><li>Venture capital institutes and networks </li></ul>
  13. 13. Financing With Equity <ul><li>Equity from friends and family </li></ul><ul><ul><li>The most expensive long term funding </li></ul></ul><ul><ul><li>The entrepreneur is more likely to lose control of the business </li></ul></ul><ul><li>Private investors-Angels </li></ul><ul><ul><li>Angels are informal risk-capital sources </li></ul></ul><ul><ul><li>Funding is between $10k-$500k </li></ul></ul><ul><ul><li>Angels are often well educated entrepreneurs who tend to invest within a short distance from home </li></ul></ul><ul><ul><li>Angels take an active role in the company </li></ul></ul>
  14. 14. Financing With Equity (continued) <ul><li>Private placement </li></ul><ul><ul><li>Private investments obtained by selling securities in a private corporation/partnership </li></ul></ul><ul><ul><li>SEC Regulation D covers memorandum details </li></ul></ul><ul><ul><li>Advantages </li></ul></ul><ul><ul><ul><li>Few prior assets or credit references are needed </li></ul></ul></ul><ul><ul><ul><li>No SEC filing needed for entrepreneurs </li></ul></ul></ul>
  15. 15. Financing With Equity (continued) <ul><li>Strategic Alliances </li></ul><ul><ul><li>Formal/informal partnerships with other businesses </li></ul></ul><ul><li>Small Business Investment Companies-SBIC </li></ul><ul><ul><li>Privately managed venture capital firms licensed by the Small Business Administration </li></ul></ul><ul><li>Grants </li></ul><ul><li>Venture Capital Institutes and Networks </li></ul>
  16. 16. Financing with Debt <ul><li>Commercial banks </li></ul><ul><li>Commercial finance companies </li></ul><ul><li>Small Business Administration loan </li></ul><ul><li>State-funded venture funding </li></ul><ul><li>Incubators </li></ul><ul><li>Customers and suppliers </li></ul>
  17. 17. Financing with Debt <ul><li>Commercial banks </li></ul><ul><ul><li>Basis of loans </li></ul></ul><ul><ul><ul><li>Character </li></ul></ul></ul><ul><ul><ul><li>Capacity </li></ul></ul></ul><ul><ul><ul><li>Capital </li></ul></ul></ul><ul><ul><ul><li>Collateral </li></ul></ul></ul><ul><ul><ul><li>Condition </li></ul></ul></ul>
  18. 18. Financing With Debt (continued) <ul><li>Commercial finance companies </li></ul><ul><ul><li>Less regulated than banks </li></ul></ul><ul><ul><li>High finance charges </li></ul></ul><ul><ul><li>Factoring </li></ul></ul><ul><ul><ul><li>Receivable financing in which the factor takes ownership of a receivable at a discount and then collects against it </li></ul></ul></ul>
  19. 19. Financing With Debt (continued) <ul><li>Small Business Administration loan </li></ul><ul><ul><li>Entrepreneur applies for up to $2M loan from his personal bank; BA guarantees that it will repay up to 75% of the loan to the commercial lender should the business default </li></ul></ul><ul><ul><li>Micro loans exist for companies to use nonprofit community development corporations rather than banks </li></ul></ul>SBA
  20. 20. Financing With Debt (continued) <ul><li>State-funded venture capital </li></ul><ul><li>Incubators </li></ul><ul><li>Customers and suppliers </li></ul>

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