Entrepreneurship Chap 6


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Entrepreneurship Chap 6

  1. 1. Early Stage Funding Patterns of Entrepreneurship Chapter 6 Funding Sources
  2. 2. copyright 2003 Jack M. Kaplan  Personal and self Funding  Angel Financing  Friends and Family  Bank Loans  Programs of SBA and Government Loans  Where to Find Funding Early Stage Funding
  3. 3. copyright 2003 Jack M. Kaplan Personal Funding  Investing your own money - sweat equity for stock – Offers greatest return, if successful – Investors and venture capital sources usually require it – Your personal funds can be treated as equity or debt
  4. 4. copyright 2003 Jack M. Kaplan Moonlighting Founder still working a regular job Income used to support the entrepreneur during needed cash flow When the venture begins paying as well or better- entrepreneur leaves job
  5. 5. copyright 2003 Jack M. Kaplan Bootstrapping • Often applied to a current business that can reduce costs from current operation • Usually overlooked as a source to entrepreneurs • The entrepreneur becomes more efficient and cost conscious
  6. 6. copyright 2003 Jack M. Kaplan Protect your Investment  Specify in writing if it is a loan to the company, how the loan is payable, conversion rights or equity  Specify if the loan is payable in full upon the company receiving venture funding Personal Funds
  7. 7. copyright 2003 Jack M. Kaplan  Second mortgage, credit cards or sell your car OR  Get an investor to use a bank deposit or stock holdings as collateral – Use of Personal Assets
  8. 8. copyright 2003 Jack M. Kaplan  Well-off individuals with money to invest  Good prospects get funded  Need good contacts - contact Columbia Business School- Lang fund.  Angel Networks. Fees range from $150- $300  garage.com assists startups.Call (800) 577- 3838 (lists 20 networks nationwide) Angels
  9. 9. copyright 2003 Jack M. Kaplan Friends And Family • The most popular source of funds for startup capital • Friends and family are not as worried about quick profits as professional investors • Usually they do not investigate the business and are not familiar with all the risks • The best method is to provide the same disclosure to a friend as you would a investor
  10. 10. copyright 2003 Jack M. Kaplan SOURCES OF CAPITAL USED IN START-UP 73% 31% 18% 16% 10% 4% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% Personal Savings Bank Loans Family Mortgaged Property Friends State/Federal Guaranteed Loans Venture Capital
  11. 11. copyright 2003 Jack M. Kaplan Accredited Investors • Accredited investor is defined as having income in excess of $200,000 in each of the two most recent years or joint income of $300,000 or • Individual net worth or joint worth exceeds $1,000,000
  12. 12. copyright 2003 Jack M. Kaplan  Common Stock - Purest form of equity –No fixed or guaranteed return –Greatest risk and greatest return –Voting stock versus non-voting stock  Preferred Stock –Guaranteed dividends –Rights are prior to common stock rights Equity Investments
  13. 13. copyright 2003 Jack M. Kaplan  New York Venture Group 212-832-nyvg  Mid-Atlantic Investment Network 301-681-0163  See Stanley Pratt’s Directory for lists of Venture Capital firms - $300  Contact Venture Economics Wellesley Hills, Massachusetts (617) 431-8780 OR  Contact National Venture Capital Corp. Arlington, Virginia (703) 528-4370 Investor Networks and Contacts
  14. 14. copyright 2003 Jack M. Kaplan Bank Loans Prepare a loan Proposal Summary Page Management team Profiles Business Description Financial Projections Purpose of Loan and how spent Amount required Repayment Plan
  15. 15. copyright 2003 Jack M. Kaplan How to Apply for a Bank Loan Prepare a loan Proposal The four “C”s of a loan request Character Cash Flow Collateral Contribution
  16. 16. copyright 2003 Jack M. Kaplan Programs of the SBA Most of the SBA loans are made by lenders( commercial Banks, savings and loans, Insurance companies) Guaranteed by the SBA Average loan is $100,000 plus-with a maturity of 10 years
  17. 17. copyright 2003 Jack M. Kaplan  The program allocates in excess of 50 million annually for scientific innovation  Phase 1-awards up to $100,000 for the purpose of investigating the feasibility of an innovation  Phase 11 –The report is reviewed and if feasible, an award up to $1,000,000  Phase 111- Funding for commercialization must come from private sources SBIR Program
  18. 18. copyright 2003 Jack M. Kaplan  Licensed by the SBA - Invest locally and have industry preferences  Limited to companies under $2 million in earnings and less than $6 million in net worth  Have both debt and equity investments  Do not take a majority position in the company Small Business Investment Companies
  19. 19. copyright 2003 Jack M. Kaplan  State programs – Most states target funds: Penn. Ben Franklin Technology Centers make grants up to $100,00 N.J. New Jersey Economic Development Agency, loans and royalty agreements – Advantages: No repayment unless the project succeeds and no equity requirements – Disadvantages: Pay royalties on sales State Development programs