Chapter 9 overview• In chapter 9, we look at the ways to find money for your business.• We talk about raising money and securing the necessary funding. • You need long-term investment capital for buying machines and factories (the fixed assets). • You also need short-term working capital for buying raw materials.
Chapter 9 overview• The young entrepreneur may have winning plans and impressive projects, but he still needs to find the money to start the enterprise. • The first and logical source of funding is personal savings and personal assets. • Afterwards comes investment money from relatives or friends.
Chapter 9 overview• When funding comes from other people, you can distinguish between many kinds of external investors. • Some investors are kind and patient; • many are brutal and impatient.
Chapter 9 overview• Venture capital (such as funds from angel investors) usually comes in at an early stage in the company’s development.• Later on, larger-sized private-equity investors come in to bring the company to a higher level.
Chapter 9 overview• After some years of successful operation, the company will be able to approach a bank for further financing.
Chapter 9 overview• An aggressive bank can provide long-term capital on easy terms, based on an impressive business plan alone.
Chapter 9 overview• A conservative bank would provide small amounts of short-term loans if there is collateral.• Collateral is property that could be confiscated in case of non-payment of loans.
Chapter 9 overview• At a later stage, the business owner may be able to sell some shares of stock to raise big money for a corporate expansion.
Coverage of the ChapterPart One. How to access funding• Easy or difficult?• Personal resources• Size of the initial financing• Steps from start to finish• Sources of funding
Coverage of the ChapterPart Two. Where to Access the Funds• Your personal money• Family as a source of funding• Friends & Contacts• Angel Investors• Venture Capitalist• Private-Equity Fund
Coverage of the ChapterPart Three: Two general types of capital• Loans from banks and lending institutions• Stock Financing: from equity investors.
Activities angel various sources Icebreaker investors. of funding venture capital. Story: DragerGlossary. Video. Story: Cisco of Phanta Story: systems. ARDC. Media. personalhow to access Summary. Case money. friendsfunding. steps analysis. or family.
Learning Objectives• Learn how to secure the financial resources to start a business• Understand the steps you must take to determine the necessary funding• Know where to seek the necessary funding
Learning Objectives• Determine if you can supply funding with your own money• Discuss the pros and cons of using your personal money for business
Learning Objectives• Learn the pros and cons of tapping your family as a source of funding• Appreciate the reasons why angel investors invest in unknown start-up companies• Know how to make convincing presentations to venture capitalists to ask for funding
Learning Objectives• Understand the motivation of private-equity funders• Understand the types of debt financing: secured and unsecured loans.• Understand the pros and cons of stock financing
Central Idea Prepare the pitchPrivate-equity Secure Friendly funds & funding for sources: familyventure capital & contacts your business Debt and/or Equity
Story from Real LifeStarting a small business is a lot like having a new baby, just as business owner Mark Drager discovered."Both consume all of your time, money and energy!" he says.
Story from Real LifeDrager is President of Phanta Media (www.phantamedia.com), a Toronto-area multimedia company providing a full range of video, graphics, and interactive marketing services.The company helps businesses communicate with prospects, clients, and staff.
Story from Real LifeDrager decided it was time to be his own boss in late 2006.He launched his media communications firm about the same time he had a daughter.He also had to ask his mother for some money to start the business.
Story from Real Life"Borrowing money from family members is very motivating because failure is not an option…you have to pay them back!" recalls Drager.
Story from Real LifeDrager did not regret giving up his career and predictable income.Although spending long hours building his company and raising a daughter at the same time is not easy, he says he is happier than ever before."Its so rewarding to be focused on these things that matter so much to me," he says.
GlossaryAngel investor: a rich individual who invests in early- stage companies in exchange for equity ownership in the business.Bankruptcy: declaration that the company is unable to pay back its loans.
GlossaryBear Market: when prices are falling, as if a bear was clawing them down.Bull Market: a market where prices have been rising for many weeks or months already, like a bull charging up a hill.
GlossaryCapitalization: funds used to start operating your company.Collateral: property or other belongings that the bank can confiscate if you fail to pay your loan.
GlossaryCommon shares: certificates of part-ownership in a company. Common shares have voting rights.
GlossaryConvertible debenture: With a convertible debenture, the venture capitalist makes a loan and then retains the option to convert the loan to shares in the company, at a future date.
GlossaryDividend: money paid regularly to a company’s shareholders or owners.Equity: ownership or part-ownership.
GlossaryEquity firms: an investment company formed by cash contributions from shareholders.
GlossaryHigh-Growth Stage: strong growth in sales and profits in the first few years of the life of a companyINC 500 and INC 5000: the fastest growing companies in America, as monitored by a business magazine.
GlossaryInvestee company: a company that has received investment money from an investor.Leveraged firms: a kind of venture capital company that borrows money from government or private sources.
GlossaryMortgage: a loan based on the value of your house or your land. If you fail to pay the loan, the lender may confiscate your house or your land.Niche: specialized area, or specialty.
GlossaryParadox: a mystery or contradiction.Pitch: A presentation to investors for the purpose of obtaining investment funds
GlossaryPreferred shares: are investments that have a fixed annual dividend. They behave almost like loans that require an annual profit-sharing. They do not usually have voting rights.
GlossaryPrivate-equity firms: Private-equity funds are collected sums of money that are intended to be invested in young & promising private companies. The aim is to capture the “high-growth stage” in young companies.
GlossarySubordinate: less important than something “senior” as in “subordinated debt” or “senior debt.”
GlossarySubordinated debt: debt that will be paid only after certain senior creditors have already been paid.
GlossaryVenture capital funds: a pile of money that was assembled for investing in new ventures. The fund may be advised or administered by a venture capital firm.
GlossaryVenture capital firms: a company that channels investments to new ventures.
Points to Remember• Without funding or capital, your business idea—no matter how good it is—will not amount to anything.
Points to Remember• To get funding, you need to determine how much money you need, convince an investor that your company will be profitable, that it needs the amount you say it needs, offer him incentives, profit-sharing or collateral, and make arrangements to pay back the borrowed money or give cash dividends as return on investment.
Points to Remember• Sources of funding for your business include personal savings, loans, assets, money from relatives and friends, venture capital firms, private-equity firms, banks or lenders and other equity investors.
Points to Remember• You should consider investing your own money in your business to show your investor you believe in your company.• After all, your personal savings is the easiest to manage and access and the accounting process is simpler. Disadvantage: you might not have enough, or you might need the money for yourself or your family.
Points to RememberWhen tapping your family and friends for funding, the advantage is that their funds are easily accessible and they may charge lower profit-sharing. The problem with this method is the large probability of personal risk that when your business loses money, your relatives and friends may lose money too, and this might put a strain on your relationship.
Points to Remember• Angel investors put money in start-ups to enjoy the huge pay-offs and the sense of mission and adventure in supporting a company before it grows big.• Private-equity funds put money in small firms to capture the “high-growth” stage.
Subsets and subsetsEquity Capital: public and private. Private Equity: late-stage and early-stage. Venture Capital (early stage): individual and institutional Angel Investors: Individuals in early-stage venture capital
Points to Remember• Secured loans are backed up by collaterals like fixed assets or real property.• Unsecured loans do not require collateral, but need to be paid back in a short period of time and are granted only to creditworthy customers.
Points to RememberThe advantages of stock financing are the following: a corporation is not legally obligated to make payments to stockholders; listed stock improves the credit rating of the company; stocks are attractive to some investors because they give capital gains that are higher than inflation.
Points to RememberDisadvantages of stock financing: common stock owners get voting rights. (They might vote against you.) Control over the company will be transferred to the new stockholders, if they have majority. Shareholders share in the profits of the company through dividends for a very long time.
Ask Yourself• Would I target first the source of funding that is “easy to access”?• Am I confident enough about my new business venture to ask for funding from my relatives?
Ask Yourself• Am I too shy to approach relatives? Do I prefer to approach strangers?• Am I confident enough about my new business venture to ask for funding from perfect strangers? (They may be high- level professionals, but they are strangers, nonetheless.)
Ask Yourself• How much are my personal savings?• Do I have any assets that I could bring into a new business venture? (For example, your own sports equipment could be displayed in a shop that rents out sports equipment.)
Ask Yourself• Would I be able to borrow from a bank at all? Can I find someone who can guarantee my bank loan? If I truly believe in the value of my new business venture, would I risk 100% of my personal money in it? If not 100%, what percent of my money would I risk in the new venture?
Ask Yourself• I was told that it would be difficult to raise money from venture capitalists. Will that stop me from trying?• Am I persistent enough to keep on trying even if things are already very difficult?
Ask Yourself• Can you develop yourself to be strong inside, so that nothing in the outside world can make you sad for very long?
Ask Yourself• Do I have good credit standing?• Have I always paid back money that I have borrowed from other people?
Ask Yourself• Since I don’t know much about the stock market, will I study all about it?• Will I start learning more about the stock market (all over the world) in my spare time?
Ask Yourself• Do I realize that the attitude of a true winner is: “Nothing can stop me. I should at least give it a try. I should at least try my best.”
Review QuestionsWhy it is important to secure the financial resources to be able to start a business. What are the steps to take to determine the necessary funding? Where can one seek the necessary funding?
Review QuestionsCan you supply funding from your own personal money? What are the pros and cons of using my personal money for business. What are the pros and cons of tapping your family as a source of funding?
Review QuestionsWhat are the reasons why angel investors invest in unknown start-up companies?Will I be able to make convincing presentations to venture capitalists to ask for funding?
Review QuestionsWhat is the motivation of private- equity funders for making investments?
Review QuestionsWhat are secured loans and unsecured loans?What are the pros and cons of stock financing?
Case Study questions• What does this story say about the profits that can be made by investing in young companies?• When William Simon raised $80 million, of which only $1million was rumored to have been contributed by the investors, what does that mean?
Case Study questions• Does it mean that William Simon borrowed $79 million from a bank?• Do you think it is more likely that William Simon raised $79 million in private-equity investment?
Case Study questions• What is a leveraged buyout?• Once it was revealed that the profits could be large, did many people follow William Simon’s example in organizing leveraged buyouts?
Chapter 10 overviewIn chapter 10, we discuss the important step of hiring managers and hiring staff for a start-up business.It may be necessary to hire specialists: people with unique skills and talents.
Chapter 10 overviewThe business owner, the boss, must manage his team closely.Under close supervision, each worker should know what to do, what is expected of him, and how to do a good job.All workers should be productive.
Chapter 10 overviewIn case the number of workers is large, the boss must find some way to supervise them all through department heads or team leaders.
Chapter 10 overviewAt some point, the chairman and president of the company must appoint a chief operating officer (COO) who would direct day-to-day operations.
Chapter 10 overviewThe COO coordinates the marketing, production, finance, and accounting.The chairman and chief executive officer (CEO) should concentrate on big issues.
Chapter 10 overviewThe job of the chairman or CEO, is to make sure that the company continues to have a bright future given the opportunities and threats in the environment.
Chapter 10 overviewThe sum total of skills and talents of a company can be said to be its “human capital.” Human capital is the human component that makes the firm productive. It is the “brain” that organizes the material resources of the firm to make the firm profitable.
Chapter 10 overviewWe tackle the question: Is appropriate to hire friends to work for us, or work with us, in the business?