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Abdm4223 lecture week 11 130712

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Startup Financing …

Startup Financing

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    • 1. Getting Funding andGetting Funding and FinancingFinancing Getting Funding andGetting Funding and FinancingFinancing ABDM4233 ENTREPRENEURSHIPABDM4233 ENTREPRENEURSHIP by Stephen OngStephen Ong Principal Lecturer (Specialist)Principal Lecturer (Specialist) Visiting Professor, ShenzhenVisiting Professor, Shenzhen
    • 2. FINANCIALFINANCIAL MILESTONESMILESTONES BUSINESSBUSINESS MODELMODEL The 360° CUBE PitchThe 360° CUBE Pitch Six Posters in a 6 minute Investor Pitch SOCIALSOCIAL PROBLEMPROBLEM VISION &VISION & MISSIONMISSION MARKETINGMARKETING & SALES& SALES OPERATIONS TEAMOPERATIONS TEAM & KEY PARTNERS& KEY PARTNERS
    • 3. 360° Business CUBE360° Business CUBE 1.1. The Problem : How BIG is the problem?The Problem : How BIG is the problem? 2.2. The Solution : Our Social Enterprise’sThe Solution : Our Social Enterprise’s Vision & MissionVision & Mission 3.3. The Business Model : Getting the JOB doneThe Business Model : Getting the JOB done for the Customer Segmentsfor the Customer Segments 4.4. Marketing & Sales (and Fundraising)Marketing & Sales (and Fundraising) 5.5. The Team & Key PartnersThe Team & Key Partners 6.6. The Financial Plan : GoalsThe Financial Plan : Goals and objectives, with aand objectives, with a timeline (Milestones)timeline (Milestones)
    • 4. CUBE : Preparing a Promo VideoCUBE : Preparing a Promo Video Part 1 Part 2 Part 3 CUBE Total 60 seconds 60 seconds 60 seconds 180 seconds 360 seconds Describe the opportunity or problem that needs to be solved. Describe your mission and how your product meets the opportunity or solves the problem. Ask your audience for their support. Describe your organisation, qualifications and future plans
    • 5. CUBE : Preparing An Elevator SpeechCUBE : Preparing An Elevator Speech 1 of 21 of 2 Purpose • An elevator speech is a brief, carefully constructed statement that outlines the merits of amerits of a business opportunitybusiness opportunity. • There are many occasions when a carefully constructed elevator speech might come in handy. • Most elevator speeches are 45 seconds to 2 minutes2 minutes long. Elevator Speech
    • 6. CUBE : Preparing an Elevator SpeechCUBE : Preparing an Elevator Speech 2 of 22 of 2 Step 1 Step 2 Step 3 Step 4 Total 20 seconds 20 seconds 10 seconds 10 seconds 60 seconds Describe the opportunity or problem that needs to be solved. Describe how your product meets the opportunity or solves the problem. Describe your qualifications. Describe your market.
    • 7. X-Factor Test forX-Factor Test for Venture Capital InvestorVenture Capital Investor 1.1. Quality of Management TeamQuality of Management Team 2.2. Size of marketSize of market 3.3. Product qualities (uniqueness, brands,Product qualities (uniqueness, brands, patents)patents) 4.4. Intensity of competitionIntensity of competition 5.5. Market growth rateMarket growth rate 6.6. Barriers to entryBarriers to entry 7.7. Company’s stage of developmentCompany’s stage of development 8.8. Industry where company isIndustry where company is
    • 8. Breakeven AnalysisBreakeven Analysis  Breakeven point - the level of operationBreakeven point - the level of operation at which a business neither earns aat which a business neither earns a profit nor incurs a loss.profit nor incurs a loss.  A useful planning tool because it showsA useful planning tool because it shows entrepreneurs minimum level of activityentrepreneurs minimum level of activity required to stay in business.required to stay in business.  With one change in the breakevenWith one change in the breakeven calculation, an entrepreneur can alsocalculation, an entrepreneur can also determine the sales volume required todetermine the sales volume required to reach a particular profit target.reach a particular profit target.
    • 9. Calculating the Breakeven PointCalculating the Breakeven Point Step 1.Step 1. Determine the expenses the business can expect toDetermine the expenses the business can expect to incur.incur. Step 2.Step 2. Categorize the expenses in step 1 into fixed expensesCategorize the expenses in step 1 into fixed expenses and variable expenses.and variable expenses. Step 3.Step 3. Calculate the ratio of variable expenses to net sales.Calculate the ratio of variable expenses to net sales. Then compute the contribution margin:Then compute the contribution margin: Contribution Margin =Contribution Margin = 1 -1 - Variable ExpensesVariable Expenses Net Sales EstimateNet Sales Estimate Step 4.Step 4. Compute the breakeven point:Compute the breakeven point: Breakeven Point ($)Breakeven Point ($) == Total Fixed CostsTotal Fixed Costs Contribution MarginContribution Margin
    • 10. Calculating the Breakeven Point:Calculating the Breakeven Point: The Magic ShopThe Magic Shop Step 1.Step 1. Net Sales estimate is $950,000 with Cost of Goods SoldNet Sales estimate is $950,000 with Cost of Goods Sold of $646,000 and total expensesof $646,000 and total expenses of $236,500.of $236,500. Step 2.Step 2. Variable Expenses: $705,125Variable Expenses: $705,125 Fixed Expenses: $177,375Fixed Expenses: $177,375 Step 3.Step 3. Contribution margin:Contribution margin: Contribution Margin =Contribution Margin = 1 -1 - $705,125$705,125 $950,000$950,000 StepStep 4.4. Breakeven Point:Breakeven Point: Breakeven PointBreakeven Point $$ == $177,375$177,375 .26.26 = .26= .26 = $682,212= $682,212
    • 11. FIGURE 11.8 Break-Even Chart for the Magic Shop
    • 12. Raising CapitalRaising Capital  Raising capital to launch or expandRaising capital to launch or expand a business is a challenge.a business is a challenge.  Many entrepreneurs are caught in aMany entrepreneurs are caught in a “credit crunch.”“credit crunch.”  Financing needs in theFinancing needs in the $100,000 to $3 million$100,000 to $3 million range may be the mostrange may be the most challenging to fill.challenging to fill.
    • 13. The “Secrets” toThe “Secrets” to Successful FinancingSuccessful Financing 1.1. Choosing the right sources of capital is aChoosing the right sources of capital is a decision that will influence a company fordecision that will influence a company for a lifetime.a lifetime. 2.2. The money is out there; the key isThe money is out there; the key is knowing where to look.knowing where to look. 3.3. Raising money takes time and effort.Raising money takes time and effort. 4.4. Creativity counts. Entrepreneurs have toCreativity counts. Entrepreneurs have to be as creative in their searches for capitalbe as creative in their searches for capital as they are in developing their businessas they are in developing their business ideasideas..
    • 14. The “Secrets” toThe “Secrets” to Successful FinancingSuccessful Financing 5.5. The Internet puts at entrepreneur’sThe Internet puts at entrepreneur’s fingertips vast resources of informationfingertips vast resources of information that can lead to financing.that can lead to financing. 6.6. Be thoroughly prepared beforeBe thoroughly prepared before approaching lenders and investors.approaching lenders and investors. 7.7. Entrepreneurs should not underestimateEntrepreneurs should not underestimate the importance of making sure that thethe importance of making sure that the “chemistry” among themselves, their“chemistry” among themselves, their companies, and their funding sourcescompanies, and their funding sources is good.is good. (continued)
    • 15. The Importance of Getting Financing orThe Importance of Getting Financing or FundingFunding  The Nature of the Funding and Financing ProcessThe Nature of the Funding and Financing Process  Few people deal with the process of raising investmentFew people deal with the process of raising investment capital until they need to raise capital for their owncapital until they need to raise capital for their own firm.firm.  As a result, many entrepreneurs go about the task of raisingAs a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area.capital haphazardly because they lack experience in this area.  Why Most New Ventures Need FundingWhy Most New Ventures Need Funding  There are three reasons most new ventures need toThere are three reasons most new ventures need to raise money during their early life.raise money during their early life.  The three reasons are shown on the following slide.The three reasons are shown on the following slide.
    • 16. Why Most New Ventures NeedWhy Most New Ventures Need Financing or FundingFinancing or Funding
    • 17. Alternatives for Raising Money for aAlternatives for Raising Money for a New VentureNew Venture Personal Funds Equity Capital Debt Financing Creative Sources
    • 18. Financing a BusinessFinancing a Business  Entrepreneurs must cast aEntrepreneurs must cast a wide net to capture thewide net to capture the financing they need tofinancing they need to launch their businesses.launch their businesses.  Layered financing – piecingLayered financing – piecing together capital fromtogether capital from multiple sources.multiple sources.
    • 19. Three Types of CapitalThree Types of Capital 1.1. FixedFixed - Used to purchase the permanent- Used to purchase the permanent or fixed assets of the business (e.g.,or fixed assets of the business (e.g., buildings, land, equipment, and others).buildings, land, equipment, and others). 2.2. WorkingWorking - Used to support the small- Used to support the small company's normal short-term operationscompany's normal short-term operations (e.g., buy inventory, pay bills, wages, or(e.g., buy inventory, pay bills, wages, or salaries, and others).salaries, and others). 3.3. GrowthGrowth - Used to help the small business- Used to help the small business expand or change its primary direction.expand or change its primary direction. Capital is any form of wealth employedCapital is any form of wealth employed to produce more wealth for a firm.to produce more wealth for a firm.
    • 20. Equity CapitalEquity Capital  Represents the personal investment ofRepresents the personal investment of the owner(s) in the business.the owner(s) in the business.  Is calledIs called risk capitalrisk capital because investorsbecause investors assume the risk of losing their moneyassume the risk of losing their money if the business fails.if the business fails.  DoesDoes notnot have to be repaidhave to be repaid with interest like a loan does.with interest like a loan does.  Means that an entrepreneurMeans that an entrepreneur must give up some ownershipmust give up some ownership in the company to outside investors.in the company to outside investors.
    • 21. Debt CapitalDebt Capital  Must be repaid with interest.Must be repaid with interest.  Is carried as a liability on theIs carried as a liability on the company’s balance sheet.company’s balance sheet.  Can be just as difficult to secure as equityCan be just as difficult to secure as equity financing, even though sources of debtfinancing, even though sources of debt financing are more numerous.financing are more numerous.  Can be expensive, especially for smallCan be expensive, especially for small companies, because of the risk/returncompanies, because of the risk/return tradeoff.tradeoff.
    • 22. Sources of Equity FinancingSources of Equity Financing  Personal savingsPersonal savings  Friends and family membersFriends and family members  AngelsAngels  PartnersPartners  Venture capital companiesVenture capital companies  Corporate venture capitalCorporate venture capital  Public stock sale – “going public”Public stock sale – “going public”  Simplified registrations and exemptionsSimplified registrations and exemptions (continued)
    • 23. Sources of Personal FinancingSources of Personal Financing 1 of 21 of 2  Personal FundsPersonal Funds  The vast majority of foundersThe vast majority of founders contribute personal funds, alongcontribute personal funds, along with sweat equity, to their ventures.with sweat equity, to their ventures.  Sweat equity represents the value ofSweat equity represents the value of the time and effort that a founder putsthe time and effort that a founder puts into a new venture.into a new venture.  Friends and FamilyFriends and Family  Friends and family are the secondFriends and family are the second source of funds for many newsource of funds for many new ventures.ventures.
    • 24. Personal SavingsPersonal Savings  TheThe firstfirst place an entrepreneur shouldplace an entrepreneur should look for money.look for money.  The most common sourceThe most common source of equity capital for startingof equity capital for starting a business.a business.  Outside investors and lenders expectOutside investors and lenders expect entrepreneurs to put some of theirentrepreneurs to put some of their own capital into the businessown capital into the business beforebefore investing theirs.investing theirs.
    • 25. Friends and Family MembersFriends and Family Members  After emptying their own pockets,After emptying their own pockets, entrepreneurs should turn toentrepreneurs should turn to those most likely to invest in thethose most likely to invest in the business: friends and familybusiness: friends and family members.members.  Be careful! Inherent dangersBe careful! Inherent dangers lurk in family/friendly businesslurk in family/friendly business deals,deals, especiallyespecially those that flop.those that flop.
    • 26. Friends and Family MembersFriends and Family Members Guidelines for family and friendship financing:Guidelines for family and friendship financing:  Consider the impact of the investment on everyoneConsider the impact of the investment on everyone involved.involved.  Keep the arrangement “strictly business.”Keep the arrangement “strictly business.”  Prepare a business plan.Prepare a business plan.  Settle the details up front.Settle the details up front.  Never accept more than investorsNever accept more than investors can afford to lose.can afford to lose.  Create a written contract.Create a written contract.  Treat the money as “bridge financing.”Treat the money as “bridge financing.”  Develop a payment schedule that suits both parties.Develop a payment schedule that suits both parties.  Have an exit plan.Have an exit plan.
    • 27. Sources of Personal FinancingSources of Personal Financing 2 of 22 of 2  BootstrappingBootstrapping  A third source of seed money for aA third source of seed money for a new venture is referred to asnew venture is referred to as bootstrapping.bootstrapping.  Bootstrapping is finding ways to avoidBootstrapping is finding ways to avoid the need for external financing orthe need for external financing or funding through creativity, ingenuity,funding through creativity, ingenuity, thriftiness, cost cutting, or any meansthriftiness, cost cutting, or any means necessary.necessary.  Many entrepreneurs bootstrap out ofMany entrepreneurs bootstrap out of necessity.necessity.
    • 28. Examples of Bootstrapping MethodsExamples of Bootstrapping Methods Buying used instead of new equipment Coordinating purchases with other businesses Leasing equipment instead of buying Obtaining payments in advance from customers Minimizing personal expenses Avoiding unnecessary expenses Buying items cheaply but prudently via options such as eBay Sharing office spaceSharing office space or employees withor employees with Other businessesOther businesses HiringHiring internsinterns
    • 29. Preparing to Raise Debt or EquityPreparing to Raise Debt or Equity FinancingFinancing 1 of 31 of 3
    • 30. Equity Funding Debt Financing Means exchanging partial ownership in a firm, usually in the form of stock, for funding Is getting a loan Preparing to Raise Debt or EquityPreparing to Raise Debt or Equity FinancingFinancing 2 of 32 of 3 Two Most Common Alternatives 10-30
    • 31. Preparing to Raise Debt or Equity FinancingPreparing to Raise Debt or Equity Financing 3 of 33 of 3 Matching a New Venture’s Characteristics withMatching a New Venture’s Characteristics with the Appropriate Form of Financing or Fundingthe Appropriate Form of Financing or Funding
    • 32. Sources of Equity FundingSources of Equity Funding VentureVenture CapitalCapital BusinessBusiness AngelsAngels Initial PublicInitial Public OfferingsOfferings
    • 33. Business AngelsBusiness Angels 1 of 21 of 2  Business AngelsBusiness Angels  Are individuals who invest theirAre individuals who invest their personal capital directly in start-ups.personal capital directly in start-ups.  The prototypical business angel isThe prototypical business angel is about 50 years old, has high incomeabout 50 years old, has high income and wealth, is well educated, hasand wealth, is well educated, has succeeded as an entrepreneur, and issucceeded as an entrepreneur, and is interested in the start-up process.interested in the start-up process.  The number of angel investors in theThe number of angel investors in the U.S. has increased dramatically overU.S. has increased dramatically over the past decade.the past decade.
    • 34. Business AngelsBusiness Angels 2 of 22 of 2  Business Angels (continued)Business Angels (continued)  Business angels are valuable because of theirBusiness angels are valuable because of their willingness to make relatively small investments.willingness to make relatively small investments.  These investors generally invest between $10,000 andThese investors generally invest between $10,000 and $500,000 in a single company.$500,000 in a single company.  Are looking for companies that have the potential toAre looking for companies that have the potential to grow betweengrow between 30% to 40% per year30% to 40% per year..  Business angels are difficult to find.Business angels are difficult to find.
    • 35. Business AngelsBusiness Angels  Wealthy individuals who invest in emergingWealthy individuals who invest in emerging entrepreneurial companies in exchange forentrepreneurial companies in exchange for equity )ownership) stakes.equity )ownership) stakes.  An excellent source of “patient money” forAn excellent source of “patient money” for investors needing relatively small amounts ofinvestors needing relatively small amounts of capital typically ranging fromcapital typically ranging from $100,000$100,000 (sometimes less) to as(sometimes less) to as much as $5 million.much as $5 million.  Willing to invest in the early stages of aWilling to invest in the early stages of a business.business.
    • 36. Business AngelsBusiness Angels  An estimated 258,000 angels across the U.S.An estimated 258,000 angels across the U.S. invest $26 billion a year in 57,000 smallinvest $26 billion a year in 57,000 small companies.companies.  Their investments exceed those of ventureTheir investments exceed those of venture capital firms, providing more capital to 15capital firms, providing more capital to 15 times astimes as many small companies.many small companies.  Angels fill a gap in the seed capital market,Angels fill a gap in the seed capital market, specifically in the $10,000 to $2 million range.specifically in the $10,000 to $2 million range.
    • 37. Business AngelsBusiness Angels  Average angel investment =Average angel investment = $50,000$50,000..  Typical angel invests in 1 company per year,Typical angel invests in 1 company per year, and the average time to close a deal is 67and the average time to close a deal is 67 days.days.  52% of angels’ investments lose money, but52% of angels’ investments lose money, but 7% produce a return more than 10 times7% produce a return more than 10 times their original investment.their original investment.  Angels can be an excellent source ofAngels can be an excellent source of “patient” money.“patient” money.
    • 38. Business AngelsBusiness Angels The Challenge: Finding Them!The Challenge: Finding Them!  NetworkNetwork  Look nearby: within a 50- to 100-mileLook nearby: within a 50- to 100-mile radiusradius  7 out of 10 angels invest in companies that7 out of 10 angels invest in companies that are within 50 miles of their homes orare within 50 miles of their homes or offices.offices.  Informal angel “clusters” and networksInformal angel “clusters” and networks  265 angel groups across the U.S.265 angel groups across the U.S.  InternetInternet
    • 39. FIGURE 13.1 Angel Financing Source: Center for Venture Financing, Whittemore School of Business, University of New Hampshire, www.unh.edu/cvr.
    • 40. Venture CapitalVenture Capital 1 of 31 of 3  Venture CapitalVenture Capital  Is money that is invested by venture capital firms inIs money that is invested by venture capital firms in start-ups and small businesses with exceptional growthstart-ups and small businesses with exceptional growth potential.potential.  There are about 800 venture capital firms in the U.S.There are about 800 venture capital firms in the U.S.  Venture capital firms are limited partnerships of moneyVenture capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-upsmanagers who raise money in “funds” to invest in start-ups and growing firms.and growing firms.  The funds, or pool of money, are raised from wealthyThe funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreignindividuals, pension plans, university endowments, foreign investors, and similar sources.investors, and similar sources.  The investors who invest in venture capital funds are calledThe investors who invest in venture capital funds are called limited partners. The venture capitalists are called generallimited partners. The venture capitalists are called general partners.partners.
    • 41. Venture CapitalVenture Capital 2 of 32 of 3  Venture Capital (continued)Venture Capital (continued)  Venture capital firms fund very fewVenture capital firms fund very few entrepreneurial firms in comparison toentrepreneurial firms in comparison to business angels.business angels.  Many entrepreneurs get discouraged when they areMany entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding,repeatedly rejected for venture capital funding, even though they may have an excellent businesseven though they may have an excellent business plan.plan.  Venture capitalists are looking for the “home run”Venture capitalists are looking for the “home run” and so reject the majority of the proposals theyand so reject the majority of the proposals they consider.consider.  Venture capitalists fund between 3,000 and 4,000Venture capitalists fund between 3,000 and 4,000 companies per year, compared to about 62,000 percompanies per year, compared to about 62,000 per year for business angels.year for business angels.
    • 42. Venture CapitalVenture Capital 3 of 33 of 3  Venture Capital (continued)Venture Capital (continued)  An important part ofAn important part of obtaining venture capitalobtaining venture capital funding is going through thefunding is going through the due diligence process.due diligence process.  Venture capitalists investVenture capitalists invest money in start-ups in “stages,”money in start-ups in “stages,” meaning that not all themeaning that not all the money that is invested ismoney that is invested is disbursed at the same time.disbursed at the same time.  Some venture capitalists alsoSome venture capitalists also specialize in certain “stages”specialize in certain “stages” of funding.of funding.
    • 43. FIGURE 13.2 Venture Capital Funding Source: Based on PriceWaterhouseCoopers http:/www.pwcmoneytree.com.
    • 44. Venture Capital CompaniesVenture Capital Companies  More than 740 venture capital firmsMore than 740 venture capital firms operate across the U.S.operate across the U.S.  Most venture capitalists seekMost venture capitalists seek investments in the $3 million to $10investments in the $3 million to $10 million rangemillion range  Target companies with high-growth andTarget companies with high-growth and high-profit potential.high-profit potential.  Business plans are subjected to anBusiness plans are subjected to an extremelyextremely rigorous review - less than 1%rigorous review - less than 1% accepted.accepted.
    • 45. Venture Capital CompaniesVenture Capital Companies  Most often, venture capitalists invest inMost often, venture capitalists invest in a company across several stages.a company across several stages.  On average, 98% of venture capital goesOn average, 98% of venture capital goes to:to:  Early stage investments (companies inEarly stage investments (companies in the early stages of development).the early stages of development).  Expansion stage investments (companiesExpansion stage investments (companies in the rapid growth phase).in the rapid growth phase).  Only 2% of venture capital goes toOnly 2% of venture capital goes to businesses in the startup or seed phase.businesses in the startup or seed phase. (continued)
    • 46. Corporate Venture CapitalCorporate Venture Capital  About 300 large corporations acrossAbout 300 large corporations across the globe invest in start-up companies.the globe invest in start-up companies.  Approximately 6 to 8% of all ventureApproximately 6 to 8% of all venture capital invested is from corporations.capital invested is from corporations.  Capital infusions are just one benefit;Capital infusions are just one benefit; corporate partners may sharecorporate partners may share marketing and technical expertise.marketing and technical expertise.
    • 47. FIGURE 13.4FIGURE 13.4 Angel Investing and VentureAngel Investing and Venture Capital InvestingCapital Investing Source:Source: Robert Wiltbank and Warren Bocker,Robert Wiltbank and Warren Bocker, Returns to Angel Investors in GroupsReturns to Angel Investors in Groups, Angel Capital Education, Angel Capital Education Foundation,Foundation, http://www.kauffman.org/Details.aspx?id=1032http://www.kauffman.org/Details.aspx?id=1032, and PWC Moneytree Report,, and PWC Moneytree Report, PricewaterhousePricewaterhouse Coopers,Coopers, https://www.pwcmonnneytree.com/MTPublic/nc/indes.jsphttps://www.pwcmonnneytree.com/MTPublic/nc/indes.jsp..
    • 48. What Do Venture CapitalWhat Do Venture Capital Companies Look For?Companies Look For?  Competent managementCompetent management  Competitive edgeCompetitive edge  Growth industryGrowth industry  Viable exit strategyViable exit strategy  Intangibles factorsIntangibles factors
    • 49. FIGURE 13.5Which Factors Are Most ImportantWhich Factors Are Most Important to Venture Capitalists?to Venture Capitalists? Source: Dee Powers and Brian E. Hill, Venture Capital Survey, The Capital Connection, http//www.capital-connection.com/survey-value.html.
    • 50. Initial Public OfferingInitial Public Offering 1 of 31 of 3  Initial Public OfferingInitial Public Offering  An initial public offering (IPO) is a company’sAn initial public offering (IPO) is a company’s first sale of stock to the public. When a companyfirst sale of stock to the public. When a company goes public, its stock is traded on one of the majorgoes public, its stock is traded on one of the major stock exchanges.stock exchanges.  Most entrepreneurial firms that go public trade onMost entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily towardthe NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks.technology, biotech, and small-company stocks.  An IPO is an important milestone for a firm.An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it hasTypically, a firm is not able to go public until it has demonstrated that itdemonstrated that it is viable and has a brightis viable and has a bright future.future.
    • 51. Going PublicGoing Public  Initial public offeringInitial public offering (IPO) - when a(IPO) - when a company raises capitalcompany raises capital by selling shares of itsby selling shares of its stock to the public forstock to the public for the first time.the first time.  Since 2000, the averageSince 2000, the average number of companiesnumber of companies making IPOs each yearmaking IPOs each year is 173.is 173.  Few companies withFew companies with less than $25 million inless than $25 million in annual sales makeannual sales make IPOs.IPOs.
    • 52. FIGURE 13.6 Initial Public Offerings (IPOs)Initial Public Offerings (IPOs) Source: Thompson Financial Securities Data.
    • 53. Reason 1Reason 1 Reason 2Reason 2 Is a way toIs a way to raise equityraise equity capital to fundcapital to fund current andcurrent and futurefuture operations.operations. Raises a firm’sRaises a firm’s public profile,public profile, making it easier tomaking it easier to attract high-qualityattract high-quality customers andcustomers and business partners.business partners. Initial Public OfferingInitial Public Offering 2 of 32 of 3 Reasons that Motivate Firms to Go PublicReasons that Motivate Firms to Go Public
    • 54. Reason 3Reason 3 Reason 4Reason 4 Is a liquidity eventIs a liquidity event that provides athat provides a means for ameans for a company’scompany’s investors to recoupinvestors to recoup their investments.their investments. Creates a formCreates a form of currency thatof currency that can be used tocan be used to grow thegrow the company viacompany via acquisitions.acquisitions. Initial Public OfferingInitial Public Offering 3 of 33 of 3 Reasons that Motivate Firms to Go PublicReasons that Motivate Firms to Go Public
    • 55. Successful IPO CandidatesSuccessful IPO Candidates Have…Have…  Consistently high growth ratesConsistently high growth rates  Strong record of earningsStrong record of earnings  3 to 5 years of audited financial statements3 to 5 years of audited financial statements that meet or exceed SEC standardsthat meet or exceed SEC standards  Solid position in a rapidly-growing industry:Solid position in a rapidly-growing industry: Average company age is 14 yearsAverage company age is 14 years  Sound management team with experienceSound management team with experience and a strong board of directorsand a strong board of directors
    • 56. Advantages ofAdvantages of “Going Public”“Going Public”  Ability to raise large amounts of capitalAbility to raise large amounts of capital  Improved corporate imageImproved corporate image  Improved access to future financingImproved access to future financing  Attracting and retaining key employeesAttracting and retaining key employees  Using stock for acquisitionsUsing stock for acquisitions  Listing on a stock exchangeListing on a stock exchange
    • 57. Disadvantages ofDisadvantages of “Going Public”“Going Public”  Dilution of founder’s ownershipDilution of founder’s ownership  Loss of controlLoss of control  Loss of privacyLoss of privacy  Reporting to the SECReporting to the SEC  Filing expensesFiling expenses  Accountability to shareholdersAccountability to shareholders  Pressure for short-term performancePressure for short-term performance  TimingTiming
    • 58. Sources of Debt FinancingSources of Debt Financing CommercialCommercial BanksBanks SMESME GuaranteedGuaranteed LoansLoans
    • 59. Commercial BanksCommercial Banks  BanksBanks  Historically, commercial banks have not beenHistorically, commercial banks have not been viewed as a practical source of financing forviewed as a practical source of financing for start-up firms.start-up firms.  This sentiment is not a knock against banks; itThis sentiment is not a knock against banks; it is just that banks are risk averse, and financingis just that banks are risk averse, and financing start-ups is a risky business.start-ups is a risky business.  Banks are interested in firms that have a strong cashBanks are interested in firms that have a strong cash flow, low leverage, audited financials, goodflow, low leverage, audited financials, good management, and a healthy balance sheet.management, and a healthy balance sheet.
    • 60. Sources of Debt CapitalSources of Debt Capital  Commercial banksCommercial banks  Lenders of first resort for smallLenders of first resort for small businessesbusinesses  Average micro-business loan = $7,400Average micro-business loan = $7,400  Average small business loan = $181,000Average small business loan = $181,000  Study: 12% of entrepreneurs receive bankStudy: 12% of entrepreneurs receive bank loans to start their businesses.loans to start their businesses.
    • 61. Sources of Debt CapitalSources of Debt Capital From Commercial BanksFrom Commercial Banks  Short-term loansShort-term loans  Home Equity LoansHome Equity Loans  Commercial LoansCommercial Loans  Lines of CreditLines of Credit  Floor planningFloor planning  Immediate and Long-Term LoansImmediate and Long-Term Loans  Installment LoansInstallment Loans  Term LoansTerm Loans
    • 62. Six Common Reasons BankersSix Common Reasons Bankers Reject Small Business LoansReject Small Business Loans 1.1. ““Our bank doesn’t make small businessOur bank doesn’t make small business loans.”loans.” Cure: Before applying for a loan,Cure: Before applying for a loan, research banks to find out which onesresearch banks to find out which ones seek theseek the type of loantype of loan you need.you need. 2.2. ““I don’t know enough about you or yourI don’t know enough about you or your business.”business.” Cure: Develop aCure: Develop a detailed business plandetailed business plan to present to the banker.to present to the banker.
    • 63. 3.3. “You haven’t told me why you need the“You haven’t told me why you need the money.”money.” Cure: YourCure: Your business planbusiness plan should explainshould explain how much money you need and how youhow much money you need and how you plan to use it.plan to use it. 4.4. “Your numbers don’t support your loan“Your numbers don’t support your loan request.”request.” Cure: Include aCure: Include a cash flow forecastcash flow forecast inin your business plan.your business plan. (continued)(continued) Six Common Reasons BankersSix Common Reasons Bankers Reject Small Business LoansReject Small Business Loans
    • 64. 5.5. “You don’t have enough collateral.”“You don’t have enough collateral.” Cure: Be prepared to pledge yourCure: Be prepared to pledge your company’s assets – and perhaps yourcompany’s assets – and perhaps your personal assetspersonal assets – as collateral for the– as collateral for the loan.loan. 6.6. “Your business does not support the loan“Your business does not support the loan on its own.”on its own.” Cure: Be prepared to provide aCure: Be prepared to provide a personalpersonal guaranteeguarantee on the loan.on the loan. (continued)(continued) Six Common Reasons BankersSix Common Reasons Bankers Reject Small Business LoansReject Small Business Loans
    • 65. Asset-Based LendersAsset-Based Lenders  Businesses can borrow money byBusinesses can borrow money by pledging as collateral otherwise idlepledging as collateral otherwise idle assets – accounts receivable,assets – accounts receivable, inventory, and othersinventory, and others  Advance rateAdvance rate – the percentage of an– the percentage of an asset’s value that a lender will lend.asset’s value that a lender will lend.
    • 66. Asset-Based BorrowingAsset-Based Borrowing  Discounting accounts receivableDiscounting accounts receivable Inventory financingInventory financing
    • 67. Other Sources of Debt CapitalOther Sources of Debt Capital  Vendor financing (trade credit)Vendor financing (trade credit)  Equipment suppliersEquipment suppliers  Commercial finance companiesCommercial finance companies  Saving and loan associationsSaving and loan associations  Stock brokersStock brokers
    • 68. Other Sources of Debt CapitalOther Sources of Debt Capital  Credit unionsCredit unions  Private placementsPrivate placements  Small Business InvestmentSmall Business Investment Companies (SBIC)Companies (SBIC)  Small Business LendingSmall Business Lending Companies (SBLCs)Companies (SBLCs) (continued)
    • 69. Other Sources of Debt FinancingOther Sources of Debt Financing 2 of 22 of 2  Peer-to-Peer LendingPeer-to-Peer Lending  Is a financial transaction that occurs directly betweenIs a financial transaction that occurs directly between individuals or peers.individuals or peers.  Prosper is the best known peer-to-peer lending networkProsper is the best known peer-to-peer lending network..  CrowdfundingCrowdfunding  A form of raising money that takes place, usually via theA form of raising money that takes place, usually via the Internet, where people pool their money to support aInternet, where people pool their money to support a start-up or other initiative, usually in return for some sortstart-up or other initiative, usually in return for some sort of amenity rather than loan.of amenity rather than loan.  Kickstarter is a popular online crowdfunding platform.Kickstarter is a popular online crowdfunding platform.
    • 70. Creative Sources of Financing orCreative Sources of Financing or FundingFunding Vendor Credit/ Factoring/ Credit Cards Leasing StrategicStrategic PartnersPartners Grant Programs
    • 71. Internal Methods of FinancingInternal Methods of Financing  Factoring Accounts Receivable –Factoring Accounts Receivable – selling accounts receivable outrightselling accounts receivable outright  Leasing –Leasing – assets rather than buying themassets rather than buying them  Credit cardsCredit cards
    • 72. Other Sources of Debt FinancingOther Sources of Debt Financing 1 of 21 of 2  Vendor CreditVendor Credit  Also known as trade credit, is when a vendorAlso known as trade credit, is when a vendor extends credit to a business in order to allow theextends credit to a business in order to allow the business to buy its products and/or services upbusiness to buy its products and/or services up front but defer payment until later.front but defer payment until later.  FactoringFactoring  Is a financial transaction whereby a business sellsIs a financial transaction whereby a business sells its accounts receivable to a third party, called aits accounts receivable to a third party, called a factor, at a discount in exchange for cash.factor, at a discount in exchange for cash.
    • 73. LeasingLeasing 1 of 21 of 2  LeasingLeasing  A lease is a written agreement inA lease is a written agreement in which the owner of a piece ofwhich the owner of a piece of property allows an individual orproperty allows an individual or business to use the property forbusiness to use the property for a specified period of time ina specified period of time in exchange for payments.exchange for payments.  The major advantage of leasingThe major advantage of leasing is that it enables a company tois that it enables a company to acquire the use of assets withacquire the use of assets with very little or no down payment.very little or no down payment.
    • 74. LeasingLeasing 2 of 22 of 2  Leasing (continued)Leasing (continued)  Most leases involve a modest downMost leases involve a modest down payment and monthly payments duringpayment and monthly payments during the duration of the lease.the duration of the lease.  At the end of an equipment lease, theAt the end of an equipment lease, the new venture typically has the option tonew venture typically has the option to stop using the equipment, purchase itstop using the equipment, purchase it for fair market value, or renew the lease.for fair market value, or renew the lease.  Leasing is almost always more expensiveLeasing is almost always more expensive than paying cash for an item, so mostthan paying cash for an item, so most entrepreneurs think of leasing as anentrepreneurs think of leasing as an alternative to equity or debt financing.alternative to equity or debt financing.
    • 75. Grant ProgramsGrant Programs  Private GrantsPrivate Grants  There are a limited number of grantThere are a limited number of grant programs available.programs available.  Getting grants takes a little detectiveGetting grants takes a little detective work.work.  Granting agencies are low key, andGranting agencies are low key, and must be sought out.must be sought out.  Government GrantsGovernment Grants  The federal government has grantThe federal government has grant programs.programs.  The full spectrum of grantsThe full spectrum of grants available is listed atavailable is listed at www.mof.gov.mywww.mof.gov.my  Be careful of grant-related scams.Be careful of grant-related scams.
    • 76. Strategic PartnersStrategic Partners  Strategic PartnersStrategic Partners  Strategic partners are anotherStrategic partners are another source of capital for new ventures.source of capital for new ventures.  Many partnerships are formed toMany partnerships are formed to share the costs of product orshare the costs of product or service development, to gainservice development, to gain access to particular resources, oraccess to particular resources, or to facilitate speed to market.to facilitate speed to market.  Older established firms benefit byOlder established firms benefit by partnering with youngpartnering with young entrepreneurial firms by gainingentrepreneurial firms by gaining access to their creative ideas andaccess to their creative ideas and entrepreneurial spirit.entrepreneurial spirit.
    • 77. Strategic PartnersStrategic Partners  Giving up personal controlGiving up personal control  Diluting ownershipDiluting ownership  Sharing profitsSharing profits  ““For every penny you get in the door,For every penny you get in the door, you have to give something up.”you have to give something up.”
    • 78. Strategic PartnersStrategic Partners • Biotech firms often partner with large drug companies to conduct clinical trials and bring new products to market. • The biotech firms benefit by obtaining funding from their partners, and the partners benefit by having additional products to sell.
    • 79. FIGURE 13.8 Where Do Small Businesses GetWhere Do Small Businesses Get Their Financing?Their Financing? Source: Based on 2008 Survey of Small and Mid-Sized Businesses, National Small Business Association, Washington, DC, 2009.
    • 80. ConclusionConclusion  Capital is key for entrepreneurs.Capital is key for entrepreneurs.  In the face of a capital crunch, business’sIn the face of a capital crunch, business’s need for capital has never been greater.need for capital has never been greater.  Sources of capital may include:Sources of capital may include:  Family and FriendsFamily and Friends  Angel InvestorsAngel Investors  Initial Public OfferingInitial Public Offering  Traditional Bank LoanTraditional Bank Loan  Asset-based BorrowingAsset-based Borrowing  Federal, SME Loans, and othersFederal, SME Loans, and others
    • 81. Appendix 1 :Appendix 1 : Fundraising fromFundraising from DonorsDonors
    • 82. 8 - 83 The Donorschoose.org caseThe Donorschoose.org case  Donorschoose.org matches donors withDonorschoose.org matches donors with nonprofits seeking supportnonprofits seeking support  It specializes in grants that are too smallIt specializes in grants that are too small for most funders to continuefor most funders to continue  In addition to matching, it providesIn addition to matching, it provides feedback and reports to donors on the usefeedback and reports to donors on the use of their fundsof their funds  This is an example of entrepreneurialThis is an example of entrepreneurial fundraisingfundraising
    • 83. 8 - 84 Five types of fundraising activityFive types of fundraising activity (1)(1) Fundraising is a major activity for nonprofitFundraising is a major activity for nonprofit managersmanagers  1. Personal relationships1. Personal relationships  Get others on board with personal contactGet others on board with personal contact  Letters may not be sufficient to convey thatLetters may not be sufficient to convey that visionvision  Conversations, tours, and events with directConversations, tours, and events with direct contact with individualscontact with individuals  2. Direct mail2. Direct mail  Although it seems antiquated, it is profitableAlthough it seems antiquated, it is profitable  Some fundraising firms conduct direct mail forSome fundraising firms conduct direct mail for nonprofits, e.g., Easter Seals, St. Jude’snonprofits, e.g., Easter Seals, St. Jude’s Children’s HospitalChildren’s Hospital  Few (1 – 3%) of recipients respond to initialFew (1 – 3%) of recipients respond to initial asksasks  More (e.g., 20%) of prior givers donate laterMore (e.g., 20%) of prior givers donate later
    • 84. 8 - 85 Five types of fundraising activityFive types of fundraising activity (2)(2)  3. Telemarketing, calling lists of donors3. Telemarketing, calling lists of donors and non-donorsand non-donors  There is resistance from call recipientsThere is resistance from call recipients  It helps with small donations, memberIt helps with small donations, member renewalrenewal  Impractical for some early-stage socialImpractical for some early-stage social venturesventures  Because it needs equipment and expertise, itBecause it needs equipment and expertise, it is often delivered by fundraising firmsis often delivered by fundraising firms  4. Traditional media4. Traditional media  Newspapers, magazines, television, radioNewspapers, magazines, television, radio  Fundraising using broadcasting has beenFundraising using broadcasting has been effective for many Christian organizationseffective for many Christian organizations  Social ventures can buy advertising andSocial ventures can buy advertising and
    • 85. 8 - 86 Five types of fundraising activityFive types of fundraising activity (3)(3)  5. Virtual means5. Virtual means  Raising revenue over the web is not aRaising revenue over the web is not a cure-allcure-all  Social entrepreneurs should be carefulSocial entrepreneurs should be careful  Donors are still adapting to e-givingDonors are still adapting to e-giving  E-mail solicitations are treated as spamE-mail solicitations are treated as spam  No guarantees of Web site trafficNo guarantees of Web site traffic  Nonprofit have been slow to adaptNonprofit have been slow to adapt technologiestechnologies
    • 86. 8 - 87 Spending fundraising dollarsSpending fundraising dollars  Building fundraising over timeBuilding fundraising over time  Personal relationships at first, then direct mailPersonal relationships at first, then direct mail  Virtual fundraising for organizations withVirtual fundraising for organizations with capacitycapacity  Traditional media can be costlyTraditional media can be costly  Tradeoffs between purposes and targetsTradeoffs between purposes and targets  Between number of donors and size of giftBetween number of donors and size of gift  Figure 8.1 illustrates this tradeoffFigure 8.1 illustrates this tradeoff  Between purposes and focus:Between purposes and focus:  Purposes: raise money or raise visibilityPurposes: raise money or raise visibility  Focus of targets: new or established donorsFocus of targets: new or established donors  Table 8.2 shows the strategies from eachTable 8.2 shows the strategies from each choicechoice
    • 87. 8 - 88 Figure 8.1 Spending tradeoffs inFigure 8.1 Spending tradeoffs in fundraisingfundraising Averageannualgiving perdonor Number of donors per year Relatively few “angels” Relatively numerous small donors Averageannualgiving perdonor Number of donors per year Relatively few “angels” Averageannualgiving perdonor Number of donors per year Relatively few “angels” Relatively numerous small donors
    • 88. 8 - 89 Table 8.2 Choosing a fundraisingTable 8.2 Choosing a fundraising strategystrategy Focus: new donors Focus: Established donors Purpose: Raise money Strategy: mix of large and small gifts Strategy: larger, fewer donations Purpose: Raise visibility Strategy: smaller, more numerous donations Strategy: mix of large and small gifts
    • 89. 8 - 90 The Easter Seals caseThe Easter Seals case  A long-established nonprofit that helpsA long-established nonprofit that helps individuals with special needs andindividuals with special needs and disabilitiesdisabilities  Dozens have contributed amounts overDozens have contributed amounts over $100,000$100,000  3,800 have contributed over $1,0003,800 have contributed over $1,000  But millions have contributed amounts lessBut millions have contributed amounts less than $1,000 – even penniesthan $1,000 – even pennies  Small donations make up the majority ofSmall donations make up the majority of Easter Seals revenueEaster Seals revenue
    • 90. 8 - 91 Differentiating donorsDifferentiating donors  There are different kinds of donorsThere are different kinds of donors  Potential donorsPotential donors  New donorsNew donors  Transition – give a second timeTransition – give a second time  Core – three or more donorsCore – three or more donors  Lapsed – have stopped givingLapsed – have stopped giving  Lapsed but reactivatedLapsed but reactivated  Most donors – as much as 80% – are inactiveMost donors – as much as 80% – are inactive  Active donors can be in any of the otherActive donors can be in any of the other typestypes  Core donors are the most productiveCore donors are the most productive  Figures 8.2 and 8.3 illustrate these typesFigures 8.2 and 8.3 illustrate these types
    • 91. 8 - 92 Figure 8.2 The dimensions of aFigure 8.2 The dimensions of a typical list of active donorstypical list of active donors Percentage of active donors Percentage of revenues Core 30% Transition 18% Lapsed but reactivated 19% New 33% Core 50% Transition 17% Lapsed but reactivated 14% New 19% Percentage of active donors Percentage of revenues Core 30% Transition 18% Lapsed but reactivated 19% New 33% Core 50% Transition 17% Lapsed but reactivated 14% New 19%
    • 92. 8 - 93 Figure 8.3 Gift size among activeFigure 8.3 Gift size among active donors to a sample of social servicedonors to a sample of social service organizationsorganizations $128 $81 $60 $51 $46 $42 $43 $37 $0 $20 $40 $60 $80 $100 $120 $140 Core Transition Lapsed but reactivated New Average annual dollars given Average gift
    • 93. 8 - 94 Fundraising strategiesFundraising strategies  Win: gain new donors or regain lapsedWin: gain new donors or regain lapsed donorsdonors  Example: Habitat for Humanity soliciting volunteers andExample: Habitat for Humanity soliciting volunteers and donors through churchesdonors through churches  Keep: maintain donors in the coreKeep: maintain donors in the core  Example: World Vision targets donors for retentionExample: World Vision targets donors for retention  Lift: Obtain larger gifts from core donorsLift: Obtain larger gifts from core donors  Example: MAP targeting the best prospects from donorsExample: MAP targeting the best prospects from donors to increase gift averagesto increase gift averages  Figure 8.4 illustrates donor retentionFigure 8.4 illustrates donor retention  Figure 8.5 illustrates the fundraisingFigure 8.5 illustrates the fundraising ecosystemecosystem
    • 94. 8 - 95 Figure 8.4 The percentage of donorsFigure 8.4 The percentage of donors retained from one year to the nextretained from one year to the next 69% 38% 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% Core Transition Lapsed but reactivated Source: Merkle-Domain
    • 95. 8 - 96 Figure 8.5 The fundraisingFigure 8.5 The fundraising ecosystemecosystem New donors Lapsed donors Transition donors Core donors Win Win Keep Keep Lift
    • 96. 8 - 97 Figure 8.6 Average number ofFigure 8.6 Average number of donations by different donor typesdonations by different donor types 2.8 1.9 1.4 1.4 0 0.5 1 1.5 2 2.5 3 Core Transition Lapsed but reactivated New
    • 97. 8 - 98 Losing donorsLosing donors Why do donors lapse:Why do donors lapse: Fatigue from too many requests is a mythFatigue from too many requests is a myth Other organizations are more deservingOther organizations are more deserving Can’t afford to supportCan’t afford to support Failure of organization to establish a relationshipFailure of organization to establish a relationship Donors are not asked a second timeDonors are not asked a second time Research suggests that fundraising expensesResearch suggests that fundraising expenses increase donations but administrativeincrease donations but administrative expenditures don’t reduce donationsexpenditures don’t reduce donations So, nonprofits should not fear responsibleSo, nonprofits should not fear responsible spending to build donations, includingspending to build donations, including administrative capacityadministrative capacity Figure 8.6 illustrates donations by donorFigure 8.6 illustrates donations by donor categorycategory Figure 8.7 illustrates reasons for donor lapseFigure 8.7 illustrates reasons for donor lapse
    • 98. 8 - 99 Figure 8.7 The main reasons donorsFigure 8.7 The main reasons donors lapselapse 27% 22% 11% 7% 3% 2% 2% 2% 1% 0% 5% 10% 15% 20% 25% 30% Other organizations moredeserving Can’taffordto keepsupporting Don’tremember supporting Didn’tlike fundraising Notre-askedto give Badservice Notenough informationon usesofmoney Didnotreceive acknowledgement ofgift Didnotfeel needed Reason for donor lapse Percentageofrespondents 27% 22% 11% 7% 3% 2% 2% 2% 1% 0% 5% 10% 15% 20% 25% 30% Other organizations moredeserving Can’taffordto keepsupporting Don’tremember supporting Didn’tlike fundraising Notre-askedto give Badservice Notenough informationon usesofmoney Didnotreceive acknowledgement ofgift Didnotfeel needed Reason for donor lapse Percentageofrespondents
    • 99. 8 - 100 The United Way caseThe United Way case  UW fundraising was veryUW fundraising was very successful in the 1970s and 1980ssuccessful in the 1970s and 1980s  In the 1990s, it faltered even whenIn the 1990s, it faltered even when the economy was doing well, forthe economy was doing well, for two reasonstwo reasons  Scandal based on the CEO’s fraudScandal based on the CEO’s fraud  Corporate downsizing and declinesCorporate downsizing and declines in union membership changed givingin union membership changed giving patternspatterns
    • 100. 8 - 101 Volunteer recruitment and attritionVolunteer recruitment and attrition  Donations of time must also be won,Donations of time must also be won, kept, and liftedkept, and lifted  Three main types of appeals toThree main types of appeals to volunteersvolunteers  ““Warm body,” i.e., no special skill neededWarm body,” i.e., no special skill needed  Targeted recruitment for specific skillsTargeted recruitment for specific skills  Concentric circles, when volunteers recruitConcentric circles, when volunteers recruit other volunteersother volunteers  Help the Hospices built volunteering byHelp the Hospices built volunteering by gaining publicity for its missiongaining publicity for its mission
    • 101. 8 - 102 Avoiding volunteer attritionAvoiding volunteer attrition  Understand that volunteers recognizeUnderstand that volunteers recognize the value of their time – it is not freethe value of their time – it is not free  What are the elements of time valuationWhat are the elements of time valuation  Compared to the value of market workCompared to the value of market work  Compared to other volunteer opportunitiesCompared to other volunteer opportunities  Compared to leisure timeCompared to leisure time
    • 102. 8 - 103 The CARE International caseThe CARE International case  CARE’s programs address underlying causes ofCARE’s programs address underlying causes of poverty, but it is still seen primarily as a distributorpoverty, but it is still seen primarily as a distributor of food reliefof food relief  CARE changed its logo to reduce the mismatchCARE changed its logo to reduce the mismatch between perception and reality, and also usesbetween perception and reality, and also uses newsletters to inform donorsnewsletters to inform donors Old logo New logo
    • 103. 8 - 104 Social enterprise messagesSocial enterprise messages  Targeted marketing emphasizes social enterpriseTargeted marketing emphasizes social enterprise benefits important to specific groupsbenefits important to specific groups  Messages can be devised to address underlyingMessages can be devised to address underlying reasons why some people don’t givereasons why some people don’t give  Appeals can be abstract, concrete, promotional, orAppeals can be abstract, concrete, promotional, or refutationalrefutational  Table 8.3 shows appeals that were significant toTable 8.3 shows appeals that were significant to some demographic groups in a survey of Atlantasome demographic groups in a survey of Atlanta residentsresidents  Table 8.4 shows which issues nonprofits in SpainTable 8.4 shows which issues nonprofits in Spain need to address to build contributionsneed to address to build contributions  Table 8.5 shows types of messagesTable 8.5 shows types of messages
    • 104. 8 - 105 Table 8.3 Targeting demographicsTable 8.3 Targeting demographics DEMOGRAPHICSDEMOGRAPHICS TO TARGETTO TARGET FUNDRAISING FOCUSFUNDRAISING FOCUS SENSE OFSENSE OF COMMUNICOMMUNI TYTY CHARITIESCHARITIES ARE MOREARE MORE EFFECTIVEEFFECTIVE THAN GOV’TTHAN GOV’T SENSEN SESE OFOF DUTDUT YY HELPEHELPE D YOUD YOU ININ TIMESTIMES OFOF NEEDNEED TAXTAX BENEFBENEF ITSITS RELIGIORELIGIO USUS REASONREASON SS HIGH INCOMEHIGH INCOME X LOW INCOMELOW INCOME X X YOUNGERYOUNGER X PRACTICINGPRACTICING FAITHFAITH X X MARRIEDMARRIED X SINGLESINGLE NONWHITENONWHITE X X WOMENWOMEN X X X X CONSERVATIVESCONSERVATIVES X VOLUNTEERVOLUNTEER X X X X X
    • 105. 8 - 106 Table 8.4 Using negativeTable 8.4 Using negative information in marketinginformation in marketing StrategyStrategy Target groupTarget group ShowShow how aidhow aid helpshelps those inthose in needneed Show thatShow that aidaid reachesreaches those inthose in needneed Show thatShow that eveneven small giftssmall gifts can becan be usefuluseful ImproveImprove awareness ofawareness of organizationorganization YoungYoung X OlderOlder X MenMen X UnmarriedUnmarried X Low educationLow education X X Small familySmall family X No religionNo religion X X Big cityBig city X
    • 106. Table 8.5 Types of messagesTable 8.5 Types of messages  Source: Clary, et. a., (1994)Source: Clary, et. a., (1994)  Concrete/promotional and abstract/refutationalConcrete/promotional and abstract/refutational are especially effectiveare especially effective PromotionalPromotional RefutationalRefutational AbstractAbstract ““Giving is vital forGiving is vital for society”society” ““Your gift might be small,Your gift might be small, but you are doing yourbut you are doing your part”*part”* ConcreteConcrete ““Your $10 gift will feed aYour $10 gift will feed a child for 10 days”*child for 10 days”* ““$10 might seem like a$10 might seem like a pittance, but it will feed apittance, but it will feed a child for 10 days”child for 10 days”
    • 107. 8 - 108 Pricing: Alternative approachesPricing: Alternative approaches  Maximize profit (e.g., net revenues)Maximize profit (e.g., net revenues)  Like a business, but inconsistent withLike a business, but inconsistent with nonprofit objectivesnonprofit objectives  Sliding scale or price discrimination,Sliding scale or price discrimination, e.g.,e.g.,  Charge some clients more to cross-Charge some clients more to cross- subsidize desirable programssubsidize desirable programs  Voluntary price discrimination, whenVoluntary price discrimination, when clients make voluntary donationsclients make voluntary donations  Charge different prices at different timesCharge different prices at different times
    • 108. 8 - 109 Table 8.6 Pricing optionsTable 8.6 Pricing options StrategyStrategy DescriptionDescription ProfitProfit maximizationmaximization Maximize net revenuesMaximize net revenues Mixed pricingMixed pricing Cross subsidize favored clients with feesCross subsidize favored clients with fees from othersfrom others Classical priceClassical price discriminationdiscrimination Charge prices that vary by clientCharge prices that vary by client characteristics (age, race, income, etc.)characteristics (age, race, income, etc.) Voluntary priceVoluntary price discriminationdiscrimination Charge a low price but augment withCharge a low price but augment with voluntary donations elicited at time of salevoluntary donations elicited at time of sale Classical priceClassical price discriminationdiscrimination Charge according to time or dayCharge according to time or day
    • 109. Appendix 2 : OtherAppendix 2 : Other Financing SourcesFinancing Sources Based on US RegulationsBased on US Regulations
    • 110. Sources of Equity FinancingSources of Equity Financing  Public stock sale – “going public”Public stock sale – “going public”  Simplified registrations and exemptionsSimplified registrations and exemptions (continued)
    • 111. TimeTime ActionAction Week 1Week 1 Conduct organizational meeting with IPO team, including underwriter, attorneys, accountants, and others. Begin drafting registration statement. Week 5Week 5 Distribute first draft of registration statement to IPO team and make revisions. Week 6Week 6 Distribute second draft of registration statement and make revisions. Week 7Week 7 Distribute third draft of registration statement and make revisions. Week 8Week 8 File registration statement with the SEC. Begin preparing presentations for road show to attract other investment bankers to the syndicate. Comply with Blue Sky laws in states where offering will be sold. Week 12Week 12 Receive comment letter on registration statement from SEC. Amend registration statement to satisfy SEC comments. Week 13Week 13 File amended registration statement with SEC. Prepare and distribute preliminary offering prospectus (called a “red herring”) to members of underwriting syndicate. Begin road show meetings. Week 15Week 15 Receive approval for offering from SEC (unless further amendments are required). Issuing company and lead underwriter agree on final offering price. Prepare, file, and distribute final offering prospectus. Week 16Week 16 Company and underwriter sign the final agreement. Underwriter issues stock, collects the proceeds from the sale, and delivers proceeds to company. Timetable for an IPOTimetable for an IPO
    • 112. The Registration ProcessThe Registration Process  Choose the underwriterChoose the underwriter  Negotiate a letter of intentNegotiate a letter of intent  Prepare the registration statementPrepare the registration statement  File with the SECFile with the SEC  Wait to “go effective” and road showWait to “go effective” and road show  Meet all state requirementsMeet all state requirements
    • 113. Simplified RegistrationsSimplified Registrations and Exemptionsand Exemptions Goal:Goal: To give small companies easyTo give small companies easy access to capital markets withaccess to capital markets with simplified registrationsimplified registration requirementsrequirements
    • 114. Simplified RegistrationsSimplified Registrations and Exemptionsand Exemptions  Regulation S-BRegulation S-B  Regulation D (Rule 504): SmallRegulation D (Rule 504): Small Company Offering Registration (SCOR)Company Offering Registration (SCOR)  Regulation D (Rule 505 and 506): PrivateRegulation D (Rule 505 and 506): Private PlacementsPlacements  Section 4 (6) Private PlacementsSection 4 (6) Private Placements  Intrastate Offerings (Rule 147)Intrastate Offerings (Rule 147)  Regulation ARegulation A
    • 115. Federally Sponsored ProgramsFederally Sponsored Programs  Economic Development Administration (EDA)Economic Development Administration (EDA)  Department of Housing and UrbanDepartment of Housing and Urban Development (HUD)Development (HUD)  U.S. Department of Agriculture’s RuralU.S. Department of Agriculture’s Rural Business (USDA) - Cooperative ServiceBusiness (USDA) - Cooperative Service  Small Business Innovation Research (SBIR)Small Business Innovation Research (SBIR)  Small Business Technology TransferSmall Business Technology Transfer programs (STTR)programs (STTR)  Small Business Administration (SBA)Small Business Administration (SBA)
    • 116. SBA Loan ProgramsSBA Loan Programs  Patriot Express ProgramPatriot Express Program  CommunityCommunityExpressExpress ProgramProgram  7(A) Loan Guaranty Program7(A) Loan Guaranty Program  Average 7(a) loan = $183,000Average 7(a) loan = $183,000
    • 117. FIGURE 13.7 SBA 7(A) Guaranteed Loans Source: U.S Small Business Administration.
    • 118. SBA Loan ProgramsSBA Loan Programs  Patriot Express ProgramPatriot Express Program  CommunityCommunityExpressExpress ProgramProgram  7(A) Loan Guaranty Program7(A) Loan Guaranty Program  Average 7(a) loan = $183,000Average 7(a) loan = $183,000  Section 504 Certified Development CompanySection 504 Certified Development Company ProgramProgram  Microloan ProgramMicroloan Program  Average microloan = $13,000Average microloan = $13,000
    • 119. SBA Loan ProgramsSBA Loan Programs  The Capline ProgramThe Capline Program  Loans involving international tradeLoans involving international trade  Export Working CapitalExport Working Capital  International Trade ProgramInternational Trade Program  Disaster LoansDisaster Loans (continued)
    • 120. State and Local Loan ProgramsState and Local Loan Programs  Capital Access Programs (CAPs)Capital Access Programs (CAPs) –– Designed to encourage lenders to makeDesigned to encourage lenders to make loans to businesses that do not qualify forloans to businesses that do not qualify for traditional financingtraditional financing  Revolving Loan Fund (RLFs)Revolving Loan Fund (RLFs) –– Combine private and public funds to makeCombine private and public funds to make small business loanssmall business loans
    • 121. SBA Guaranteed LoansSBA Guaranteed Loans 1 of 21 of 2  The SBA Guaranteed Loan ProgramThe SBA Guaranteed Loan Program  Approximately 50% of the 9,000 banks in the U.S.Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.participate in the SBA Guaranteed Loan Program.  The program operates through private-sector lendersThe program operates through private-sector lenders who provide loans that are guaranteed by the SBA.who provide loans that are guaranteed by the SBA.  The loans are for small businesses that are not able toThe loans are for small businesses that are not able to obtain credit elsewhere.obtain credit elsewhere.  The 7(A) Loan Guarantee ProgramThe 7(A) Loan Guarantee Program  The most notable SBA program available to smallThe most notable SBA program available to small businesses.businesses.
    • 122. SBA Guaranteed LoansSBA Guaranteed Loans 2 of 22 of 2  Size and Types of LoansSize and Types of Loans  Almost all small businesses are eligible to apply for anAlmost all small businesses are eligible to apply for an SBA guaranteed loan.SBA guaranteed loan.  The SBA can guarantee as much as 85% on loans up toThe SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000.$150,000 and 75% on loans over $150,000.  An SBA guaranteed loan can be used for almost anyAn SBA guaranteed loan can be used for almost any legitimate business purpose.legitimate business purpose.  Although SBA guaranteed loans are utilized moreAlthough SBA guaranteed loans are utilized more heavily by existing small businesses than start-ups, theyheavily by existing small businesses than start-ups, they should not be dismissed as a possible source ofshould not be dismissed as a possible source of financing.financing.
    • 123. Creative Sources of Financing orCreative Sources of Financing or FundingFunding SBIR and STTR Grant Programs
    • 124. SBIR and STTR GrantsSBIR and STTR Grants 1 of 41 of 4  The full spectrum of grants available is listed atThe full spectrum of grants available is listed at www.grants.govwww.grants.gov  SBIR and STTR ProgramsSBIR and STTR Programs  The Small Business Innovation Research (SBIR) andThe Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR)the Small Business Technology Transfer (STTR) programs are two important sources of early-stageprograms are two important sources of early-stage funding for technology firms.funding for technology firms.  These programs provide cash grants to entrepreneursThese programs provide cash grants to entrepreneurs who are working on projects in specific areas.who are working on projects in specific areas.  The main difference between the SBIR and the STTRThe main difference between the SBIR and the STTR programs is that the STTR program requires the participationprograms is that the STTR program requires the participation of researchers working at universities or other researchof researchers working at universities or other research institutions.institutions.
    • 125. SBIR and STTR GrantsSBIR and STTR Grants 2 of 42 of 4  SBIR ProgramSBIR Program  The SBIR Program is a competitive grant program thatThe SBIR Program is a competitive grant program that provides over $1 billion per year to small businesses inprovides over $1 billion per year to small businesses in early-stage and development projects.early-stage and development projects.  Each year, 11 federal departments and agencies areEach year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&Drequired by the SBIR to reserve a portion of their R&D funds for awards to small businesses.funds for awards to small businesses.  Guidelines for how to apply for the grants are providedGuidelines for how to apply for the grants are provided on each agency’s Web site.on each agency’s Web site.
    • 126. SBIR and STTR GrantsSBIR and STTR Grants 3 of 43 of 4  SBIR Program (continued)SBIR Program (continued)  The SBIR is a three-phase program, meaning that firmsThe SBIR is a three-phase program, meaning that firms that qualify have the potential to receive more than onethat qualify have the potential to receive more than one grant to fund a particular proposal.grant to fund a particular proposal.  Historically, less than 15% of all Phase I proposals areHistorically, less than 15% of all Phase I proposals are funded. The payoff for successful proposals, however,funded. The payoff for successful proposals, however, is high.is high.  The money is essentially free. It is a grant, meaning that itThe money is essentially free. It is a grant, meaning that it doesn’t have to be paid back and no equity in the firm is atdoesn’t have to be paid back and no equity in the firm is at stake.stake.  The small business receiving the grant also retains the rights toThe small business receiving the grant also retains the rights to any intellectual property generated as the result of the grantany intellectual property generated as the result of the grant initiative.initiative.
    • 127. SBIR and STTR GrantsSBIR and STTR Grants 4 of 44 of 4 SBIR Three-Phase Grant Program
    • 128. Further ReadingFurther Reading  Scarborough, Norman, M. 2011.Scarborough, Norman, M. 2011. Essentials ofEssentials of Entrepreneurship and Small BusinessEntrepreneurship and Small Business Management.Management. 66thth edition. Pearson.edition. Pearson.  Brooks, Arthur C. (2006) Social Entrepreneurship :Brooks, Arthur C. (2006) Social Entrepreneurship : A Modern Approach to Social Value Creation.A Modern Approach to Social Value Creation. PearsonPearson  Barringer, Bruce R. & Ireland, R. Duane, 2011Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching newEntrepreneurship – Successfully launching new venturesventures 44thth edition, Pearson.edition, Pearson.  Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011.Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Entrepreneurship and Small Business.Entrepreneurship and Small Business. 33rdrd AsiaAsia Pacific edition. John Wiley.Pacific edition. John Wiley.

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