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  1. 1. Financing a Small Business Part II Equity Financing & Planning for Capital The ABC’s from Start to Finance…
  2. 2. Equity or “Risk Capital <ul><li>Equity capital represents the personal investment of the owner(s)…it is often called RISK capital </li></ul><ul><li>It is called RISK because the investors assume the primary risk of losing their funds if the business fails </li></ul><ul><li>In the 1990’s entrepreneurs began to turn more to equity financing to get their businesses up & running </li></ul><ul><li>Apart from personal savings, family and friends, equity capital is tough for a start-up to obtain </li></ul>
  3. 3. Equity Financing <ul><li>Most frequently used to fund emerging businesses and to provide “seed” start-up for the early stage and expansion ventures </li></ul><ul><li>For businesses in their 2 nd and 3 rd level of business development </li></ul><ul><li>Start-up businesses often have challenges attracting traditional equity investment </li></ul><ul><li>Start-ups often use the 3 F’s for equity investment </li></ul>
  4. 4. The Equity Ladder <ul><li>Start with your personal savings …lenders & investors EXPECT you to reach into your pockets first! </li></ul><ul><li>2. Three out of four start-ups tap their family members for capital; followed by friends. </li></ul><ul><li>Entrepreneurs can take on partners to expand the capital foundation of their business. </li></ul><ul><li>4. Angels fill a significant gap in the seed capital market. </li></ul><ul><li>Venture Capitalists & Capitalist Firms purchase equity positions in young businesses that have high-growth potential </li></ul><ul><li>Going Public- Public Stock Sale </li></ul>
  5. 5. Tips for Tapping the Family & Friends for Funds <ul><li>Consider the impact the investment will have on everyone </li></ul><ul><li>Keep the arrangement strictly business </li></ul><ul><li>Keep it professional! </li></ul><ul><li>Settle the details upfront </li></ul><ul><li>Create a written document…put the agreement in writing </li></ul><ul><li>Treat the money as “bridge” financing </li></ul><ul><li>Develop a payment schedule </li></ul>
  6. 6. Angel Overview <ul><li>Angels – are normally wealthy individuals, often entrepreneurs themselves, who invest in business start-ups </li></ul><ul><li>Angels – have a “personal” interest in the industry and are willing to put money into companies before venture capitalists and institutions. They often fund in “clusters” and can be “patient” to wait for a ROI. </li></ul><ul><li>Angels are more likely to fund in the range from $10,000 - $2 million (VC’s are more $3 million+) </li></ul><ul><li>Joe Bezos, CEO Amazon, attracted $1.2 million in Angel financing to start Amazon.com but only after he had tapped-out his friends & family </li></ul>
  7. 7. Where to find Angels Make the right contacts, network in the industry Most angels will look for businesses they know something about Internet sightings include: Angelmoney.com, Garage.com, Jumpstart Investments, Angel Investing WomenAngels.net, ACE-Net (sba.gov), Bay Area Regional Technological Alliance
  8. 8. Howdy Partner! Partners for Your Equity <ul><li>Consider the Risks before taking on a partner for your business. </li></ul><ul><li>Follow the UPA (Unified Partnership Agreement Act) in sharing in management profit & losses. </li></ul><ul><li>A limited partner cannot share in the day to day operations and management & if the business fails they lose ONLY what they have invested in it. </li></ul><ul><li>Most partnership agreements restrict how a partner can dispose of their interest. Dissolving can be a difficult process. </li></ul>
  9. 9. Venture Capital Firms <ul><li>Traditional VC is hard to get…they are looking for companies that grow REALLY Big, REALLY Fast! </li></ul><ul><li>Many Large Corporations are in the VC business of financing “smaller” businesses </li></ul><ul><li>Foreign Corporations are also investing in smaller US businesses </li></ul><ul><li>VC’s normally expect a ROI of 300-500% over 5 to 7 years!! </li></ul><ul><li>VC’s lend in the area of 1- ??? Million </li></ul><ul><li>(although smaller products are there) </li></ul>
  10. 10. Venture Capitalist Sources <ul><li>Venture Capital Marketplace- www.vcmarketplace.com </li></ul><ul><li>SBA- SBIC Program (Small Business Investment Companies)- small VC’s provide seed funding with SBA guarantees- </li></ul><ul><li>Pratt’s Guide to Venture Capital Sources (no relation..sorry) </li></ul><ul><li>National Venture Capital Association www.nvca.org </li></ul>
  11. 11. Planning For Your Capital Needs Having the appropriate business -“financial” plan is critical! <ul><li>Business Plan Types & Uses: </li></ul><ul><li>Financing- must support ability to repay </li></ul><ul><li>Investment- illustrates strengths & potential of business in order to capture market share. </li></ul><ul><li>Describes the “equity investment” and structure </li></ul><ul><li>Composite (existing)- often used by existing businesses for on-going financing </li></ul><ul><li>Start-up (“projected”)- details the projected strengths and needs of a new business. The plan MUST BE able to support the assumptions </li></ul><ul><li>Other types- Strategic, Marketing, Operational </li></ul>
  12. 12. Ten Most Common Mistakes Found in Financial Business Plans <ul><li>Too Long </li></ul><ul><li>No Competition Indicated </li></ul><ul><li>Unreasonable Expectations & Projections </li></ul><ul><li>Unreasonable Financial Projections </li></ul><ul><li>Unrealistic Profitability for Investors </li></ul><ul><li>Management Skills not demonstrated </li></ul><ul><li>Unrealistic projections of products & services </li></ul><ul><li>Lack of Knowledge of Industry </li></ul><ul><li>Inadequate Calculations </li></ul><ul><li>NOT Clear to the reader </li></ul>
  13. 13. Outline of a Typical Small Business Financing Business Plan <ul><li>Cover Page </li></ul><ul><li>Cover Letter & Statement of Purpose </li></ul><ul><li>Table of Contents </li></ul><ul><li>Executive Summary </li></ul><ul><li>Description of Business </li></ul><ul><li>Market Analysis </li></ul><ul><li>Management </li></ul><ul><li>Operations </li></ul><ul><li>Use of Funds </li></ul><ul><li>Financial Information </li></ul><ul><li>Supporting Information (resumes, agreements) </li></ul>
  14. 14. Checklist for getting it all together! <ul><li>Every bank or organization will have a slightly different list of everything that is needed. </li></ul><ul><li>Here is a basic list: </li></ul><ul><li>Applicant Information Sheet </li></ul><ul><li>Current Personal Financial Statement (for all partners) </li></ul><ul><li>Schedule of Real Estate Owned </li></ul><ul><li>Personal Tax Returns- 3 years (or business if in business) </li></ul><ul><li>Signed Credit Authorization </li></ul><ul><li>Current Financial Statement </li></ul><ul><li>Business Debt Schedule </li></ul><ul><li>If new business, business plan and projections for first 12 months </li></ul><ul><li>If purchasing, Purchase agreement </li></ul><ul><li>If franchising, Franchise agreement </li></ul>
  15. 15. Where to go for Help! <ul><li>Your local banker </li></ul><ul><li>The SBDC </li></ul><ul><li>The SBA </li></ul><ul><li>Local Consultants </li></ul><ul><li>US Hispanic Chamber of Commerce </li></ul><ul><li>Business Plan Pro (software) </li></ul><ul><li>Bplans.com </li></ul>Just a few places to start…There are a lot of resources available!