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  1. 1. Financing Your Venture Presented by Jeffrey A. Robinson, Ph.D. Assistant Professor of Management & Entrepreneurship NYU Stern School of Business
  2. 2. Agenda <ul><li>The Business Plan </li></ul><ul><ul><li>Review of the financial aspects of the plan </li></ul></ul><ul><li>Two more financial consideration </li></ul><ul><li>Start-up Budgets and Operating Budgets </li></ul><ul><li>Ways to Finance your Venture </li></ul>
  3. 3. Opportunity Innovation Networks Capital What is a good framework for entrepreneurship?
  4. 4. <ul><li>Capital can be acquired, exchanged & converted </li></ul><ul><li>Five forms of capital </li></ul><ul><ul><li>Financial (debt, equity, etc.) </li></ul></ul><ul><ul><li>Human (skills, education) </li></ul></ul><ul><ul><li>Social (networks of people) </li></ul></ul><ul><ul><li>Cultural (social resources, family background and knowledge of cultural nuances) </li></ul></ul><ul><ul><li>Intellectual (IP in firms, transferable) </li></ul></ul>Capital
  5. 5. <ul><li>The identification , evaluation , exploration , and exploitation of a venture opportunity </li></ul><ul><li>The structures around an opportunity or context </li></ul>Opportunity
  6. 6. <ul><li>The cultivation and management of innovation and innovative practices </li></ul><ul><li>The innovation of business models </li></ul><ul><li>The protection of innovations </li></ul>Innovation
  7. 7. <ul><li>Networks connect people within organizations and between organization </li></ul><ul><li>Networks connect entrepreneurs to capital, innovation, opportunities </li></ul><ul><li>Networks tie everything together </li></ul><ul><li>Personal Networks/Professional Networks/ Entrepreneurial Networks </li></ul>Networks
  8. 8. Opportunity Innovation Networks Capital The success or failure of your venture depends upon how your put these pieces together. Entrepreneurship
  9. 9. Why is this important? <ul><li>… because good entrepreneurs leverage capital, opportunities, innovation and networks to create viable ventures </li></ul><ul><li>… because good business plans demonstrate how an entrepreneurial team will leverage capital, opportunities, innovation and networks to create a new venture </li></ul>
  10. 10. Two important statements … <ul><li>CFIMITYM </li></ul><ul><li>EENASWASI </li></ul>
  11. 11. Financial Statements Detailing the Financial Picture for your Venture
  12. 12. Financing Requirements and Opportunity <ul><li>Target financings (equity and debt) </li></ul><ul><li>Current Offering </li></ul><ul><li>Capitalization </li></ul><ul><li>Use of Proceeds </li></ul>
  13. 13. Financial Projections <ul><li>5 year summary projections </li></ul><ul><li>3 year detailed, quarterly projections </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Cash Flow Operational </li></ul><ul><li>Break-even Analysis </li></ul>
  14. 14. The Start-up Budget & The Operating Budget What will it take to get this venture started?
  15. 15. What’s the Difference? <ul><li>Start-Up Budget </li></ul><ul><ul><li>How much will you need to get this venture started? </li></ul></ul><ul><ul><li>Includes one time capital purchases and typically 3-6 months of operations </li></ul></ul><ul><li>Operating Budget </li></ul><ul><ul><li>How much will you need to remain in business? </li></ul></ul><ul><ul><li>Includes the monthly expenses to run your business </li></ul></ul>
  16. 16. Financing Your Venture Sources of Funding
  17. 17. Traditional Ventures: Types of Firms <ul><li>Lifestyle firms </li></ul><ul><ul><li>generally < $1M in revenues </li></ul></ul><ul><ul><li>founders have no desire to expand </li></ul></ul><ul><ul><li>Forged out of something you are passionate about </li></ul></ul><ul><li>Growth Firms </li></ul><ul><ul><li>$1 M to 20 M revenues, 10-20% growth </li></ul></ul><ul><ul><li>$20M + revenues, >20% growth {gazelles} </li></ul></ul><ul><ul><li>Founders want to expand and grow the firm </li></ul></ul>
  18. 18. Opportunity Recognition <ul><li>There are far more good ideas than there are good business opportunities </li></ul><ul><li>Many businesses run out of money before they find enough customers for their good ideas </li></ul>
  19. 19. How Much Money They Had (A) Less than $1,000 (E) $50,001 to $100,000 In terms of start-up capital, including personal assets, Inc. 500 companies started with little.* (B) $1,000 to $10,000 (F) $100,001 to $300,000 (C) $10,001 to $20,000 (G) More than $300,000 (D) $20,001 to $50,000 *”Start-up capital” refers to funds raised before any product or service was delivered. “Personal assets” includes savings, mortgage or other personal loans, credit cards, 401(k), etc. 13% (A) 23% (B) 12% (C) 13% (D) 12% (E) 13% (F) 14% (G) 2004 Inc. Magazine 500
  20. 20. Where the Money Came From The following sources of funds provided Inc. 500 start-up capital. (C) Assets of family or friends (other than co-founders) (A) Personal assets (B) Other founders’ personal assets (D) Commercial bank loan or line of credit (E) Private equity investment (F) Financing from a supplier, customer, or other business entity (G) SBA loan or funds from other government program (H) Formal venture capital 53% (A) 2% (H) 2% (G) 4% (F) 4% (E) 8% (D) 10% (C) 17% (B) SOURCE OF FUNDS 2004 Inc. Magazine 500
  21. 21. Since Start-up of companies have raised private equity. 17% 2004 Inc. Magazine 500
  22. 22. Since Start-up 12% of companies have raised venture capital. 2004 Inc. Magazine 500
  23. 23. Stages <ul><li>Seed Idea </li></ul><ul><li>Startup Identifying Customers </li></ul><ul><li>Growth Working Capital Generally Needed </li></ul><ul><li>Expansion Need Capital for WC as well as for equipment and infrastructure </li></ul><ul><li>Harvest Always think how investors and entrepreneurs get their money out </li></ul>
  24. 24. Bootstrap Capital <ul><li>Self </li></ul><ul><li>Business Partners </li></ul><ul><li>Friends and Family </li></ul><ul><ul><li>Personal Savings </li></ul></ul><ul><ul><li>Credit Cards </li></ul></ul><ul><ul><li>Loans against property </li></ul></ul><ul><ul><li>Bank Loans </li></ul></ul><ul><ul><li>Equity Investments by friends and family </li></ul></ul>
  25. 25. Bootstrap Finance (Bhide) <ul><li>Get operational quickly </li></ul><ul><li>Look for quick break-even, cash-generating projects </li></ul><ul><li>Offer high-value products or services that can sustain direct personal selling </li></ul><ul><li>Forget about the crack team </li></ul><ul><li>Keep growth in check </li></ul><ul><li>Focus on cash, not on profits, market share, or anything else </li></ul><ul><li>Cultivate banks before the business becomes creditworthy </li></ul>
  26. 26. <ul><li>Do not buy new what you can buy used. </li></ul><ul><li>Do not buy used what you can lease. </li></ul><ul><li>Do not lease what you can borrow. </li></ul><ul><li>Do not borrow when you can barter. </li></ul><ul><li>Do not barter when you can beg. </li></ul><ul><li>Do not beg what you can scavenge. </li></ul><ul><li>Do not scavenge what you can get free. </li></ul><ul><li>Do not take for free what someone will pay you for. </li></ul><ul><li>Do not take payment for something that people will bid for. </li></ul>More bootstrapping tips … From “10 Principles of Entrepreneurial Creation” by S. Venkataraman
  27. 27. Debt or Equity <ul><li>Equity will help your grow quicker but will result in sharing of wealth and control with other investors </li></ul><ul><li>Debt is less expensive than equity </li></ul><ul><ul><li>Quicker and easier to find </li></ul></ul><ul><ul><li>Requires regular payments of principle and equity </li></ul></ul>
  28. 28. Debt VS Equity <ul><li>Always a consideration </li></ul><ul><li>Debt usually less expensive than equity but hard to get </li></ul><ul><li>If you do use debt -- generally you will have to pledge assets that are personal </li></ul><ul><ul><li>In a small business the owner personally pledges assets </li></ul></ul>
  29. 29. Sources of Capital <ul><li>Government </li></ul><ul><ul><li>SBA - Small Business Administration 7 (A) Program </li></ul></ul><ul><ul><li>SBIC - Small Business Investment Corporation/ MESBIC </li></ul></ul><ul><ul><ul><li>no more than 20 percent of SBIC assets in 1 company </li></ul></ul></ul><ul><ul><ul><li>MESBIC – Minority Enterprise SBIC </li></ul></ul></ul><ul><ul><ul><ul><li>51 percent owned by socially or economically disadvantaged minority </li></ul></ul></ul></ul><ul><ul><li>SBIR – Small Business Innovation Research Grants </li></ul></ul>
  30. 30. The Capital Markets Food Chain for Entrepreneurial Ventures Text Exhibit 14.1
  31. 31. Sources of Capital <ul><li>Banks </li></ul><ul><ul><li>Amount available to entrepreneurs is highly depended on where in the business cycle the economy happens to be </li></ul></ul><ul><ul><li>Business loans are different than commercial real estate loans </li></ul></ul><ul><ul><li>Consider Community Development Banks if Social Enterprise </li></ul></ul><ul><ul><li>Small Business Services at local bank – i.e. Line of Credit </li></ul></ul><ul><ul><li>Factoring -- Selling Accounts Receivables for Cash </li></ul></ul>
  32. 32. Sources of Capital <ul><li>Corporations </li></ul><ul><ul><li>We do not really talk much about in this course </li></ul></ul><ul><ul><li>It is not uncommon for a former employee to get funding from her old company if the business would be complimentary </li></ul></ul><ul><ul><li>Corporation may be able to use the technology </li></ul></ul>
  33. 33. Sources of Capital <ul><li>Angel Investors </li></ul><ul><ul><li>Private investors (often family and friends -- but can be established member of a community) </li></ul></ul><ul><ul><li>return 20-40 percent annually </li></ul></ul><ul><li>Venture Capitalist </li></ul><ul><ul><li>Generally don’t finance seed or startup phase </li></ul></ul><ul><ul><li>return 30 to 60 percent annually </li></ul></ul>
  34. 34. Rate of Return Sought by Venture Capital Investors Text Exhibit 15.1
  35. 35. Informal Investors <ul><li>What kind of ventures lend themselves to the use of informal investors? </li></ul><ul><ul><li>Ventures with capital requirements of $50 K - $500 K </li></ul></ul><ul><ul><li>Ventures with sales potential of $2 M - $20 M over 5 to 10 years </li></ul></ul><ul><ul><li>Small established, privately held venture with sales and profit growth of 10% to 20% per year </li></ul></ul><ul><ul><li>Some R&D deals </li></ul></ul><ul><ul><li>Companies with high levels of FCF within 3 or 5 years </li></ul></ul>Source: Timmons, Chapter 14
  36. 36. Characteristics of Business Angels <ul><li>Bill Wetzel found that business angels are mainly American self-made entrepreneur millionaires who: </li></ul><ul><li>Have made it on their own, have substantial business and financial experience, and are likely to be in their 40s or 50s. </li></ul><ul><li>Are well educated: 95% hold college degrees and 51% have graduate degrees. </li></ul><ul><li>Have technical or business education—of those who have graduate degrees, 44% were in a technical field and 35% in business or economics. </li></ul><ul><li>Are predominantly male—over 96% are men. </li></ul>
  37. 37. Sources of Capital <ul><li>IPO </li></ul><ul><ul><li>Usually when Angels, Venture Capitalists and sometimes entrepreneur try to “cash out” </li></ul></ul><ul><ul><li>Expensive </li></ul></ul><ul><ul><li>Time Consuming </li></ul></ul><ul><ul><li>Highly dependent on where the business cycle is </li></ul></ul>
  38. 38. Finding Money <ul><li>Less than 1 percent from SBA </li></ul><ul><li>Angels -- Informal Capital </li></ul><ul><ul><li>Require an average of 26%/yr </li></ul></ul><ul><ul><li>Usually local </li></ul></ul><ul><ul><li>Accept about 30% of deals </li></ul></ul><ul><li>Banks </li></ul><ul><ul><li>Will lend but usually require collateral </li></ul></ul><ul><ul><li>Easier to get a personal loan than a commercial loan </li></ul></ul>
  39. 39. Resources and Sources <ul><li> </li></ul><ul><li>Angel Investor Networks/Venture Exhibitions or Venture Fairs </li></ul><ul><li>Your Business School (Entrepreneurship Center, Alumni Network) </li></ul><ul><li>Business Plan Competitions ($25 K - $100 K) </li></ul><ul><li>City, State and Regional Economic Development agencies/departments </li></ul>
  40. 40. Contact information <ul><li>Jeffrey A. Robinson, Ph.D. </li></ul><ul><li>[email_address] </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><ul><li>African American Women Entrepreneurs Research Project </li></ul></ul><ul><ul><li>The Ph.D. Project – Ph.D. in Business School </li></ul></ul><ul><ul><li>Venture Plan Document </li></ul></ul>