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Joseph Fabiilli
What you’ll learn…
 Resources available to entrepreneurs to start their
business
 Compare/Contrast sources of financing for start-up
ventures
 Importance of financial planning
 Information needed to obtain financing
 Types of growth financing available to entrepreneurs
 How to calculate start-up requirements
Entrepreneurial Resources
 Finding the resources to launch a business is a creative
process. It requires understanding of short-term and long-
term needs.
 Short-Term: Activities that are not part of normal operations
 Seasonal increase in sales that requires purchasing more inventory
than normal
 Long-Term: Preparation for future growth
 Acquiring a larger facility or buying new/additional equipment
Bootstrapping
 The most common way businesses get off the ground!
 Involves operating as frugally as possible and cutting all un-
necessary expenses
 Involves borrowing, leasing and partnering to acquire resources
 You can accomplish this in a few ways:
 Hire as few employees as possible
 Leasing anything you can
 Being creative
Start-Up Money
 New businesses have no track record to prove it will survive.
For this reason, it’s hard to get investors.
 The main resources for start-up money is usually personal resources.
 Friends, Family, Others
 Savings, Credit Cards, Loans, Investments
 To finance a new business, entrepreneurs can use banks,
financial companies, investment companies, and government
grants. There are 2 broad types of financing for new ventures
 Equity Financing
 Debt Financing
Sources of Equity Financing
 Equity Capital: Cash raised for a business in exchange for
ownership stake in that business
 Ex: Investor might invest $50k for a 25% ownership stake
 Equity funding, AKA: Risk Capital
 Because of the financial risk involved
 Successful Business: Investor makes a return on investment
 Business Fails: Investor loses money
Types of Equity Funding
 Personal Savings
 #1 Source of $. 67% of businesses are started this way, without borrowing
money
 Friends/Family
 What happens to your relationship with these people if the business fails?
 Private Investors
 Angel: Private investor who funds start-up companies. Nonprofessional
financing source.
 Partners
 Remember the partnership agreement we talked about in Ch. 7
 Share responsibilities and costs
 Venture Capitalists
 Individual investors or investment firms that invest capital professionally.
Provide managerial as well as technical expertise.
 State Sponsored Venture Capital Funds
 Local economic development corporations help fund new businesses to
create jobs.
Sources of Debt Financing
 Money is raised by taking out loans. Not only do you borrow
money, but you pay it back with interest.
 The entrepreneur retains ownership of the business, however
must record the liability on the business’ accounting books.
 Make sure you are certain the business can generate enough
cash flow to repay the loan.
 Compare and contrast long-term vs. short term financing.
 Do you want a loan out for 30 years, or for 3,5 or 10 years?
Types of Debt Funding
 Banks
 Usually only lend to well-established businesses
 Trade Credit
 Credit that one business will grant to another for the purchase of goods or
services.
 Minority Enterprise Development Programs
 Funded by the private sector & SBA. Owners must be at least 51% ethnic
minority, female, or disabled. Also helps secure government contracts & find
strategic partners
 Commercial Finance Companies
 More expensive alternate to commercial banks. Less conservative than banks,
and more willing to take risks. Form of security or collateral is required, such as
your home.
 SBA Loan
 Small Business Administration. Uses a commercial bank, but guarantees
repayment to the lender up to 90% should your business fail. You and anyone
with more than 20% ownership in the business must guarantee the loan with
personal assets. (Home, Cars, etc)
 SBIC’s
 Small Business Investment Companies. Privately managed venture capital
companies. Licensed by the SBA to provide equity and debt financing to young,
established businesses.
Joseph Fabiilli | What Venture Capitalists Expect
How To Get Financed!
 Once you’ve figured out which method your company
will use (Equity vs. Debt), you must create pro forma
financial statements
 Pro Forma: Proposed or Estimated financial statements
based on predictions of how the operations of the
business will turn out.
 Income Statements, Balance Sheets, Cash Flow, etc.
 This will give potential investors and other sources of
funds a sense of confidence that you know what your
doing!
What Venture Capitalists Expect
 Venture Capitalists rarely invest in start up companies, but
when they do, they look for high-growth firms with BIG
potential.
 Venture Capitalists typically want a 30-70% ROI for a growing
company, and a 50% or more for an early stage venture because
of the risk involved.
 Ex: If they give you $2 million for 5 years. They will want their
original investment within those 5 years, as well as an
additional $600,000-$1 Million on top of that.
 Your business must generate enough money to pay them off.
What Private Investors Expect
 Remember from 19.1, called “Angels”.
 Unlike Venture Capitalists, they enjoy being involved in the
business.
 Typically invest in the business because they are familiar or
understand that industry.
 Most private investors put between $10-500k into a new business.
 On average, they aim to get 10x’s their investment at the end of
five years.
 A strong management team will attract private investors
What Bankers Expect
 Banks must invest conservatively and follow strict rules about
how to invest the bank’s money.
 Very different from that of a venture capitalist
 Because of that, they are MUCH MORE interested in how you
plan, and your ability to repay that loan
 Cash Flow is a big concern to them
 You’ve got to be able to cover the business’ monthly expenses AND the
loan payment
 Bankers rely on the 5 C’s to determine your loan application
 Character-Reputation for business practices
 Capacity-Ability to pay a loan (Cash Flow)
 Capital-Net worth of a business
 Collateral-Security for the loan should you not be able to repay
 Conditions-Growth, Competition, Economy, etc.
Growth Financing
 This is financing for an already established business looking
to grow! Not start up funding!
 VC (Venture Capital) Companies
 Expect returns of 30-70%
 May require significant ownership, or a seat on the board of directors
 Requires Due Dilligence-Investigation & analysis by an investor
 Private Placements
 Raises capital by selling ownership
 Private offering or sale of securities (ownership)
 Investors must meet certain standards, must be “sophisticated”
 Investors must have a net worth of at least a million dollars
 IPOs (Initial Public Offerings)
 Sale of stock in a company on a public exchange
 5 steps to becoming a public company with stock on pg. 418. List them.
Calculating Start-Up Needs
 Start-Up Costs
 Those that you incur prior to the business opening it’s doors
 Fig. 19.1 on pg. 420, good example of costs
 Equipment, furniture, fixtures, etc.
 Operating Costs
 AKA working capital
 Amount of cash needed to carry out daily operations
 Covers the time between selling your product/service and
receiving payment from the customer
 Contingency Fund
 Extra amount of money used only when absolutely necessary
 “Emergency Fund”
 Some businesses keep enough money in here to operate for 2 or
more months.
Thank You

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Joseph Fabiilli | What Venture Capitalists Expect

  • 2. What you’ll learn…  Resources available to entrepreneurs to start their business  Compare/Contrast sources of financing for start-up ventures  Importance of financial planning  Information needed to obtain financing  Types of growth financing available to entrepreneurs  How to calculate start-up requirements
  • 3. Entrepreneurial Resources  Finding the resources to launch a business is a creative process. It requires understanding of short-term and long- term needs.  Short-Term: Activities that are not part of normal operations  Seasonal increase in sales that requires purchasing more inventory than normal  Long-Term: Preparation for future growth  Acquiring a larger facility or buying new/additional equipment
  • 4. Bootstrapping  The most common way businesses get off the ground!  Involves operating as frugally as possible and cutting all un- necessary expenses  Involves borrowing, leasing and partnering to acquire resources  You can accomplish this in a few ways:  Hire as few employees as possible  Leasing anything you can  Being creative
  • 5. Start-Up Money  New businesses have no track record to prove it will survive. For this reason, it’s hard to get investors.  The main resources for start-up money is usually personal resources.  Friends, Family, Others  Savings, Credit Cards, Loans, Investments  To finance a new business, entrepreneurs can use banks, financial companies, investment companies, and government grants. There are 2 broad types of financing for new ventures  Equity Financing  Debt Financing
  • 6. Sources of Equity Financing  Equity Capital: Cash raised for a business in exchange for ownership stake in that business  Ex: Investor might invest $50k for a 25% ownership stake  Equity funding, AKA: Risk Capital  Because of the financial risk involved  Successful Business: Investor makes a return on investment  Business Fails: Investor loses money
  • 7. Types of Equity Funding  Personal Savings  #1 Source of $. 67% of businesses are started this way, without borrowing money  Friends/Family  What happens to your relationship with these people if the business fails?  Private Investors  Angel: Private investor who funds start-up companies. Nonprofessional financing source.  Partners  Remember the partnership agreement we talked about in Ch. 7  Share responsibilities and costs  Venture Capitalists  Individual investors or investment firms that invest capital professionally. Provide managerial as well as technical expertise.  State Sponsored Venture Capital Funds  Local economic development corporations help fund new businesses to create jobs.
  • 8. Sources of Debt Financing  Money is raised by taking out loans. Not only do you borrow money, but you pay it back with interest.  The entrepreneur retains ownership of the business, however must record the liability on the business’ accounting books.  Make sure you are certain the business can generate enough cash flow to repay the loan.  Compare and contrast long-term vs. short term financing.  Do you want a loan out for 30 years, or for 3,5 or 10 years?
  • 9. Types of Debt Funding  Banks  Usually only lend to well-established businesses  Trade Credit  Credit that one business will grant to another for the purchase of goods or services.  Minority Enterprise Development Programs  Funded by the private sector & SBA. Owners must be at least 51% ethnic minority, female, or disabled. Also helps secure government contracts & find strategic partners  Commercial Finance Companies  More expensive alternate to commercial banks. Less conservative than banks, and more willing to take risks. Form of security or collateral is required, such as your home.  SBA Loan  Small Business Administration. Uses a commercial bank, but guarantees repayment to the lender up to 90% should your business fail. You and anyone with more than 20% ownership in the business must guarantee the loan with personal assets. (Home, Cars, etc)  SBIC’s  Small Business Investment Companies. Privately managed venture capital companies. Licensed by the SBA to provide equity and debt financing to young, established businesses.
  • 11. How To Get Financed!  Once you’ve figured out which method your company will use (Equity vs. Debt), you must create pro forma financial statements  Pro Forma: Proposed or Estimated financial statements based on predictions of how the operations of the business will turn out.  Income Statements, Balance Sheets, Cash Flow, etc.  This will give potential investors and other sources of funds a sense of confidence that you know what your doing!
  • 12. What Venture Capitalists Expect  Venture Capitalists rarely invest in start up companies, but when they do, they look for high-growth firms with BIG potential.  Venture Capitalists typically want a 30-70% ROI for a growing company, and a 50% or more for an early stage venture because of the risk involved.  Ex: If they give you $2 million for 5 years. They will want their original investment within those 5 years, as well as an additional $600,000-$1 Million on top of that.  Your business must generate enough money to pay them off.
  • 13. What Private Investors Expect  Remember from 19.1, called “Angels”.  Unlike Venture Capitalists, they enjoy being involved in the business.  Typically invest in the business because they are familiar or understand that industry.  Most private investors put between $10-500k into a new business.  On average, they aim to get 10x’s their investment at the end of five years.  A strong management team will attract private investors
  • 14. What Bankers Expect  Banks must invest conservatively and follow strict rules about how to invest the bank’s money.  Very different from that of a venture capitalist  Because of that, they are MUCH MORE interested in how you plan, and your ability to repay that loan  Cash Flow is a big concern to them  You’ve got to be able to cover the business’ monthly expenses AND the loan payment  Bankers rely on the 5 C’s to determine your loan application  Character-Reputation for business practices  Capacity-Ability to pay a loan (Cash Flow)  Capital-Net worth of a business  Collateral-Security for the loan should you not be able to repay  Conditions-Growth, Competition, Economy, etc.
  • 15. Growth Financing  This is financing for an already established business looking to grow! Not start up funding!  VC (Venture Capital) Companies  Expect returns of 30-70%  May require significant ownership, or a seat on the board of directors  Requires Due Dilligence-Investigation & analysis by an investor  Private Placements  Raises capital by selling ownership  Private offering or sale of securities (ownership)  Investors must meet certain standards, must be “sophisticated”  Investors must have a net worth of at least a million dollars  IPOs (Initial Public Offerings)  Sale of stock in a company on a public exchange  5 steps to becoming a public company with stock on pg. 418. List them.
  • 16. Calculating Start-Up Needs  Start-Up Costs  Those that you incur prior to the business opening it’s doors  Fig. 19.1 on pg. 420, good example of costs  Equipment, furniture, fixtures, etc.  Operating Costs  AKA working capital  Amount of cash needed to carry out daily operations  Covers the time between selling your product/service and receiving payment from the customer  Contingency Fund  Extra amount of money used only when absolutely necessary  “Emergency Fund”  Some businesses keep enough money in here to operate for 2 or more months.