week 7 discussion

Getting New

Venture Funding

or Financing

* Every company needs to raise funds * Most investors don’t invest alone

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The Importance of Getting Financing or Funding

• The Nature of the Funding and Financing Process • Few people deal with the process of raising investment

capital until they need to raise capital for their own firm. • As a result, many entrepreneurs go about the task of raising capital

haphazardly because they lack experience in this area.

• Why Most New Ventures Need Funding • There are three reasons most new ventures need to raise

money during their early life. • The three reasons are shown on the following slide.

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Why Most New Ventures Need Financing or Funding

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Alternatives for Raising Money for a New Venture

Personal Funds (or friends and family)

Equity Capital - Angels, Venture,

Private Equity

Debt Financing (mostly impossible

for new venture)

Creative Sources (Crowd-Funding now massive, but amounts

per company are small at about $28,000)

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Sources of Personal Financing 1 of 2

•Personal Funds • The vast majority of founders contribute

personal funds, along with sweat equity, to their ventures. • Sweat equity represents the value of the time

and effort that a founder puts into a new venture.

•Friends and Family • Friends and family are the second source

of funds for many new ventures.

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Sources of Personal Financing 2 of 2

•Bootstrapping • A third source of seed money for a new

venture is referred to as bootstrapping. • Bootstrapping is finding ways to avoid the

need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary.

• Many entrepreneurs bootstrap out of necessity.

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Examples 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 space or employees with other

businesses Hiring interns

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Preparing to Raise Debt or Equity Financing 1 of 3

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Equity Funding Debt Financing

Means exchanging partial ownership in a

firm, usually in the form of stock, for

funding

Getting a loan (almost impossible without

substantial collateral, even then unlikely)

Preparing to Raise Debt or Equity Financing 2 of 3

Two Most Common Alternatives

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Preparing to Raise Debt or Equity Financing 3 of 3

Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding

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Sources of Equity Funding

Venture Capital

Private Equity

Business Angels

Initial Public Offerings (never available for new startup. Must

go through several rounds of investment before this

Crowd Funding

Alternative Finance

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Business Angels 1 of 2

•Business Angels • Are individuals who invest their personal capital

directly in start-ups. • The prototypical business angel is about 50 years old,

has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the start-up process.

• The number of angel investors is significant, though remained steady over the past few decades.

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Business Angels 2 of 2

•Business Angels (continued) • Business angels are valuable because of their

willingness to make relatively small investments. • These investors generally invest between $10,000 and

$500,000 in a single company.

• Are looking for companies that have the potential to grow between 30% to 40% per year.

• Business angels are difficult to find.

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Venture Capital 1 of 3

• Venture Capital • Is money that is invested by venture capital firms in start-ups and small

businesses with exceptional growth potential.

• There are about 800 venture capital firms in the U.S. • Venture capital firms are limited partnerships of money managers who raise

money in “funds” to invest in start-ups and growing firms.

• The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.

• The investors who invest in venture capital funds are called limited partners. The venture capitalists are called general partners.

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Venture Capital 2 of 3

•Venture Capital (continued) • Venture capital firms fund very few entrepreneurial

firms in comparison to business angels. • Many entrepreneurs get discouraged when they are

repeatedly rejected for venture capital funding, even though they may have an excellent business plan.

• Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider.

• Venture capitalists fund a massive amount of money for startups - $345 billion in 2021 in the US alone.

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Venture Capital 3 of 3

•Venture Capital (continued) • An important part of obtaining venture capital funding

is going through the due diligence process. • Venture capitalists invest money in start-ups in

“stages,” meaning that not all the money that is invested is disbursed at the same time.

• Some venture capitalists also specialize in certain “stages” of funding (commonly referred to as series A, series B, etc..)

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Initial Public Offering 1 of 3

• Initial Public Offering • An initial public offering (IPO) is a company’s first sale of stock to the

public. When a company goes public, its stock is traded on one of the major stock exchanges.

• Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks.

• An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

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Reason 1 Reason 2

Is a way to raise equity

capital to fund current

and future operations.

Raises a firm’s public

profile, making it easier

to attract high-quality

customers and business

partners.

Initial Public Offering 2 of 3

Reasons that Motivate Firms to Go Public

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Reason 3 Reason 4

Is a liquidity event that provides a means for a company’s investors to

recoup their investments.

Creates a form of currency that can be

used to grow the company via acquisitions.

Initial Public Offering 3 of 3

Reasons that Motivate Firms to Go Public

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Sources of Debt Financing

Commercial Banks

Goverment Guaranteed

Loans

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Other Sources of Debt Financing 1 of 2

• Vendor Credit • Also known as trade credit, is when a vendor extends credit to

a business in order to allow the business to buy its products and/or services up front but defer payment until later.

• Factoring • Is a financial transaction whereby a business sells its accounts

receivable to a third party, called a factor, at a discount in exchange for cash.

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Other Sources of Debt Financing 2 of 2

• Peer-to-Peer Lending • Is a financial transaction that occurs directly between individuals or

peers.

• Prosper is the best know peer-to-peer lending network.

• Crowdfunding • A form of raising money that takes place, usually via the Internet, where

people pool their money to support a start-up or other initiative, usually in return for some sort of amenity rather than loan. Can be equity based, and many other alternative variants.

• Kickstarter is a popular online crowdfunding platform.

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Creative Sources of Financing or Funding

SBIR and STTR Grant Programs

Leasing

Strategic PartnersOther Grant Programs