I need a discussion done for week 4 and response to 2 other classmates for my JWI 575: New Business Ventures and Entrepreneurship

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 575 RTC – Week 4 Lecture Notes (1188) Page 1 of 5

JWI 575 New Business Ventures and Entrepreneurship

Week Four Lecture Notes

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 575 RTC – Week 4 Lecture Notes (1188) Page 2 of 5

FUNDING THE VENTURE What it Means Any new venture, whether it is a startup or a new project within a company, must have adequate funding. For an intrapreneur, funding comes from your company, but only if you can persuade the executive team that your idea is a worthwhile investment. However, for an entrepreneur, finding financial support is a key part of the early planning for the new business.

For a small startup venture, it may be possible to bootstrap the startup: that is, fund it yourself without equity investors by using research grants, personal savings, and support from friends and family. However, most startups need to seek external funding. There are many funding options, including bank loans, angel investors, venture capital, or going public with an IPO. In this lecture, we consider the funding needs of several types of startup business and explore the pros and cons of the funding sources available to them.

Why it Matters

• For new ventures to succeed, innovators must have the ability to assess funding requirements realistically • Raising capital externally involves an obligation in one of the following areas: debt, equity, or revenue • To make informed decisions, you must understand the pros and cons of different funding options

“Most venture capitalists won’t read a business plan unless the entrepreneur is introduced to

them by a contact.”

Guy Kawasaki

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 575 RTC – Week 4 Lecture Notes (1188) Page 3 of 5

FINANCING NEEDS OF A STARTUP BUSINESS

What is it going to cost you to launch your company? Where will you get the money? Will you get it all at once, or start with a little, then ask for more later? How will you identify the best partners for financial support of your idea? Who will introduce you to potential investors? These questions puzzle every entrepreneur. This lecture examines the most common forms of financing for new ventures, with a focus on the equity financing sources most common to high- growth startups. But before you begin the hunt for an investor, you need to figure out your funding requirements.

How Much Startup Capital Do You Need?

Some businesses are more capital intensive than others. Consider the example of a simple consulting business. If you spend an hour giving someone advice at a cafe in exchange for $100, you don’t really have to raise much money to launch this business. You will have to invest some time in finding and building a relationship with clients, and in amassing the expertise that will persuade them to hire you to do some task. But beyond that, and perhaps the cost of an existing computer and cell phone that you now convert to business use, your startup has very low initial capital requirements.

An example that involves a bit more capital would be a social website. If you spend some time designing a site and pay for hosting and a domain name, you can put up your website, tell your friends about it, and try to get people to visit. It might cost you a few hundred dollars. You may need a web professional to help you, as your business grows, but that will come later. For right now, a more important concern is: how can you convert your viewers into paying customers? Regardless of the answer to that question, from a capital-requirements standpoint, both of these businesses can be launched without raising much capital.

On the other end of the spectrum, consider a group of engineers who are convinced they have invented a design for a new nuclear power plant that will produce electricity at a fraction of the existing cost. They are convinced that, if an investor gives them $5 billion to build the first plant, their business will displace all other electricity sources and the company will earn $50 billion in revenue a year. It is possible – though unlikely – that these innovative engineers are capable of transforming the entire electricity-generation industry. But nobody will ever know, because no investor is going to give this startup $5 billion with which to conduct the experiment. It is extremely challenging to launch a startup that can flourish with such capital-intensive requirements.

Three Options for Raising Capital

Once you have determined the financial requirements of launching your new venture, you have a few options for raising the necessary funds. For a small venture, you can bootstrap your startup: that is, fund it yourself without equity investors by using research grants, personal savings, and support from friends and family. However, in the majority of cases, startup capital for a new business comes from one of three external sources: debt, equity, or revenue. At a high level, these options can be described as shown below:

Ø Debt: you borrow money from someone, so now you must carry that loan as a liability that will accrue interest

Ø Equity: you sell someone stock (ownership) in your company, so now you must share control of the company

Ø Revenue: you sell a product or service to a customer in return for cash, so now you have to deliver the goods

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 575 RTC – Week 4 Lecture Notes (1188) Page 4 of 5

FUNDING AND INVESTOR OPTIONS

Funding Sources: Pros and Cons

Capital to start your business can come from many sources. Each has its advantages and disadvantages. To help you explore the implications of the key funding sources for entrepreneurial ventures, the chart below explains the pros and cons of the most common ways to raise capital for a new venture.

SOURCE PROS CONS

The Entrepreneur

Easy to access funds. No need to pitch anyone

Persuading another person that the business is viable is a good discipline. If you can’t convince others, you might not have a viable business idea.

Friends and Family

Easy terms and a nonintrusive investor.

Taking money from family can put stress on your personal relationships. Without the oversight of a professional investor, you might be depriving your company of valuable guidance.

Angel Investors Can make quicker decisions than major institutional investors. Good ones have strong networks.

Might be doing this as a hobby and not have the focus to spend time on your company. Might not have the deep pockets to see your company through the next stage of required financing.

Grants, Business Plan Competitions

Often “free money” that doesn’t require you to surrender equity or collateralize your personal or family savings.

Often involves a lot of time or arduous paperwork.

Venture Capitalists

You might get much richer much faster.

You generally surrender control of the company and must go public or be acquired by investors to get back their money.

Customer Prepayments

A great way to finance your venture from revenue. In exchange, customers may want exclusive rights to the product, a promise of future discounts, or stock options in the company.

You might not want to reveal your product to a customer yet, as you will lose your chance to make a good first impression at launch. You might also be instructing a competitor on how to copy your idea.

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 575 RTC – Week 4 Lecture Notes (1188) Page 5 of 5

GETTING THE MOST OUT OF THIS WEEK’S CLASS

As you read the materials and participate in class activities, stay focused on the key learning outcomes for the week:

• Consider the pros and cons of self-financing versus support from investors

Self-financing is attractive because it is easy and gives you independence in decision-making. But there are several downsides to this option too. Will you have enough funding to see you through the launch until you reach the point where you can make a profit? If not, at what point will you look for an investor, and why is it better to wait? Would it be beneficial to have the rigor of explaining your business idea to an outsider with a more detached perspective and experience in the business of startups?

• Explore different funding models for a new business or venture

Clearly there are many options out there for raising capital in support of a startup business. What have you learned about the different sources? How did you react to the pros and cons of each funding model? Were there some particular funding models that seemed unattractive to you? Choosing the right funding model and a well-matched funding partner are key decisions in the early stages of a new business.

• Discuss what investors are seeking when they fund a new business startup Perhaps you had not thought much about the motivations of investors, but it is very important to understand “what is in it for them”, since that will impact their expectations and willingness to continue to support the venture. So what are investors seeking when they assess startup business plans? They want to see a promising idea from an energetic founder, but beyond that they look for a well-developed, detailed business plan that is realistic and extends over several years. Since they will have a stake in any business they choose to support financially, they also want some degree of control over the way the business grows and develops.