Sources of Funds: Equity and Debt - Economics

1 Sources of Funds: Equity and DebtSources of Funds: Equity and DebtThe Secrets to Successful The Secrets to Successful FinancingFinancing1. Choosing the right Sources of capital is a 1. Choosing the right Sources of capital is a decision that will influence a company for a decision that will influence a company for a The money is out there; the key is knowing 2. The money is out there; the key is knowing where to to Creativity counts. Entrepreneurs have to be as 3. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are creative in their searches for capital as they are in developing their business developing their business Secrets to Successful The Secrets to Successful FinancingFinancing(continued)(continued) 4.

2 The World Wide Web puts at entrepreneur s 4. The World Wide Web puts at entrepreneur s fingertips vast resources of information that fingertips vast resources of information that can lead to financing. can lead to financing. 5. Be thoroughly prepared before approaching 5. Be thoroughly prepared before approaching lenders and investors. lenders and investors. 6. Entrepreneurs should not underestimate the 6. Entrepreneurs should not underestimate the importance of making sure that the importance of making sure that the chemistry between themselves, their chemistry between themselves, their companies, and their funding Sources is a good companies, and their funding Sources is a good one.

3 One. Three Types of CapitalThree Types of CapitalnnFixedFixed--used to purchase the permanent or used to purchase the permanent or fixed assets of the business ( , buildings, land, fixed assets of the business ( , buildings, land, equipment, etc.)equipment, etc.)nnWorkingWorking--used to support the small company s used to support the small company s normal shortnormal short--term operations ( , buy term operations ( , buy inventory, pay bills, wages, salaries, etc.)inventory, pay bills, wages, salaries, etc.)nnGrowthGrowth--used to help the small business used to help the small business expand or change its primary or change its primary any form of wealth employed to produce more is any form of wealth employed to produce more wealth for a for a CapitalEquity CapitalnnRepresents the personal investment of the Represents the personal investment of the owner(s) in the (s)

4 In the called Is called risk capital risk capital because investors because investors assume the risk of losing their money if the assume the risk of losing their money if the business Does notnothave to be repaid with interest like have to be repaid with interest like a loan loan that an entrepreneur must give up Means that an entrepreneur must give up some ownership in the company to outside some ownership in the company to outside of Equity Sources of Equity FinancingFinancingnnPersonal savingsPersonal savingsnnFriends and family membersFriends and family membersnnAngelsAngelsnnPartnersPartnersn nCorporationsCorporationsnnVenture capital companiesVenture capital companiesnnPublic stock salePublic stock salePersonal SavingsPersonal SavingsnnThe The firstfirstplace an entrepreneur place an entrepreneur should look for money.

5 Should look for money. nnThe most common source of Equity The most common source of Equity capital for starting a for starting a investors and lenders Outside investors and lenders expect the entrepreneur to put expect the entrepreneur to put some of her own capital into the some of her own capital into the business business beforebeforeinvesting and Family MembersFriends and Family MembersnnAfter emptying her own pockets, an After emptying her own pockets, an entrepreneur should turn to those entrepreneur should turn to those most likely to invest in the business most likely to invest in the business friends and family and family : 10% of business owners turn Survey.

6 10% of business owners turn to family and friends for capital. to family and friends for capital. nnCareful!!! Inherent dangers lurk in Careful!!! Inherent dangers lurk in family/friendly business deals, family/friendly business deals, especiallyespeciallythose that that and Family MembersFriends and Family MembersnnGuidelines for Family and Friendship Guidelines for Family and Friendship Financing Deals:Financing Deals:wwConsider the impact of the investment on Consider the impact of the investment on everyone involved. Keep the arrangement everyone involved. Keep the arrangement strictly business. strictly business. wwSettle the details up the details up a written a written the money as bridge financing.

7 Treat the money as bridge financing. wwDevelop a payment schedule that suits both Develop a payment schedule that suits both parties. parties. AngelsAngelsnnAngels Angels --private investors who back private investors who back emerging entrepreneurial companies emerging entrepreneurial companies with their own their own growing segment of the small Fastest growing segment of the small business capital market. business capital market. nnAn excellent source of patient money An excellent source of patient money for investors needing relatively small for investors needing relatively small amounts of capital amounts of capital often less than often less than $500,000.

8 $500, : finding them! Key: finding them! nnAngels almost always invest their money Angels almost always invest their money locally and can be found through locally and can be found through networks. networks. nnThe typical angel accepts 30% of the The typical angel accepts 30% of the proposals presented to him and has proposals presented to him and has invested an average of $131,000 in invested an average of $131,000 in businesses. businesses. Corporate Venture CapitalCorporate Venture Capitalnn30% of all venture capital investments 30% of all venture capital investments come from from 900 large corporations across the About 900 large corporations across the globe invest in startglobe invest in start--up infusions are just one benefit; Capital infusions are just one benefit; corporate partners may share marketing corporate partners may share marketing and technical expertise.

9 And technical expertise. Venture Capitalist CompaniesVenture Capitalist CompaniesnnMore than 3,000 venture capital firms More than 3,000 venture capital firms operate across the United States. operate across the United States. nnMost venture capitalists seek investments Most venture capitalists seek investments in the $3,000,000 in the $3,000,000 --$10,000,000 range in $10,000,000 range in companies with highcompanies with high--growth and highgrowth and high--profit potential. profit potential. nnBusiness plans are subjected to an Business plans are subjected to an extremely rigorous review extremely rigorous review less than 1% less than 1% Capitalist CompaniesVenture Capitalist CompaniesnnMost venture capitalists take an active Most venture capitalists take an active role in managing the companies in which role in managing the companies in which they venture capitalists focus their Many venture capitalists focus their investments in specific industries with investments in specific industries with which they are they are often, venture capitalists invest in a Most often.

10 Venture capitalists invest in a company across several across several Capital Financing$-$ $ $ $ $ Financed (in Billions of $)-2004006008001,0001,2001,4001,6001,800 Number of DealsBillions of $Number of DealsWhat Do Venture CapitalWhat Do Venture CapitalCompanies Look For?Companies Look For?nnCompetent managementCompetent managementnnCompetitive edgeCompetitive edgennGrowth industryGrowth industrynnViable exit strategyViable exit strategynn Intangibles Intangibles Going PublicGoing PublicnnInitial public offering (IPO) Initial public offering (IPO) --when a when a company raises capital by selling shares company raises capital by selling shares of its stock to the public for the first time.