Ch 11 Sources of Funds

8/16/2019 Ch 11 Sources of Funds

1/20

Sources of Funds:

Equity and Debt

Sources of Funds:

Equity and Debt


2/20

The “Secrets” to Successful

Financing1. Choosing the right sources of capital is a

decision that ill influence a co!pany for a

lifeti!e.". The !oney is out there# the $ey is $noing

here to loo$.

%. Creati&ity counts. Entrepreneurs ha&e to be as

creati&e in their searches for capital as they arein de&eloping their business ideas.


3/20

The “Secrets” to Successful

Financing(continued)

'. The (orld (ide (eb puts at entrepreneur)s

fingertips &ast resources of infor!ation that

can lead to financing.*. +e thoroughly prepared before approaching

lenders and in&estors.

,. Entrepreneurs should not underesti!ate the

i!portance of !a$ing sure that the“che!istry” beteen the!sel&es- their

co!panies- and their funding sources is a good

one.


4/20

Three Types of Capital

Capital is any for! of ealth e!ployed to produce !ore

ealth for a fir!.

Fied / used to purchase the per!anent or

fied assets of the business 0e.g.- buildings- land-equip!ent- etc.

(or$ing / used to support the s!all co!pany)s

nor!al short/ter! operations 0e.g.- buy

in&entory- pay bills- ages- salaries- etc. 2roth / used to help the s!all business

epand or change its pri!ary direction.


5/20

Equity Capital

3epresents the personal in&est!ent of the

oner0s in the business.

4s called risk capital because in&estors

assu!e the ris$ of losing their !oney if thebusiness fails.

Does not ha&e to be repaid ith interest li$e

a loan does.

5eans that an entrepreneur !ust gi&e upso!e onership in the co!pany to outside

in&estors.


6/20

Sources of Equity

Financing 6ersonal sa&ings

Friends and fa!ily

!e!bers

7ngels

6artners

Corporations

8enture capital co!panies

6ublic stoc$ sale


7/20

6ersonal Sa&ings

The first place an entrepreneur

should loo$ for !oney.

The !ost co!!on source of equity

capital for starting a business.

9utside in&estors and lenders

epect the entrepreneur to put

so!e of her on capital into the

business before in&esting

theirs.


8/20

Friends and Fa!ily 5e!bers

7fter e!ptying her on poc$ets- an

entrepreneur should turn to those

!ost li$ely to in&est in the business

friends and fa!ily !e!bers. Sur&ey: 1;< of business oners turn

to fa!ily and friends for capital.

Careful=== 4nherent dangers lur$

in fa!ily>friendly business deals-especially those that flop.


9/20

Friends and Fa!ily 5e!bers

2uidelines for Fa!ily and Friendship

Financing Deals:

Consider the i!pact of the in&est!ent on

e&eryone in&ol&ed. ?eep thearrange!ent “strictly business.”

Settle the details up front.

Create a ritten contract.

Treat the !oney as “bridge financing.”

De&elop a pay!ent schedule that suits both

parties.


10/20

7ngels

7ngels / pri&ate in&estors ho bac$e!erging entrepreneurial

co!panies ith their on !oney. Fastest groing seg!ent of the

s!all business capital !ar$et.

7n ecellent source of “patient !oney”for in&estors needing relati&ely s!all

a!ounts of capital often less than

@*;;-;;;.


11/20

7ngels

?ey: finding the!=

7ngels al!ost alays in&est their !oney

locally and can be found through“netor$s.”

The typical angel accepts %;< of the

proposals presented to hi! and has

in&ested an a&erage of @1%1-;;; in

%.* businesses.


12/20

Corporate 8enture Capital

%;< of all &enture capital

in&est!ents co!e fro! corporations.

7bout A;; large corporations across

the globe in&est in start/up co!panies.

Capital infusions are Bust one benefit#

corporate partners !ay share!ar$eting and technical epertise.


13/20

8enture Capitalist Co!panies

5ore than %-;;; &enture capital fir!s

operate across the nited States.

5ost &enture capitalists see$

in&est!ents in the @%-;;;-;;; /@1;-;;;-;;; range in co!panies ith

high/groth and high/ profit potential.

+usiness plans are subBected to anetre!ely rigorous re&ie less than 1<

accepted.


14/20

8enture Capitalist Co!panies

5ost &enture capitalists ta$e an acti&e

role in !anaging the co!panies in

hich they in&est.

5any &enture capitalists focus theirin&est!ents in specific industries

ith hich they are fa!iliar.

5ost often- &enture capitalists in&est ina co!pany across se&eral stages.


15/20

Venture Capital Financing

$20.0

$15.0

$10.0

$5.0

$-

$25.0

Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2

1995 1996 1997 2000

A m o u n

t F i n a n c e ! i n

" i l l i o n # o $ %

1&6001&4001&2001&000'00600400200-

1&'00

( u m )

e r o * e a l #

Billions of

$

199'

1999

Number of Deals


16/20

(hat Do 8enture CapitalCo!panies oo$ For

Co!petent

!anage!ent

Co!petiti&e edge

2roth industry

8iable eit strategy

“4ntangibles”


17/20

2oing 6ublic

4nitial public offering 0469 / hen a

co!pany raises capital by selling shares

of its stoc$ to the public for the firstti!e.

Typical year: about **; co!panies !a$e

469s. Fe co!panies ith sales belo @1;

!illion in annual sales !a$e 469s.


18/20

+nitial ,u)lic ering#

'00

600

400

200

0

1000

1 9 ' 1

1 9 ' 3

1 9 ' 5

1 9 ' 7

1 9 ' 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

( u m ) e r o

+ , - #

$0.

0

$20.0$10.0

$30.0

$70.0$60.0

$50.0$40.0

$'0.0

. o n e / 0 a i # e ! $

) i l l i o n # %

(um)er

$ ai#e!"illion#%


19/20

7d&antages of “2oing 6ublic”

7bility to raise large a!ounts of

capital

4!pro&ed corporate i!age

4!pro&ed access to future

financing

7ttracting and retaining $ey

e!ployees sing stoc$ for acquisitions

isting on a stoc$ echange


20/20

Disad&antages of “2oing 6ublic”

Dilution of founder)s onership

oss of control

oss of pri&acy

3eporting to the SEC

Filing epenses

7ccountability to shareholders

6ressure for short/ter!perfor!ance

Ti!ing

Ch 11 Sources of Funds

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Transcript of Ch 11 Sources of Funds