Chapter 8 Stu

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CHAPTER 8

SOURCES OF EQUITY

FINANCING


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The Secrets to Successful Financing

1. Choosing the right sources of capital is a decision

that will influence a company for a lifetime

2. The money is out there; the key is knowing where

to look

3. Creativity counts. Entrepreneurs have to be as

creative in their searches for capital as they are in

developing their business ideas


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4. The World Wide Web puts at entrepreneurs

fingertips vast resources of information that can

lead to financing5. Be thoroughly prepared before approaching lenders

and investors

6. Looking for smart money is more important than

looking for easy money

The Secrets to Successful Financing


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Three Types of Capital

Fixed - used to purchase the permanent or fixed

assets of the business (e.g. buildings, land,

equipment, etc.) Working - used to support the small company's

normal short-term operations (e.g. buy

inventory, pay bills, wages, or salaries, etc.)

Growth - used to help the small business expand

or change its primary direction


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Equity Capital

Represents the personal investment of theowner(s) in the business

Is called risk capitalbecause investors assume

the risk of losing their money if the businessfails

Does nothave to be repaid with interest like aloan does

Means that an entrepreneur must give up someownership in the company to outside investors


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Sources of Equity Financing

Personal savings

Friends and family members

Angels

Partners

Venture capital companies

Corporations

Public stock sale


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Personal Savings

Thefirstplace an entrepreneur should look

for money

The most common source of equity capitalfor starting a business

GEM study:

Average cost to start a business in U.S. is

$70,200 Typical entrepreneur provides 67.9% of the

initial capital requirement


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Friends and Family Members

After emptying her own pockets, an entrepreneurshould turn to those most likely to invest in the

business - friends and family members

Careful!!! Inherent dangers lurk infamily/friendly business deals, especially thosethat flop


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Guidelines for family and friendshipfinancing deals:

Consider the impact of the investment oneveryone involved

Keep the arrangement strictly business

Educate nave investors

Settle the details up front

Never accept more than the investor can affordto lose



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Guidelines for family and friendship

financing deals:

Create a written contract Treat the money as bridge financing

Develop a payment schedule that suits both

parties

Have an exit plan

Keep everyone informed



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Ideal source of financing for companies

that have outgrown the capacity of

friends and family members but are stilltoo small to attract the interest of venture

capital companies



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Angels

Private investors who invest in emergingbusiness start-ups in exchange for equity

stakes in the company Fastest growing segment of the small

business capital market

Center for Venture Research study:234,000 angels invest $25.6 billion a yearin 51,000 small companies


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Most likely to finance deals in the$10,000 to $2 million range

Key: finding them!Angels almost always invest their money

locally and can be found throughnetworking

Another avenue: Angel capital networkson the World Wide Web

Angels


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Typical angel accepts 12% of theproposals presented and has invested an

average of $80,000 in 3.5 businessesAn excellent source of patient money

for investors needing relatively small

amounts of capital often less than$500,000

Angels


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Corporate Venture Capital

About 300 large corporations across theglobe invest in start-up companies

19% of all venture capital investmentscome from corporations Average CVC investment = $2.97 million

Capital infusions are just one benefit;corporate partners may share marketingand technical expertise


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Venture Capital Companies

More than 1,300 venture capital firms

operate across the U.S.

Most venture capitalists seek investments

in the $3,000,000 to $10,000,000 range

in companies with high-growth and

high-profit potential Average VC investment = $7.4 million


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Venture Capital Companies

Usually take an active role in managing the

companies in which they invest

Focus their investments in specific industrieswith which they are familiar

Invest in a company across several stages Most

common stages:

Expansion

Later-stage

Early-stage


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Start-up/Seed This is the initial stage inwhich companies are just beginning to

develop their ideas into products or services.

Typically, these businesses have been in

existence less than 18 months and are not yet

fully operational.

Early stage These companies are refining

their initial products or services in pilot tests

or in the market. Even though the product or

service is available commercially, it typically

generates little or no revenue. These

companies have been in business less thanthree years.

Expansion stage These companiesproducts or services are commercially

available and are producing strong revenue

growth. Businesses at this stage may not be

generating a profit yet, however.

Later stage These companies products orservices are widely available and are

producing ongoing revenue and, in most cases,

positive cash flow. Businesses at this stage

are more likely to be generating a profit.

Sometimes these businesses are spin-offs of

already established successful privatecompanies.

Venture Capital by Stages


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What Do Venture Capital

Companies Look For?

Competent management

Competitive edgeGrowth industry

Viable exit strategy

Intangibles


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Going Public

Initial public offering (IPO) - when a

company raises capital by selling shares of

its stock to the public for the first time Since 2000, average number of companies

making IPOs is 211

Few companies with annual sales below$25 million make IPOs


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Advantages of "Going Public"

Ability to raise large amounts of capital

Improved corporate image

Improved access to future financing Attracting and retaining key employees

Using stock for acquisitions

Listing on a stock exchange


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Disadvantages of "Going Public"

Dilution of founder's ownership

Loss of control

Loss of privacy

Regulatory requirements and

reporting to the SEC

Filing expenses


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Disadvantages of "Going Public"

Accountability to shareholders

Pressure for short-term

performance Loss of focus

Timing


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End of Chapter 8

Chapter 8 Stu

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