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Sources of Funds:
Equity and Debt
Sources of Funds:
Equity and Debt
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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.
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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$ing sure that the“che!istry” beteen the!sel&es- their
co!panies- and their funding sources is a good
one.
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Three Types of Capital
Capital is any for! of ealth e!ployed to produce !ore
ealth for a fir!.
Fied / used to purchase the per!anent or
fied assets of the business 0e.g.- buildings- land-equip!ent- etc.
(or$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.
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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$e
a loan does.
5eans that an entrepreneur !ust gi&e upso!e onership in the co!pany to outside
in&estors.
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Sources of Equity
Financing 6ersonal sa&ings
Friends and fa!ily
!e!bers
7ngels
6artners
Corporations
8enture capital co!panies
6ublic stoc$ sale
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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.
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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.
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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.
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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
@*;;-;;;.
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7ngels
?ey: finding the!=
7ngels al!ost alays in&est their !oney
locally and can be found through“netor$s.”
The typical angel accepts %;< of the
proposals presented to hi! and has
in&ested an a&erage of @1%1-;;; in
%.* businesses.
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Corporate 8enture Capital
%;< of all &enture capital
in&est!ents co!e fro! corporations.
7bout A;; large corporations across
the globe in&est in start/up co!panies.
Capital infusions are Bust one benefit#
corporate partners !ay share!ar$eting and technical epertise.
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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.
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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.
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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
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(hat Do 8enture CapitalCo!panies oo$ For
Co!petent
!anage!ent
Co!petiti&e edge
2roth industry
8iable eit strategy
“4ntangibles”
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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.
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+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#%
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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
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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
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