Joseph Fabiilli is explaining about the venture Capitalists Expect. Joseph Fabiilli is a funding consultant for future-thinking entrepreneurs and agencies. Joseph helps people secure funding for their environmental projects and programs. Joseph Fabiilli is a funding consultant for future-thinking entrepreneurs and agencies. Joseph helps people secure funding for their environmental projects and programs.
2. What you’ll learn…
Resources available to entrepreneurs to start their
business
Compare/Contrast sources of financing for start-up
ventures
Importance of financial planning
Information needed to obtain financing
Types of growth financing available to entrepreneurs
How to calculate start-up requirements
3. Entrepreneurial Resources
Finding the resources to launch a business is a creative
process. It requires understanding of short-term and long-
term needs.
Short-Term: Activities that are not part of normal operations
Seasonal increase in sales that requires purchasing more inventory
than normal
Long-Term: Preparation for future growth
Acquiring a larger facility or buying new/additional equipment
4. Bootstrapping
The most common way businesses get off the ground!
Involves operating as frugally as possible and cutting all un-
necessary expenses
Involves borrowing, leasing and partnering to acquire resources
You can accomplish this in a few ways:
Hire as few employees as possible
Leasing anything you can
Being creative
5. Start-Up Money
New businesses have no track record to prove it will survive.
For this reason, it’s hard to get investors.
The main resources for start-up money is usually personal resources.
Friends, Family, Others
Savings, Credit Cards, Loans, Investments
To finance a new business, entrepreneurs can use banks,
financial companies, investment companies, and government
grants. There are 2 broad types of financing for new ventures
Equity Financing
Debt Financing
6. Sources of Equity Financing
Equity Capital: Cash raised for a business in exchange for
ownership stake in that business
Ex: Investor might invest $50k for a 25% ownership stake
Equity funding, AKA: Risk Capital
Because of the financial risk involved
Successful Business: Investor makes a return on investment
Business Fails: Investor loses money
7. Types of Equity Funding
Personal Savings
#1 Source of $. 67% of businesses are started this way, without borrowing
money
Friends/Family
What happens to your relationship with these people if the business fails?
Private Investors
Angel: Private investor who funds start-up companies. Nonprofessional
financing source.
Partners
Remember the partnership agreement we talked about in Ch. 7
Share responsibilities and costs
Venture Capitalists
Individual investors or investment firms that invest capital professionally.
Provide managerial as well as technical expertise.
State Sponsored Venture Capital Funds
Local economic development corporations help fund new businesses to
create jobs.
8. Sources of Debt Financing
Money is raised by taking out loans. Not only do you borrow
money, but you pay it back with interest.
The entrepreneur retains ownership of the business, however
must record the liability on the business’ accounting books.
Make sure you are certain the business can generate enough
cash flow to repay the loan.
Compare and contrast long-term vs. short term financing.
Do you want a loan out for 30 years, or for 3,5 or 10 years?
9. Types of Debt Funding
Banks
Usually only lend to well-established businesses
Trade Credit
Credit that one business will grant to another for the purchase of goods or
services.
Minority Enterprise Development Programs
Funded by the private sector & SBA. Owners must be at least 51% ethnic
minority, female, or disabled. Also helps secure government contracts & find
strategic partners
Commercial Finance Companies
More expensive alternate to commercial banks. Less conservative than banks,
and more willing to take risks. Form of security or collateral is required, such as
your home.
SBA Loan
Small Business Administration. Uses a commercial bank, but guarantees
repayment to the lender up to 90% should your business fail. You and anyone
with more than 20% ownership in the business must guarantee the loan with
personal assets. (Home, Cars, etc)
SBIC’s
Small Business Investment Companies. Privately managed venture capital
companies. Licensed by the SBA to provide equity and debt financing to young,
established businesses.
10.
11. How To Get Financed!
Once you’ve figured out which method your company
will use (Equity vs. Debt), you must create pro forma
financial statements
Pro Forma: Proposed or Estimated financial statements
based on predictions of how the operations of the
business will turn out.
Income Statements, Balance Sheets, Cash Flow, etc.
This will give potential investors and other sources of
funds a sense of confidence that you know what your
doing!
12. What Venture Capitalists Expect
Venture Capitalists rarely invest in start up companies, but
when they do, they look for high-growth firms with BIG
potential.
Venture Capitalists typically want a 30-70% ROI for a growing
company, and a 50% or more for an early stage venture because
of the risk involved.
Ex: If they give you $2 million for 5 years. They will want their
original investment within those 5 years, as well as an
additional $600,000-$1 Million on top of that.
Your business must generate enough money to pay them off.
13. What Private Investors Expect
Remember from 19.1, called “Angels”.
Unlike Venture Capitalists, they enjoy being involved in the
business.
Typically invest in the business because they are familiar or
understand that industry.
Most private investors put between $10-500k into a new business.
On average, they aim to get 10x’s their investment at the end of
five years.
A strong management team will attract private investors
14. What Bankers Expect
Banks must invest conservatively and follow strict rules about
how to invest the bank’s money.
Very different from that of a venture capitalist
Because of that, they are MUCH MORE interested in how you
plan, and your ability to repay that loan
Cash Flow is a big concern to them
You’ve got to be able to cover the business’ monthly expenses AND the
loan payment
Bankers rely on the 5 C’s to determine your loan application
Character-Reputation for business practices
Capacity-Ability to pay a loan (Cash Flow)
Capital-Net worth of a business
Collateral-Security for the loan should you not be able to repay
Conditions-Growth, Competition, Economy, etc.
15. Growth Financing
This is financing for an already established business looking
to grow! Not start up funding!
VC (Venture Capital) Companies
Expect returns of 30-70%
May require significant ownership, or a seat on the board of directors
Requires Due Dilligence-Investigation & analysis by an investor
Private Placements
Raises capital by selling ownership
Private offering or sale of securities (ownership)
Investors must meet certain standards, must be “sophisticated”
Investors must have a net worth of at least a million dollars
IPOs (Initial Public Offerings)
Sale of stock in a company on a public exchange
5 steps to becoming a public company with stock on pg. 418. List them.
16. Calculating Start-Up Needs
Start-Up Costs
Those that you incur prior to the business opening it’s doors
Fig. 19.1 on pg. 420, good example of costs
Equipment, furniture, fixtures, etc.
Operating Costs
AKA working capital
Amount of cash needed to carry out daily operations
Covers the time between selling your product/service and
receiving payment from the customer
Contingency Fund
Extra amount of money used only when absolutely necessary
“Emergency Fund”
Some businesses keep enough money in here to operate for 2 or
more months.