MGT 253 Chapter 10

Why most new ventures need funding cash flow challengescapital investmentslengthy product development cycles
Cash Flow Challenges Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales
Capital Investments the cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firms ability to provide funds for these needs on its own
Lengthy Product Development Cycles some products are under development for years before they generate earnings.
Alternatives for raising money for a new venture personal fundsequity capitaldebt financingcreative sources
Personal Funds The vast majority of founders contribute personal funds, along with sweat equity, to their ventures.value of the time and effort that a founder puts into a new venture
Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary
Examples of bootstrapping methods buy used equipmentcoordinate purchases with other businesseslease equipmentobtain payments in advanceminimize personal expensesavoid unnecessary expensesbuy items cheaplyshare office spacehire interns
Preparing to raise debt or equity financing determine money is neededdetermine the type of financing develop a strategy for engaging potential investors or bankers
Preparing to raise debt or rquity two common alternatives equity fundingdebt financing
Equity Funding means exchanging partial ownership in a firm, usually in the form of stock, for funding
Debt financing getting a loan
High risk business with an uncertain return personal funds, friends, bootstrappongweak cash flowhigh levweragelow to moderate growthunproven management
Low risk business with more predictable return debt financingstrong cash flowlow leverageaudited financialsgood managementhealthy balance sheet
High return business equityunique business ideahigh growthniche marketproven management
Elevator Speech a brief statement that outlines the merits of a business opportunity.around 60 seconds long
Elevator speech breakdown describe problem 20 secdescribe how product solves problem 20 secqualifications 10 secmarket 10 sec
Sources of equity funding venture capitalbusiness angelsinitial public offerings
Business angels invest their personal capital directly in start-ups. The prototypical business angel is about 50 years old, invest between $10,000 and $500,000 in a single company.grow between 30% to 40% per year
Venture Capital Is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. There are about 875 venture capital firms in the partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. limited partners.angels tend to invest earlier in the life of a company,invest money in start-ups in “stages,”
Initial Public Offering a company’s first sale of stock to the public. NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks. viable and has a bright future.
Reasons that motivate firms to go public Is a way to raise equity capital to fund current and future operations
Sources of debt financing commercial banksSBA Guaranteed Loans
Commercial Banks banks are risk averse, and financing start-ups is a risky business
SBA Guaranteed Loan Program Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.The program operates through private-sector lenders who provide loans that are guaranteed by the SBA.The loans are for small businesses that are not able to obtain credit elsewhere
The 7A Loan Guarantee Program The most notable SBA program available to small businesses
Size and Types of Loans Almost all small businesses are eligible to apply for an SBA guaranteed loan.The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000.An SBA guaranteed loan can be used for almost any legitimate business purpose.Although SBA guaranteed loans are utilized more heavily by existing small businesses than start-ups, they should not be dismissed as a possible source of financing
Vendor Credit Also known as trade credit, is when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later
Factoring a financial transaction whereby a business sells its accounts receivable to a third party, called a factor, at a discount in exchange for cash
Merchant Cash Advance Type of loan in which the lender provides a business a lump sum of money in exchange for a share of future sales that covers the payment plus fees.These types of loan are arranged by online firms at an escalated interest rate
Peer to Peer Lending a financial transaction that occurs directly between individuals or peers.The loans are facilitated by online firms such as Funding Circle, Lending Club, and Dealstruck
Creative sources of Financing or Funding CrowdfundingLeasingSBIR and STTR programsother grant programsStrategic Partners
Crowdfunding the practice of funding a project or new venture by raising monetary contributions from a large number of people (the “crowd”) typically via the Internet
Two types of crowdfunding programs Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward.Kickstarter, JOBS Act, which was passed in April 2012.It appears that equity-based crowdfunding will be confined to entrepreneurs raising money from accredited investors.Equity-based crowdfunding sites include FundersClub,, and Circle Up
Leasing written agreement in which the owner of a piece of property allows an individual to use the property for a specified period of time for venture typically has the option to stop using the equipment, purchase it for fair market value, or renew the lease.
SBIR and STTR Programs The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. STTR program requires the participation of researchers working at universities or other research institutions
SBIR Program a competitive grant program that provides over $1 billion per year to small businesses in early-stage and development projects. Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&D funds for awards to small businesses.The SBIR is a three-phase program, less than 15% of all Phase I proposals are funded.
Small business innovation research: Three-Phase Program develop and test a prototype of he innovation period in which phase 2 innovations move from research and development to marketplace
phase 1 demonstrate the proposed innovations technical feasibilityUp to 6 monthsUp to 150,000
Phase 2 available to successful phase 1 companies. develop and test a prototype of he innovation in phase 1up to 2 yearsup to 1 million
Phase 3 move from research and development to marketplaceNo SBIR funding available, however, federal agencies may award non SBIR funded follow on grants or contracts for products or processes that meet the mission needs of those agencies or for further R and D
Other Government Grants The federal government has grant programs beyond the SBIR and STTR programs.
Strategic Partners another source of capital for new ventures.Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market
Strategic PartnersBiotech Biotech firms often partner with large drug companies to conduct clinical trials and bring new products to market

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