Entrepreneurship: Successfully Launching

New Ventures
Sixth Edition

Chapter 10
Getting Financing
or Funding
Learning Objectives (1 of 2)
10.1 Describe the importance of financing for entrepreneurial success.
10.2 Explain why most entrepreneurial ventures need to raise money
during their early life.
10.3 Identify and describe the three sources of personal financing available
to entrepreneurs.
10.4 Identify and explain the three steps involved in properly preparing to
raise debt or equity financing.
10.5 Explain the three most important sources of equity funding that are
available to the entrepreneurial firm.
10.6 Describe common sources of debt financing entrepreneurial firms
use.
10.7 Describe several creative sources of financing entrepreneurial firms
may choose to use.
The Importance of Getting Financing
or Funding
• The Nature of the Funding and Financing Process
– Few people deal with the process of raising investment
capital until they need to raise capital for their own firm.
 As a result, many entrepreneurs go about the task
of raising capital haphazardly because they lack
experience in this area.
• Why Most New Ventures Need Funding
– There are three reasons most new ventures need to
raise money during their early life.
 The three reasons are shown on the following slide.
Why Most New Ventures Need Financing
or Funding

Figure 10.1 Three Reasons Start-Ups Need Funding

Alternatives for Raising Money for a
New Venture

• Personal Funds
• Debt Financing
• Equity Capital
• Creative Sources
Sources of Personal Financing (1 of 2)
• Personal Funds
– The vast majority of founders contribute personal
funds, along with sweat equity, to their ventures.
 Sweat equity represents the value of the time
and effort that a founder puts into a new venture.
• Friends and Family
– Friends and family are the second source of funds
for many new ventures.
Sources of Personal Financing (2 of 2)
• Bootstrapping
– A third source of seed money for a new venture is
referred to as bootstrapping.
– Bootstrapping is finding ways to avoid the need for
external financing or funding through creativity,
ingenuity, thriftiness, cost cutting, or any means
necessary.
– Many entrepreneurs bootstrap out of necessity.
Examples of Bootstrapping Methods (1 of 2)
• Buy used instead of new equipment.
• Coordinate purchases with other businesses.
• Lease equipment rather than buying.
• Obtain payments in advance from customers.
• Minimize personal expenses.
• Avoid unnecessary expenses, such as lavish office space
or furniture.
Examples of Bootstrapping Methods (2 of 2)

• Buy items cheaply, but prudently, through discount outlets

or online auctions such as eBay, rather than at full-price
stores.
• Share office space or employees with other businesses.
• Hire interns.
Preparing to Raise Debt or Equity
Financing (1 of 3)

Figure 10.3 Preparation for Debt or Equity Financing

Preparing to Raise Debt or Equity
Financing (2 of 3)

Two Most Common Alternatives

Equity Funding Debt Financing
• Means exchanging partial • Is getting a loan.
ownership in a firm, usually
in the form of stock, for
funding.
Preparing to Raise Debt or Equity
Financing (3 of 3)
Table 10.2 Matching an Entrepreneurial Venture’s Characteristics with
the Appropriate Form of Financing or Funding
Characteristics of the Venture Appropriate Source of Financing or Funding

The business has high risk with an uncertain return: Personal funds, friends, family, and other forms of
Weak cash flow bootstrapping
High leverage
Low-to-moderate growth
Unproven management
The business has low risk with a more predictable return: Debt financing
Strong cash flow
Low leverage
Audited financials
Good management
Healthy balance sheet

The business offers a high return: Equity

Unique business idea
High growth
Niche market
Proven management
Preparing an Elevator Speech (1 of 2)
Purpose
• An elevator speech is a brief, carefully constructed
statement that outlines the merits of a business
opportunity.
• There are many occasions when a carefully constructed
elevator speech might come in handy.
• Most elevator speeches are around 60 seconds long.
Preparing an Elevator Speech (2 of 2)
Table 10.3 Guidelines for Preparing an Elevator Speech

Describe the opportunity or

Step 1 20 seconds
problem that needs to be solved.
Describe how your product meets the
Step 2 20 seconds
opportunity or solves the problem.
Step 3 Describe your qualifications. 10 seconds

Step 4 Describe your market. 10 seconds

Total blank 60 seconds

Sources of Equity Funding

• Business Angels
• Venture Capital
• Initial Public Offerings
Business Angels (1 of 4)
• Are individuals who invest their personal capital directly
in start-ups.
• The prototypical business angel is about 50 years old,
has high income and wealth, is well educated, has
succeeded as an entrepreneur, and invests in companies
that are in the region where he or she lives.
• Angel investors generally invest between $10,000 and
$500,000 in a single company and are looking for
companies that have the potential to grow 30 to 40
percent per year before they are acquired or go public.
Business Angels (2 of 4)
• Many well-known companies, including Apple and
Google, received their initial investment from one or more
angel investors.
• The number of angel investors in the United States, which
is estimated to be around 304,900, has increased
dramatically over the past decade.
• Many angels are motivated by more than financial
returns: they enjoy the process of mentoring a new start-
up.
Business Angels (3 of 4)
• Most angel investors remain fairly anonymous and are
matched up with entrepreneurs via referrals.
– To find a business angel, an entrepreneur should
discreetly work his/her network of acquaintances to
see if anyone can make an appropriate introduction.
– An advantage that college students have in regard to
finding business angels is that many judge college or
university-sponsored business plan or business model
competitions.
Business Angels (4 of 4)
• There are organized groups of business angels.
• These groups typically consist of 10 to 150 angel
investors in a local area that meet regularly to listen to
business plan presentations.
– An example of an angel group is the Central Texas
Angel Network (CTAN) located in Austin, TX.
– It is a relatively large angel group, with 165 angel
investors with expertise in multiple sectors.
– The process the network follows to vet investment
opportunities is explained on its Web site.
Venture Capital (1 of 6)
• Venture capital is money that is invested by venture capital firms
in start-ups and small businesses with exceptional growth
potential.
• A distinct difference between angel investors and venture capital
firms is that angels tend to invest earlier in the life of a company,
whereas venture capitalists come in later.
• The majority of venture capital money goes to follow-on funding
for businesses that were originally funding by angel investors,
government programs, or by some other means.
Venture Capital (2 of 6)
• Venture capital firms are limited partnerships of money
managers who raise money in “funds” to invest in start-ups and
growing firms.
• The funds, or pools of money, are raised from high-net-worth
individuals, pension plans, university endowments, foreign
investors, and similar sources.
• The investors who invest in venture capital funds are called
limited partners. The venture capitalists are called general
partners.
Venture Capital (3 of 6)
• Because in the past venture capitalists have funded high-
profile successes such as Google, Facebook, Snap, and
Twitter, the industry receives a great deal of attention.
• In fact, venture capitalists fund less than 1 percent of new
firms.
• Many entrepreneurs become discouraged when they are
repeatedly rejected for venture capital funding, even though
they may have an excellent business plan.
• Venture capitalists are looking for the “home run.” The result is
that they do not fund the majority of the business plans they
receive and review.
Venture Capital (4 of 6)
• Still, for firms that qualify, venture capital is a viable alternative
to equity funding.
• An advantage to obtaining this funding is that venture capitalists
are extremely well-connected in the business world and can
offer a firm considerable assistance beyond funding.
• An important part of obtaining venture capital funding is going
through the due diligence process, which refers to the process
of investigating the merits of a potential venture and verifying
the key claims made in the business plan.
Venture Capital (5 of 6)
• Firms that prove to be suitable for venture capital funding
should conduct their own due diligence to make sure they
end up with a venture capital firm that is a good fit.
• They should ask the following questions before accepting
funds from a particular venture capital firm.
– Do the venture capitalists have experience in our
industry?
– Do they take a highly active or passive management
role?
– Are the personalities on both sides of the table
compatible?
Venture Capital (6 of 6)
• They should ask the following questions before accepting
funds from a particular venture capital firm (continued):
– Does the firm have deep enough pockets or sufficient
contacts within the venture capital industry to provide
follow-on rounds of financing?
– Is the firm negotiating in good faith in regard to the
percentage of our firm they want in exchange for their
investment?
Initial Public Offering (1 of 3)
• An initial public offering (IPO) is a company’s first sale of stock
to the public. When a company goes public, its stock is traded
on one of the major stock exchanges.
• Most entrepreneurial firms that go public trade on the NASDAQ,
which is weighted heavily toward technology, biotech, and small-
company stocks.
• An IPO is an important milestone for a firm. Typically, a firm is
not able to go public until it has demonstrated that it is viable
and has a bright future.
 Initial Public Offering (2 of 3)
Reasons that Motivate Firms to Go Public

Reason 1 Reason 2
• Is a way to raise equity capital • Raises a firm’s public profile,
to fund current and future making it easier to attract high-
operations. quality customers and business
partners.
Initial Public Offering (3 of 3)
Reasons that Motivate Firms to Go Public

Reason 3 Reason 4
• Is a liquidity event that provides • Creates a form of currency that
a means for a company’s can be used to grow the
investors to recoup their company via acquisitions.
investments.
Sources of Debt Financing

• Commercial Banks
• SBA Guaranteed Loans
Commercial Banks (1 of 2)
• Historically, commercial banks have not been viewed as a
practical source of financing for start-up firms.
– This sentiment is not a knock against banks; it is just
that banks are risk averse, and financing start-ups is a
risky business.
 Banks are interested in firms that have a strong
cash flow, low leverage, audited financials, good
management, and a healthy balance sheet.
 Although many new ventures have good
management, few have the other characteristics, at
least initially.
Commercial Banks (2 of 2)
• The good news is that despite these historical precedents,
some banks are starting to engage start-up entrepreneurs.
• When it comes to start-ups, some banks are rethinking
their lending standards and are beginning to focus on cash
flow and the strength of the management team rather than
on collateral and the strength of the balance sheet.
• Entrepreneurs should follow developments in this area
closely.
SBA Guaranteed Loans (1 of 2)
• The SBA Guaranteed Loan Program
– The most notable SBA program available to small
businesses is the 7(A) Guaranty 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 unable to
secure financing on reasonable terms through normal
lending channels.
– Almost all businesses are eligible to apply for and
SBA loan.
SBA Guaranteed Loans (2 of 2)
• Size and Types of Loans
– The SBA can guarantee as much as 85% on loans up
to $150,000 and 75% on loans for more than $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.
Other Sources of Debt Financing (1 of 3)
• Online Lenders
– There is a group of online lenders, including OnDeck,
Kabbage, and BlueVine that provide loans to
businesses.
– Depending on the company, loans are available from
$2,000 to $2 million.
– Interest rates are normally higher than charged by a
commercial bank, so it is advisable to check the terms
carefully.
Other Sources of Debt Financing (2 of 3)
• Peer-to-Peer Lenders
– Peer-to-peer lenders underwrite borrowers but don’t
fund the loans directly.
– Instead, they act as intermediaries between borrowers
and individuals or borrowers and institutional
investors.
– Funding Circle and Lending Club are examples of
peer-to-peer lenders.
– The thing to watch when considering peer-to-peer
loans is the annual percentage rate, which in many
cases is high.
Other Sources of Debt Financing (3 of 3)
• 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
– Is a financial transaction whereby a business sells its
accounts receivable to a third party, called a factor, at
a discount in exchange for cash.
Creative Sources of Financing or Funding
• Crowdfunding
• Leasing
• SBIR and STTR Grant Programs
• Other Grant Programs
• Strategic Partners
Crowdfunding (1 of 2)
• Crowdfunding is 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 and Indiegogo are the most popular
rewards-based crowdfunding sites.
Crowdfunding (2 of 2)
– Equity-based crowdfunding helps businesses raise
money by tapping individuals and investors who
provide funding in exchange for equity in the business.
– The catalyst for the advent of equity-based
crowdfunding was the JOBS Act, which was passed in
April 2012.
– Four of the most popular equity-based crowdfunding
sites are MicroVentures, Fundable, Crowdfunder, and
CircleUp.
– Equity-based crowdfunding is gaining momentum. Over
$85 million has been invested through MicroVentures
since 2009.
Leasing (1 of 2)
• A lease is a written agreement in which the owner of a
piece of property allows an individual or business to use
the property for a specified period of time in exchange
for payments.
• The major advantage of leasing is that it enables a
company to acquire the use of assets with very little or
no down payment.
• Leases for facilities and leases for equipment are the
two most common types of leases that entrepreneurial
ventures undertake.
Leasing (2 of 2)
• Most leases involve a modest down payment and
monthly payments during the duration of the lease.
• At the end of an equipment lease, the new venture
typically has the option to stop using the equipment,
purchase it for fair market value, or renew the lease.
• Leasing is almost always more expensive than paying
cash for an item, so most entrepreneurs think of leasing
as an alternative to equity or debt financing.
SBIR and STTR Grants (1 of 5)
• 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.
– These programs provide cash grants to entrepreneurs
who are working on projects in specific areas.
 The main difference between the SBIR and the
STTR programs is that the STTR program requires
the participation of researchers working at
universities or other research institutions.
SBIR and STTR Grants (2 of 5)
• SBIR Program
– The SBIR Program is a competitive grant program that
provides over $2.5 billion per year to small businesses
for 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.
– Guidelines for how to apply for the grants are provided
on each agency’s Web site.
SBIR and STTR Grants (3 of 5)
• SBIR Program (continued)
– The SBIR is a three-phase program, meaning that firms that
qualify have the potential to receive more than one grant to
fund a particular proposal.
– Historically, less than 15% of all Phase I proposals are
funded. The payoff for successful proposals, however, is
high.
 The money is essentially free. It is a grant, meaning that
it doesn’t have to be paid back and no equity in the firm
is at stake.
 The small business receiving the grant also retains the
rights to any intellectual property generated as the result
of the grant initiative.
SBIR and STTR Grants (4 of 5)
SBIR Three-Phase Grant Program

Table 10.5 Small Business Innovation Research: Three-Phase Program

Phase Purpose of Phase Duration Funding Available (Varies by Agency)
Phase I To demonstrate the proposed Up to 6 Up to $150,000
innovation’s technical feasibility. months
Phase II Available to successful Phase I Up to 2 Up to $1 million
companies. The purpose of a years
Phase II grant is to develop and test
a prototype of the innovation
validated in Phase I.
Phase III Period in which Phase II Open No SBIR funding available; however,
innovations move from the research federal agencies may award non-SBIR-
and development lab to the funded follow-on grants or contracts for
marketplace. products or processes that meet the
mission needs of those agencies, or for
further R&D.
SBIR and STTR Grants (5 of 5)
• STTR Program
– Is a variation of the SBIR for collaborative research projects
that involve small businesses and research organizations,
such as universities or federal labs.
– The STTR program requires the company to have a
partnering research institution.
– More information about the SBIR and STTR can be obtained
at www.sbir.gov.
Other Grant Programs
• Private Grants
– There are a limited number of grant programs available to
entrepreneurs.
– Getting grants takes a little detective work.
– Granting agencies are low key, and must be sought out.
• Other Government Grants
– The federal government has grant programs beyond the
SBIR and STTR programs.
– The full spectrum of grants available is listed at
www.grants.gov.
– Be careful of grant-related scams.
Strategic Partners
• Strategic partners are 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 partnerships that capture these types of benefits
can help new ventures lessen their need for funding or
financing.
Copyright