Getting Financing

or Funding
 POINTS TO BE
DISCUSSED…..
 Profile of successful Entrepreneur
 Importance of financing for entrepreneurial
success.
 Why most entrepreneurial ventures need to
raise money during their early life.
 Three sources of personal financing available
to entrepreneurs.
 Three steps involved in properly preparing to
raise debt or equity financing.
 Three most important sources of equity
funding that are available to the
entrepreneurial firm.
 TONY
HSIEH

$ 1.6 million in sales in 2000 to $ 1 billion

 Careful
financial
planning.
• 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.

The Importance of Getting Financing

or Funding

• 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
Three Reasons Start-Ups Need Funding
Alternatives for Raising Money for a New
Venture
 Sources of Personal Financing
• 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
• Bootstrapping
– A third source of
– Bootstrapping is seed money for a
finding ways to avoid new venture is
the need for external referred to as
financing or funding bootstrapping.
through creativity,
ingenuity, thriftiness,
cost cutting, or any
means necessary.

– Many entrepreneurs bootstrap out of

necessity.
 Examples of Bootstrapping Methods
• 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.
• 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
Preparing to Raise Debt or Equity Financing
Two Most Common Alternatives

Equity Funding
• Means exchanging partial
ownership in a firm, usually in
the form of stock, for funding.

Debt Financing
• Is getting a loan.
 Preparing to Raise Debt or Equity Financing
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 bootstrapping
Weak cash flow
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
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.
 Sources of Equity Funding

• Business Angels

• Venture Capital

• Initial Public Offerings

 Business Angels
• 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
• 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.
• 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.
Venture Capital
• 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.
• The investors who invest in venture capital
funds are called limited partners. The venture
capitalists are called general partners.
Venture Capital
• 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
• 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
• 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 froam 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?
Reason 1 Initial Public Offering
• Is a way to raise equity capital to fund
• An initial public offering (IPO) is a company’s
current and future operations.
first sale of stock to the public. When a
Reason 2 company goes public, its stock is traded on
one of the major stock exchanges.
• Raises a firm’s public profile, making it
easier to attract high-quality customers • Most entrepreneurial firms that go public
and business partners. trade on the NASDAQ, which is weighted
heavily toward technology, biotech, and
Reason 3
small-company stocks.
• Is a liquidity event that provides a means
• An IPO is an important milestone for a firm.
for a company’s investors to recoup their Typically, a firm is not able to go public until it
investments. has demonstrated that it is viable and has a
Reason 4 bright future.
• Creates a form of currency that can be
used to grow the company via
acquisitions.
Sources of Debt Financing

• Commercial Banks
• SBA Guaranteed Loans
 Commercial Banks
• 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
• 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
• 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
• 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
• 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.
• 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.
• 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
• 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
1. Rewards-based crowdfunding: allows
entrepreneurs to raise money in exchange for some type
of amenity or reward.
• Kickstarter and Indiego go are the most popular
rewards-based crowdfunding sites.
2. Equity-based crowdfunding: helps businesses raise
money by tapping individuals and investors who provide
funding in exchange for equity in the business.
 Leasing
• 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.
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 (1 of 5)
SBIR Three-Phase Grant Program: 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 Phase II years
grant is to develop and test a prototype
of the innovation validated in Phase I.

Phase III Period in which Phase II innovations Open No SBIR funding available; however,
move from the research and federal agencies may award non-SBIR-
development lab to the marketplace. funded follow-on grants or contracts for
products or processes that meet the
mission needs of those agencies, or for
further R&D.
 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.
THANK YOU
STAY BLESSED ALWAYS!