Chapter 8

Getting Funding
or Financing
Bruce R. Barringer
R. Duane Ireland

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Alternatives for Raising Money for a
New Venture

Personal Funds Equity Capital

Debt Financing Other Sources

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 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.

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 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, cost cutting, or any
means necessary.
– Many entrepreneurs bootstrap out of necessity.

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 Examples of Bootstrapping Methods

Buy used instead of Coordinate purchases Lease equipment

new equipment. with other businesses. instead of buying.

Obtain payments in
Minimize personal Avoid unnecessary
advance from
expenses. expenses.
customers.

Buy items cheaply but Share office space or

prudently via options employees with other Hire interns.
such as eBay. businesses.

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Preparing to Raise Debt or Equity Financing
2 of 3

Two Most Common Alternatives

Equity Funding Debt Financing

Means exchanging Is getting a loan.

partial ownership in a
firm, usually in the
form of stock, for
funding.

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Preparing to Raise Debt or Equity Financing
3 of 3
Matching a New Venture’s Characteristics with the Appropriate Form of
Financing or Funding

More debt than

equity

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 Sources of Equity Funding

Business Angels Venture Capital

Initial Public
Offerings

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 Business Angels
1 of 2

• 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 is interested in the start-up process.
– The number of angel investors in the U.S. has increased
dramatically over the past decade.

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 Business Angels
2 of 2

• Business Angels (continued)

– Business angels are valuable because of their willingness to
make relatively small investments.
• These investors generally invest between $10,000 and
$500,000 in a single company.
• Are looking for companies that have the potential to
grow between 30% to 40% per year.
– Business angels are difficult to find.

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 Venture Capital
1 of 1

• Venture Capital
– Venture Capital Firms are interested in start-ups and small
businesses with exceptional growth potential:

• The funds, or pool of money, are raised from wealthy 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 capitalists are looking for the “home run” and so reject the
majority of the proposals they consider.
• An important part of obtaining venture capital funding is going
through the due diligence process.

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 Initial Public Offering
1 of 4

• Initial Public Offering

– An initial public offering (IPO) is 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.

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 Initial Public Offering
4 of 4

Reasons that Motivate Firms to Go Public:

• Is a way to raise equity capital to fund current and future

operations.
• Make it easier to attract high-quality customers and business
partners.
• Is a liquidity event that provides a means for a company’s
investors to recoup their investments.

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 Other Sources of Debt Financing
1 of 2

• 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.

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 Other Sources of Debt Financing
2 of 2

• 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
– Is 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.
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 Acquiring Capital to
Implement Strategies

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 Acquiring Capital to
Implement Strategies

• Successful strategy implementation often

requires additional capital.

• Besides net profit from operations and the

sale of assets, two basic sources of capital
for an organization are debt and equity.

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 Acquiring Capital to
Implement Strategies
• EPS = Earnings Per Share, which is Net Income
divided by # of Shares Outstanding
(Another term for Shares Outstanding is Shares
Issued)
• EBIT = Earnings Before Interest and Taxes (also
called operating income)
• EBT = Earnings Before Tax
• EAT = Earnings After Tax

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EPS/EBIT Analysis for the
XYZ Company

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Calculate 50/50 debt/stock
combo

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Calculate 50/50 debt/stock combo

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