MBA Entrep Financing Venture

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 32

FINANCING VENTURE

entrepreneurship
WHERE DO ENTREPRENEURS GET
THEIR MONEY?
1. Their own money (owners equity or loans to the
business.)
2. Debt: cash now for repayment (with interest)
later.
3. Equity: cash from others for a piece of the
business.
4. Bootstrapping: piecing it together on your own.
1. PERSONAL CONTRIBUTION
Either in the form of either:
- Owners equity – to be drawn out at a later time.
- As a loan to the business – to be repaid at a later
time.

2. DEBT
Debt: cash now for repayment (with interest) later
Loans
Lines of credit
Mortgages
Credit cards
Etc.
2. DEBT
CHARACTERISTICS
 Money lent to you with expectation of
it being returned with interest.
 Terms are determined in advance.
 Different banks have different products
– but they are all pretty similar.
BANKS CONSIDER THE FOLLOWING
1.Repayment Ability
What evidence exists to convince me I'm going to get paid back?
Personal financial situation.
2.Management
What evidence exists that indicates that this person can manage his/her
affairs well enough to allow the opportunity for payback? Credit history?
3.Personal Investment
What evidence exists that this person has enough of a commitment to the
business so that I'll be sure he/she wants to work hard to protect it? (If they
protect theirs, they will be protecting mine!) Most lending institutions will require
at least 25 percent cash/equity contributed to the total capital cost of the project.
4.Security
If all else (above) fails, what protection do I have to get my money back? What
will it be worth when the business fails?
3. EQUITY
Equity: cash for a piece of the business
Investment
 Angel Investment
 Venture Capital
Share purchase (IPO)
Friends and Family (“love money”) –
may also be considered a loan or
charity!
What is Venture Capital?
• It is the money provided by an outside investor to finance a
new, growing, or troubled business. The venture capitalist
provides the funding knowing that there’s a significant risk
associated with the company’s future profits and cash flow.
Capital is invested in exchange for an equity stake in the
business rather than given as a loan.
• Venture Capital is the most suitable option for funding a
costly capital source for companies and most for
businesses having large up-front capital requirements
which have no other cheap alternatives.
Features of Venture Capital
investments
1) Equity Participation
Venture financing is actual or potential equity participation through
direct
purchase of shares, options or convertible securities.
The objective is to make capital gains by selling-off the investment,
once the enterprise becomes profitable.
2) Long-term Investment
Venture financing is a long term, illiquid investment; it is not repayable on
demand. It requires long-term investment attitude that necessitates the
venture capital firms to wait for a long period, say 5-10 years, to make
large profits.
3) Participation in management
Venture financing continuing participation of the venture
capitalist in the management of the entrepreneur’s
business. This hands on management
Approach helps him to protect and enhance his investment
by actively involving and supporting the entrepreneur.
More than finance, technology, planning and management
skills to new firm.
Advantages of Venture Capital
• They bring wealth and expertise to the company
• Large sum of equity finance can be provided
• The business does not stand the obligation to repay
the money
• In addition to capital, it provides valuable
information, resources, technical assistance to make
a business successful
Disadvantages of Venture Capital
• As the investors become part owners, the
autonomy and control of the founder is lost
• It is a lengthy and complex process
• It is an uncertain form of financing
• Benefit from such financing can be realized in long
run only
Methods of Venture capital financing
• Equity
• participating debentures
• conditional loan
Types of Venture Capital funding
• The various types of venture capital are classified as per their
applications at various stages of a business. The three principal
types of venture capital are early stage financing, expansion
financing and acquisition/buyout financing.

The venture capital funding procedure gets complete in six stages


of financing corresponding to the periods of a company's
development
• Seed money: Low level financing for proving and fructifying a
new idea
• Start-up: New firms needing funds for expenses related with
marketingand product development
CONTD..

• First-Round: Manufacturing and early sales funding


• Second-Round: Operational capital given for early stage
companies which are selling products, but not returning a
profit
• Third-Round: Also known as Mezzanine financing, this is the
money for
expanding a newly beneficial company
• Fourth-Round: Also called bridge financing, 4th round is
proposed for financing the "going public" process
The process of venture capital
financing
The venture capital activity is a sequential process
involving the following six steps:
Deal origination
Screening
Evaluation
Deal structuring
Post-investment activity
Exit Plan
VENTURE CAPITAL
Key Issues
 Process
 Due Diligence
 Valuation
 Term Sheet
 Exit
 Entrepreneur Considerations
 Ownership %
 Long term ownership (exit)
 Control

16
ANGEL INVESTORS
- Typically invest between $25,000 - $100,000.
- Very hands-on and usually have a passion for their
projects.
- Deal requirements are not as cut and dry as Venture
Capitalists.
- Think of what they do as a hobby – they do not need to
invest in a company, they choose to.
- Investments are often limited to their geographic reach.
- Tend to invest earlier but also looking for investment
where business is close to launch or release.

18
DECISION CRITERIA FOR INVESTORS
Rank by Rank
Angels by
VC
Enthusiasm of entrepreneur 1 1
Trustworthiness of entrepreneur 2 2
Sales potential of product 3 6
Expertise of entrepreneur 4 5
Liked entrepreneur upon meeting 5 7
Growth potential of market 6 3
Quality of product 7 10
Perceived investor financial
rewards 8 4
Niche market 9 16
Track record of entrepreneur 10 11

* Angel Investing, Osnabrugge & Robinson

19
4. BOOTSTRAPPING

o Piecing it together on your own!


o A means of financing a company through the
creative acquisition and use of resources without
raising cash from independent investors.

20
ADVANTAGES
• It forces you to concentrate on selling to bring
cash into the business.
• Minimizes expenses, lessens the need for cash.
• Founders retain greater authority, control and
flexibility.
• Equity is expensive especially at startup.
• Better positions the company for external
financing in the future if necessary.

21
DISADVANTAGES
• May not generate enough cash to grow at the
desired rate.
• Limits potential sales, market share and overall
competitive position.
• Provides insufficient support for high growth and
capital intensive businesses.

22
STRATEGIES FOR SUCCESS
 LEVERAGE GOVERNMENT PROGRAMS
 GET OPERATIONAL QUICKLY
• Get up and running rather than waiting for the home
run.
• Look for cash generating products or services, i.e.
consulting by day.
• Take on opportunities that might not be part of the strategic
plan.
• A business that is making money builds credibility.

23
 GO FIND A CUSTOMER
• Reach out to customers from day one.

• Get out and sell (perhaps before the product is


ready.)

• Use personal passion and salesmanship to


substitute for big marketing budgets.

• Offer products with tangible advantages over


competitors.

24
 FOCUS ON CASH
• Cash is king – not profits, market share or other
metrics.
• Create healthy margins from day one.
• Say “no” to loss making strategies to build market
share or a customer base.
• Understand your cash flow – cash position,
monthly
burn, timelines.

25
 FORM ALLIANCES FOR
• Market penetration
• Sales/marketing channels
• Product credibility
• Joint bidding on projects
• Accelerate time to market
• Geographic expansion
• Business experience
• Enhance company status

26
 WORK WITH CUSTOMERS

 Ask customers to prepay fees or provide advances.


 Get customers to fund customization work
 Deliver invoices with the goods, pay attention to
collections.
 Don’t do business with dead beats and dreamers.
 Market with no money – website, biz cards,
tradeshows, cold calls.

27
 WORK WITH SUPPLIERS
 Ask for credit.
 Deal with service providers for low rates.
 Make use of below market rent space.
 Barter your products or services.
 Don’t abuse them.
 YOU

 Use personal savings, credit cards and loans.


 Forgo, reduce or delay compensation (sweat equity).
 Work from home.
 Develop product at night and weekends while
working elsewhere.
 Wear lots of hats.

28
OTHER
 Buy used equipment (auctions).
 Borrow equipment from other businesses.
 Share business premises with others.
 Know where to save and when to spend.
 Eliminate unnecessary expenditures.

29

You might also like