Jon Arrington Omaha | What Private Investors Expect?

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What Private Investors Expect?

• Jon Arrington Omaha

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What youll learn

• Resources available to entrepreneurs to start
  their business
• Compare/Contrast sources of financing for
  start-up ventures
• Importance of financial planning
• Information needed to obtain financing
• Types of growth financing available to
  entrepreneurs
• How to calculate start-up requirements

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Entrepreneurial Resources

• Finding the resources to launch a business is a
  creative process. It requires understanding of
  short-term and long-term needs.
• Short-Term Activities that are not part of
  normal operations
• Seasonal increase in sales that requires
  purchasing more inventory than normal
• Long-Term Preparation for future growth
• Acquiring a larger facility or buying
  new/additional equipment

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Bootstrapping

• The most common way businesses get off the
  ground!
• Involves operating as frugally as possible and
  cutting all un-necessary expenses
• Involves borrowing, leasing and partnering to
  acquire resources
• You can accomplish this in a few ways
• Hire as few employees as possible
• Leasing anything you can
• Being creative

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Start-Up Money

• New businesses have no track record to prove it
  will survive. For this reason, its hard to get
  investors.
• The main resources for start-up money is usually
  personal resources.
• Friends, Family, Others
• Savings, Credit Cards, Loans, Investments
• To finance a new business, entrepreneurs can use
  banks, financial companies, investment companies,
  and government grants. There are 2 broad types
  of financing for new ventures
• Equity Financing
• Debt Financing

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Sources of Equity Financing

• Equity Capital Cash raised for a business in
  exchange for ownership stake in that business
• Ex Investor might invest 50k for a 25
  ownership stake
• Equity funding, AKA Risk Capital
• Because of the financial risk involved
• Successful Business Investor makes a return on
  investment
• Business Fails Investor loses money

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Types of Equity Funding

• Personal Savings
• 1 Source of . 67 of businesses are started
  this way, without borrowing money
• Friends/Family
• What happens to your relationship with these
  people if the business fails?
• Private Investors
• Angel Private investor who funds start-up
  companies. Nonprofessional financing source.
• Partners
• Remember the partnership agreement we talked
  about in Ch. 7
• Share responsibilities and costs
• Venture Capitalists
• Individual investors or investment firms that
  invest capital professionally. Provide
  managerial as well as technical expertise.
• State Sponsored Venture Capital Funds
• Local economic development corporations help fund
  new businesses to create jobs.

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Sources of Debt Financing

• Money is raised by taking out loans. Not only do
  you borrow money, but you pay it back with
  interest.
• The entrepreneur retains ownership of the
  business, however must record the liability on
  the business accounting books.
• Make sure you are certain the business can
  generate enough cash flow to repay the loan.
• Compare and contrast long-term vs. short term
  financing.
• Do you want a loan out for 30 years, or for 3,5
  or 10 years?

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Types of Debt Funding

• Banks
• Usually only lend to well-established businesses
• Trade Credit
• Credit that one business will grant to another
  for the purchase of goods or services.
• Minority Enterprise Development Programs
• Funded by the private sector SBA. Owners must
  be at least 51 ethnic minority, female, or
  disabled. Also helps secure government contracts
  find strategic partners
• Commercial Finance Companies
• More expensive alternate to commercial banks.
  Less conservative than banks, and more willing to
  take risks. Form of security or collateral is
  required, such as your home.
• SBA Loan
• Small Business Administration. Uses a commercial
  bank, but guarantees repayment to the lender up
  to 90 should your business fail. You and anyone
  with more than 20 ownership in the business must
  guarantee the loan with personal assets. (Home,
  Cars, etc)
• SBICs
• Small Business Investment Companies. Privately
  managed venture capital companies. Licensed by
  the SBA to provide equity and debt financing to
  young, established businesses.

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Obtaining Financial and Growth Capital
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How To Get Financed!

• Once youve figured out which method your company
  will use (Equity vs. Debt), you must create pro
  forma financial statements
• Pro Forma Proposed or Estimated financial
  statements based on predictions of how the
  operations of the business will turn out.
• Income Statements, Balance Sheets, Cash Flow,
  etc.
• This will give potential investors and other
  sources of funds a sense of confidence that you
  know what your doing!

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What Venture Capitalists Expect

• Venture Capitalists rarely invest in start up
  companies, but when they do, they look for
  high-growth firms with BIG potential.
• Venture Capitalists typically want a 30-70 ROI
  for a growing company, and a 50 or more for an
  early stage venture because of the risk involved.
• Ex If they give you 2 million for 5 years.
  They will want their original investment within
  those 5 years, as well as an additional
  600,000-1 Million on top of that.
• Your business must generate enough money to pay
  them off.

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What Private Investors Expect

• Remember from 19.1, called Angels.
• Unlike Venture Capitalists, they enjoy being
  involved in the business.
• Typically invest in the business because they are
  familiar or understand that industry.
• Most private investors put between 10-500k into
  a new business.
• On average, they aim to get 10xs their
  investment at the end of five years.
• A strong management team will attract private
  investors

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What Bankers Expect

• Banks must invest conservatively and follow
  strict rules about how to invest the banks
  money.
• Very different from that of a venture capitalist
• Because of that, they are MUCH MORE interested in
  how you plan, and your ability to repay that loan
• Cash Flow is a big concern to them
• Youve got to be able to cover the business
  monthly expenses AND the loan payment
• Bankers rely on the 5 Cs to determine your loan
  application
• Character-Reputation for business practices
• Capacity-Ability to pay a loan (Cash Flow)
• Capital-Net worth of a business
• Collateral-Security for the loan should you not
  be able to repay
• Conditions-Growth, Competition, Economy, etc.

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Growth Financing

• This is financing for an already established
  business looking to grow! Not start up funding!
• VC (Venture Capital) Companies
• Expect returns of 30-70
• May require significant ownership, or a seat on
  the board of directors
• Requires Due Dilligence-Investigation analysis
  by an investor
• Private Placements
• Raises capital by selling ownership
• Private offering or sale of securities
  (ownership)
• Investors must meet certain standards, must be
  sophisticated
• Investors must have a net worth of at least a
  million dollars
• IPOs (Initial Public Offerings)
• Sale of stock in a company on a public exchange
• 5 steps to becoming a public company with stock
  on pg. 418. List them.

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Calculating Start-Up Needs

• Start-Up Costs
• Those that you incur prior to the business
  opening its doors
• Fig. 19.1 on pg. 420, good example of costs
• Equipment, furniture, fixtures, etc.
• Operating Costs
• AKA working capital
• Amount of cash needed to carry out daily
  operations
• Covers the time between selling your
  product/service and receiving payment from the
  customer
• Contingency Fund
• Extra amount of money used only when absolutely
  necessary
• Emergency Fund
• Some businesses keep enough money in here to
  operate for 2 or more months.

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Thank You