Financing Your Venture

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Financing Your Venture

• Presented by
• Jeffrey A. Robinson, Ph.D.
• Assistant Professor of Management
  Entrepreneurship
• NYU Stern School of Business

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Agenda

• The Business Plan
• Review of the financial aspects of the plan
• Two more financial consideration
• Start-up Budgets and Operating Budgets
• Ways to Finance your Venture

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Capital
What is a good framework for entrepreneurship?
Opportunity
Innovation
Networks
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Capital

• Capital can be acquired, exchanged converted
• Five forms of capital
• Financial (debt, equity, etc.)
• Human (skills, education)
• Social (networks of people)
• Cultural (social resources, family background and
  knowledge of cultural nuances)
• Intellectual (IP in firms, transferable)

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Opportunity

• The identification, evaluation, exploration, and
  exploitation of a venture opportunity
• The structures around an opportunity or context

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• The cultivation and management of innovation and
  innovative practices
• The innovation of business models
• The protection of innovations

Innovation
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• Networks connect people within organizations and
  between organization
• Networks connect entrepreneurs to capital,
  innovation, opportunities
• Networks tie everything together
• Personal Networks/Professional Networks/
  Entrepreneurial Networks

Networks
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Opportunity
Capital
Innovation
Networks
The success or failure of your venture depends
upon how your put these pieces together.
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Why is this important?

• because good entrepreneurs leverage capital,
  opportunities, innovation and networks to create
  viable ventures
• because good business plans demonstrate how an
  entrepreneurial team will leverage capital,
  opportunities, innovation and networks to create
  a new venture

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Two important statements

• CFIMITYM
• EENASWASI

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Financial Statements

• Detailing the Financial Picture for your Venture

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Financing Requirements and Opportunity

• Target financings (equity and debt)
• Current Offering
• Capitalization
• Use of Proceeds

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Financial Projections

• 5 year summary projections
• 3 year detailed, quarterly projections
• Balance Sheet
• Income Statement
• Cash Flow Operational
• Break-even Analysis

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The Start-up Budget The Operating Budget

• What will it take to get this venture started?

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Whats the Difference?

• Start-Up Budget
• How much will you need to get this venture
  started?
• Includes one time capital purchases and typically
  3-6 months of operations
• Operating Budget
• How much will you need to remain in business?
• Includes the monthly expenses to run your business

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Financing Your Venture

• Sources of Funding

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Traditional Ventures Types of Firms

• Lifestyle firms
• generally lt 1M in revenues
• founders have no desire to expand
• Forged out of something you are passionate about
• Growth Firms
• 1 M to 20 M revenues, 10-20 growth
• 20M revenues, gt20 growth gazelles
• Founders want to expand and grow the firm

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Opportunity Recognition

• There are far more good ideas than there are good
  business opportunities
• Many businesses run out of money before they find
  enough customers for their good ideas

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How Much Money They Had
In terms of start-up capital, including personal
assets, Inc. 500 companies started with little.
23 (B)
14 (G)
13 (A)
13 (D)
13 (F)
12 (E)
12 (C)

• (A) Less than 1,000 (E) 50,001 to 100,000

2004 Inc. Magazine 500
(B) 1,000 to 10,000 (F) 100,001 to 300,000
(C) 10,001 to 20,000 (G) More than 300,000
(D) 20,001 to 50,000
Start-up capital refers to funds raised before
any product or service was delivered. Personal
assets includes savings, mortgage or other
personal loans, credit cards, 401(k), etc.
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Where the Money Came From
The following sources of funds provided Inc. 500
start-up capital.
2 (G)
4 (F)
2 (H)
4 (E)
8 (D)
SOURCE OF FUNDS
53 (A)
10 (C)
17 (B)
(A) Personal assets
(B) Other founders personal assets
(C) Assets of family or friends (other than
co-founders)
(D) Commercial bank loan or line of credit
(E) Private equity investment
(F) Financing from a supplier, customer, or
other business entity
(G) SBA loan or funds from other government
program
2004 Inc. Magazine 500
(H) Formal venture capital
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Since Start-up
17

• of companies have raised private equity.

2004 Inc. Magazine 500
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Since Start-up

• 12

of companies have raised venture capital.
2004 Inc. Magazine 500
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Stages

• Seed Idea
• Startup Identifying Customers
• Growth Working Capital Generally Needed
• Expansion Need Capital for WC as well as for
  equipment and infrastructure
• Harvest Always think how investors and
  entrepreneurs get their money out

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Bootstrap Capital

• Self
• Business Partners
• Friends and Family
• Personal Savings
• Credit Cards
• Loans against property
• Bank Loans
• Equity Investments by friends and family

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Bootstrap Finance (Bhide)

• Get operational quickly
• Look for quick break-even, cash-generating
  projects
• Offer high-value products or services that can
  sustain direct personal selling
• Forget about the crack team
• Keep growth in check
• Focus on cash, not on profits, market share, or
  anything else
• Cultivate banks before the business becomes
  creditworthy

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More bootstrapping tips

• Do not buy new what you can buy used.
• Do not buy used what you can lease.
• Do not lease what you can borrow.
• Do not borrow when you can barter.
• Do not barter when you can beg.
• Do not beg what you can scavenge.
• Do not scavenge what you can get free.
• Do not take for free what someone will pay you
  for.
• Do not take payment for something that people
  will bid for.

From 10 Principles of Entrepreneurial Creation
by S. Venkataraman
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Debt or Equity

• Equity will help your grow quicker but will
  result in sharing of wealth and control with
  other investors
• Debt is less expensive than equity
• Quicker and easier to find
• Requires regular payments of principle and equity

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Debt VS Equity

• Always a consideration
• Debt usually less expensive than equity but hard
  to get
• If you do use debt -- generally you will have to
  pledge assets that are personal
• In a small business the owner personally pledges
  assets

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Sources of Capital

• Government
• SBA - Small Business Administration 7 (A) Program
• SBIC - Small Business Investment Corporation/
  MESBIC
• no more than 20 percent of SBIC assets in 1
  company
• MESBIC Minority Enterprise SBIC
• 51 percent owned by socially or economically
  disadvantaged minority
• SBIR Small Business Innovation Research Grants

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The Capital Markets Food Chain for
Entrepreneurial Ventures
Text Exhibit 14.1
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Sources of Capital

• Banks
• Amount available to entrepreneurs is highly
  depended on where in the business cycle the
  economy happens to be
• Business loans are different than commercial real
  estate loans
• Consider Community Development Banks if Social
  Enterprise
• Small Business Services at local bank i.e. Line
  of Credit
• Factoring -- Selling Accounts Receivables for
  Cash

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Sources of Capital

• Corporations
• We do not really talk much about in this course
• It is not uncommon for a former employee to get
  funding from her old company if the business
  would be complimentary
• Corporation may be able to use the technology

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Sources of Capital

• Angel Investors
• Private investors (often family and friends --
  but can be established member of a community)
• return 20-40 percent annually
• Venture Capitalist
• Generally dont finance seed or startup phase
• return 30 to 60 percent annually

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Rate of Return Sought by Venture Capital Investors
Text Exhibit 15.1
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Informal Investors

• What kind of ventures lend themselves to the use
  of informal investors?
• Ventures with capital requirements of 50 K -
  500 K
• Ventures with sales potential of 2 M - 20 M
  over 5 to 10 years
• Small established, privately held venture with
  sales and profit growth of 10 to 20 per year
• Some RD deals
• Companies with high levels of FCF within 3 or 5
  years

Source Timmons, Chapter 14
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Characteristics of Business Angels

• Bill Wetzel found that business angels are mainly
  American self-made entrepreneur millionaires who
• Have made it on their own, have substantial
  business and financial experience, and are likely
  to be in their 40s or 50s.
• Are well educated 95 hold college degrees and
  51 have graduate degrees.
• Have technical or business educationof those who
  have graduate degrees, 44 were in a technical
  field and 35 in business or economics.
• Are predominantly maleover 96 are men.

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Sources of Capital

• IPO
• Usually when Angels, Venture Capitalists and
  sometimes entrepreneur try to cash out
• Expensive
• Time Consuming
• Highly dependent on where the business cycle is

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Finding Money

• Less than 1 percent from SBA
• Angels -- Informal Capital
• Require an average of 26/yr
• Usually local
• Accept about 30 of deals
• Banks
• Will lend but usually require collateral
• Easier to get a personal loan than a commercial
  loan

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Resources and Sources

• www.sba.gov
• Angel Investor Networks/Venture Exhibitions or
  Venture Fairs
• Your Business School (Entrepreneurship Center,
  Alumni Network)
• Business Plan Competitions (25 K - 100 K)
• City, State and Regional Economic Development
  agencies/departments

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Contact information

• Jeffrey A. Robinson, Ph.D.
• jrobinson_at_stern.nyu.edu
• www.jeffreyrobinsonphd.com
• www.bctpartners.com
• African American Women Entrepreneurs Research
  Project
• The Ph.D. Project Ph.D. in Business School
• Venture Plan Document