Financing the Venture Debt and Equity

1. Financing the VentureDebt and Equity BCEN 2900 Entrepreneurship

2. New Ventures Need Money • Where are you going to get it? • Choose the right source and know the pros and cons • Know the right people to get money • Plan money into your timeframe • Be creative where it counts • Know what you’re getting into

3. Types of Capital Needs • Capital – what is it? • Why do we need it? • Bootstrapping versus funded ventures • Three types of capital • Fixed – building, land, equipment • Working – current assets minus current liabilities • Growth – excess stores of capital to fund expansion • Why do we need to know these?

4. Debt Versus Equity • Equity – • The personal investment of an owner in a business • Can all be lost • Entrepreneur gives control to other owners • Debt • Financing that is borrowed and must be repaid • Includes an interest component • No dilution of ownership and control

5. Finding Equity Financing • Personal savings • Entrepreneurs should expect to contribute 20-50% of their start-up funds • Friends and family • Angel investors • Partners • Venture capital companies • Initial public offering

6. Entrepreneur of the Day • Dana White, UFC • Bought old UFC as a tattered brand for $2 million with help from a childhood friend. • Poured money and hype into the brand to make it a brand that grosses $200 million today, 7 years later. • Has gone from 3000 tickets sold to 21,000 per event. • Has fueled a nationwide affinity for MMA

7. How Debt Financing Works • Again, you do have to repay loans, with interest. • Loans can come from: • Banks, suppliers, finance companies, brokerages, insurers, credit unions, credit cards, bonds, and other lending companies • Banks: • May turn you down because you have no collateral, no cash flow plan, or you haven’t provided them with convincing information

8. Involving Friends and Family • A tricky proposition – relationships can be damaged! • Know how the loan or investment is impacting everyone – don’t strap anyone! • Get it in writing • Have a realistic repayment or cash-out plan.

9. You Be the Consultant • Lisa D’Aquanni, owner of The Chocolate Gecko, has been able to slowly grow her home-based business by raising funds in creative ways like selling gift certificates and bartering. She now needs to purchase and renovate a building. • John Acosta, owner of Jolly Technologies, faces the same challenge, as he attempts to raise $100,000 to modify the production and enhance marketing efforts for his garage-door opening device. • What are the advantages and disadvantages of equity and debt for both of these folks? • Would the following funding sources be appropriate for both – friends and family, angels, IPO, bank loan? • What do they need to do before approaching a funding source?

10. Government Programs • EDA and HUD loans • Up to $10 million (EDA); $5 million (HUD) • For EDA loan, owner must supply 15% of loan amount in capital • Community development block grants • USDA Rural Business-Cooperative Service • Tries to improve economies of rural areas • Great for Internet based companies without need for city ties

11. Government Programs • SBIR • Small Business Innovation Research • Cash grants! • 12% of applicants funded • $100,000 to $750,000 • STTR • Grants up to $500,000 for university/nonprofit institutions who partner with private organizations

12. Small Business Administration • Largest financial backer of small businesses in the U.S. • Up to $750,000 loans • Low Doc Loans for up to $150,000 • 7(a) loan • For startups • 10 to 25 year loans for working capital, equipment, and buildings

13. Small Business Administration • 504 loans • Group of loans, plus 10% equity from owner • For expansion through purchase of equipment and buildings • Through certified development centers (CDCs) • Microloans • Up to $35,000 for startup for small businesses and nonprofit childcare centers • Through intermediary centers