Financing Your Venture

Presented by Jeffrey A. Robinson, Ph.D.

Assistant Professor of Management & Entrepreneurship NYU Stern School of Business 1

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 2

What is a good framework for entrepreneurship? Opportunity Innovatio n

3

• 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) 4

• The

identification

,

evaluation

,

exploration

, and

exploitation

of a venture opportunity

Opportunity

• The structures around an opportunity or

context

5

• The

cultivation

and

management

of innovation and innovative practices • The innovation of

business models

• The

protection

of innovations

Innovatio n

6

Networks

• 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 7

Entrepreneurship

Opportunity Capital Networks Innovatio n

8

The success or failure of your venture depends upon how your put these pieces together.

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 9

Two important statements …

• CFIMITYM • EENASWASI 10

Financial Statements

Detailing the Financial Picture for your Venture 11

Financing Requirements and Opportunity

• Target financings (equity and debt) • Current Offering • Capitalization • Use of Proceeds 12

Financial Projections

• • • • • 5 year summary projections • 3 year detailed, quarterly projections Balance Sheet Income Statement Cash Flow Operational Break-even Analysis 13

The Start-up Budget & The Operating Budget

What will it take to get this venture started?

14

What’s 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 15

Financing Your Venture

Sources of Funding 16

Traditional Ventures: Types of Firms

• Lifestyle firms – generally < $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, >20% growth {gazelles} – Founders want to expand and grow the firm 17

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 18

How Much Money They Had In terms of start-up capital, including personal assets, Inc. 500 companies started with little.* 25 23% (B) 20 15 13% (A) 10 5 12% (C) 13% (D) 12% (E) 13% (F) 14% (G) 0 1

(A) Less than $1,000

2

(B) $1,000 to $10,000 (C) $10,001 to $20,000 (D) $20,001 to $50,000

3 4 5

(E) $50,001 to $100,000

6

(F) $100,001 to $300,000 (G) More than $300,000

7

2004 Inc. Magazine 500

*”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.

Where the Money Came From The following sources of funds provided Inc. 500 start-up capital.

2% (G) 4% (F) 4% (E) 2% (H) 8% (D) 10% (C) SOURCE OF FUNDS 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

(H)

Formal venture capital 53% (A)

2004 Inc. Magazine 500

Since Start-up

17%

of companies have raised private equity.

2004 Inc. Magazine 500

Since Start-up

12%

of companies have raised venture capital.

2004 Inc. Magazine 500

Seed Startup Growth Expansion Harvest

Stages

Idea Identifying Customers Working Capital Generally Needed Need Capital for WC as well as for equipment and infrastructure Always think how investors and entrepreneurs get their money out 23

Bootstrap Capital

• Self • Business Partners • Friends and Family – Personal Savings – Credit Cards – Loans against property – Bank Loans – Equity Investments by friends and family 24

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 25

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 26

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 27

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 28

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 29

The Capital Markets Food Chain for Entrepreneurial Ventures

Text Exhibit 14.1

30

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 31

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 32

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 don’t finance seed or startup phase – return 30 to 60 percent annually 33

Rate of Return Sought by Venture Capital Investors

Text Exhibit 15.1

34

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 R&D deals – Companies with high levels of FCF within 3 or 5 years 35 Source: Timmons, Chapter 14

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 education—of those who have graduate degrees, 44% were in a technical field and 35% in business or economics.

• Are predominantly male—over 96% are men.

36

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 37

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 38

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 39

Contact information

Jeffrey A. Robinson, Ph.D.

[email protected]

www.jeffreyrobinsonphd.com

www.bctpartners.com

–African American Women Entrepreneurs Research Project –The Ph.D. Project – Ph.D. in Business School –Venture Plan Document 40