Transcript Ch 11 Outline - Black Hills State University

Ch 11 Outline
1. Introduction
2. Seeking Capital
A. From Lenders
B. From Angels
C. From Venture Capitalists
3. Seeking Partners
4. Seeking Resources
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11-2 Seeking Capital
• Various sources of capital are available to
the entrepreneur, include lending
institutions and equity investors.
– Each of these capital sources will expect the
new venture to provide a business plan.
2
Bankers’ Concerns
Will the loan be profitable (i.e. will
they recover their principle and
earn interest)?
The 5 C’s of credit:
1. Character
2. Capacity
3. Capital
4. Conditions
5. Collateral
3
Commercial Banks
Line of Credit—Maximum amount
that bank will permit firm to borrow.
Revolving Line of Credit—Bank
commits to an amount on a revolving
basis.
4
Commercial Banks
Term Loans—Loans for 5-10
years—Usually to finance equipment.
Chattel Mortgage—Loan
collateralized by inventory or other
moveable property.
Real Estate Mortgage—Loan
collateralized by Real Estate.
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11-2b Angel Investors (cont.)
– Other documents that the entrepreneur
includes with the business plan when
attempting to sell stock (equity) to an
angel investor include:
• A subscription agreement
• A private placement memorandum
(PPM)
• A very brief version of the business
plan known as an investor’s executive
summary
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11-2b Angel Investors (cont.)
– An entrepreneur who wishes to raise
equity through angel financing
should consider the following issues
in structuring a deal with angels:
• Type of securities
• Rights of first refusal
• Board of director representation
• Negative covenants
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11-2c Venture Capital (cont.)
– Venture capital funds rarely provide capital to start-up
ventures.
• A drop-off in venture capital funding was evident in the wake
of the dot-com crash beginning in early 2000.
– Entrepreneurs will find greater success in obtaining
venture capital if they can demonstrate a successful
track record of sales to the company’s target market.
• The ability to generate steady revenues is called traction.
– Like other industries, the venture fund industry is
segmented.
• Seed funding is money provided to companies that need to
determine the feasibility of the business concept.
• It can be very difficult to find VC funds interested in funding
ventures of this type.
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11-3 Seeking Partners
• Entrepreneurs may also need a well-developed
plan to entice potential alliance partners to
participate with them in joint business ventures.
– A new venture often lacks market “identity”—its
primary market may not recognize its brand.
• One way to mitigate that problem is for emerging ventures to
become associated with well-recognized and respected brands.
–
–
Entrepreneurs stand to gain tremendous benefits through
alignment with well-known and respected brands.
To prevent potential to underestimate venture’s contribution to
the relationship, the new venture’s business plan should include
the benefits it will bring to its partners.
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11-3 Seeking Partners (cont.)
• Another type of business alignment is associated
with the acquisition of customers, referred to as
business development.
– A software venture may align itself with firms that are
already selling software products to organizations. Such
firms are often called valued added resellers, or VARs.
– Successful entrepreneurs establish such mutually
beneficial business alliances not only by promoting the
value of their own venture’s products or services but also
by negotiating a contract that provides incentives for the
VAR.
• In a third type of business alliance, a growthoriented firm or one that has reached the mature
stage develops deeper relationships with other
business ventures.
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11-3 Seeking Partners (cont.)
– To be successful, strategic alliances require their own
business plan.
• When a firm is approached to consider a joint venture
undertaking, the firm takes time to study the offer, the venture
making the offer, and the management team running it.
• Process of developing a deeper understanding of the potential
joint venture partner is known as due diligence.
• Firms also exchange financial information to determine each
company’s solvency and ability to support the joint venture.
• A business plan is an essential part of the formation stage of a
joint venture.
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