Lecture 5 Entrepreneurial financing.ppt - FINANCING THE NEW VENTURE Gaining financial support is a critical success factor for the new venture

Lecture 5 Entrepreneurial financing.ppt - FINANCING THE NEW...

This preview shows page 1 out of 48 pages.

Unformatted text preview: FINANCING THE NEW VENTURE Gaining financial support is a critical success factor for the new venture. Importance of getting Finance Launch the venture Manage the venture Grow the venture Survive the venture Three core principles of entrepreneurial finance More cash is preferred to less cash Cash sooner is preferred to cash later Less risky cash is preferred to more risky cash Important sources of investment capital the entrepreneur’s own capital; Friends; Family/ relatives; retained capital; government funding; investment in other businesses; business angels; individuals who invested their personal capital directly in start-ups retail banking; corporate banking; venture capital; public flotation. Entrepreneurs may use a mix of these sources depending on the size and stage of the venture, the amount required and the risks involved. Factors Affecting Financing Accomplishments and performance to date Investor’s perceived risk Industry and technology Venture anticipated growth rate Venture age and stage of development Investor’s required rate of return or internal rate of return Amount of capital required and prior valuations of the venture Founders’ goals regarding growth, control, liquidity, and harvesting Relative bargaining positions Investor’s required terms and covenants Solutions to Venture Finance Problems Self financing Contract provisions Specialization By industry Be development stage Geographically localized investing Syndication Capital Questions How much money do I need? Where should I get that money? What type of arrangements do I need to make to obtain that capital? Breakeven Analysis Calculate the amount of sales you need to achieve to cover your costs Determine the increase in sales volume you need to have in order to increase fixed costs Debt vs. Equity Debt—financial obligation to return capital provided plus a scheduled amount of interest Equity—a portion of ownership receive in an organization in return for money provided EQUITY CAPITAL Sources of Equity Financing Personal savings Friends and family StateForms of Equity sponsored venture Financing capital funds Venture capitalists Private investors Partners Inside Equity Equity finance represents ownership stake in the new venture. Initial equity mostly come from the: Founder Top management team Friends Family/Relatives Advantages of Inside Equity Easy and quick source Less pressure Informal arrangements Less debt Disadvantages if Inside Equity Risk of destroying personal relationships May encourage interference Force personal sacrifices Outside Equity This comes from investors who have no personal relationship with the venture beyond their investment and their concern for its profitability and protection. Obtaining Risk Capital Three central issues to be considered Does the venture need outside equity capital? Do the founders want outside equity capital? Who should invest? What to Look for in Investors Seek investors who: Are considering new financing proposals and can provide the required level of capital Are interested in companies at the particular stage of growth Understand and have a preference for investments in the particular industry Seek investors who: Can provide good business advice, moral support, and has contacts in the business and financial community Are reputable, fair, and ethical and with whom the entrepreneur gets along Have successful track records of 10 years or more advising and building smaller companies Attitude Be wary if getting through to a general partner in the investment firm is an ordeal Be wary if the investor thinks he or she can run the business better than the lead entrepreneur or the management team Over commitment Be wary of lead investors who indicate they will be active directors but who also sit on the boards of six to eight other startup and early stage companies or are in the midst of raising money for a new fund Inexperience Be wary of dealing with venture capitalists who have: No operating, hands-on experience in new and growing companies A predominantly financial focus Unfavorable reputation Be wary of funds that have a reputation for early and frequent replacement of the founders Be wary of those who have more than one-fourth or the portfolio companies are in trouble or failing to meet projections in their business plans Angel Investors Who are angel investors? Most are self-made entrepreneur millionaires Many are in their 40s and 50s Most are well educated They are sometimes reached through personal acquaintances Advantages Relative accessibility Size of investment pool Individuals may be in a position to lend their positive reputations to the venture to attract additional funds Disadvantages They sometimes lack the business expertise that would help the entrepreneur when advise in needed Sometimes they may suffer from the inability to invest more money Sometimes private investors tend to be over protective of their investment Venture Capital This is capital that comes from professionally managed pools of investor money. Instead of wealthy individuals making investments one at a time and on their own, they pull their funds with other like minded people and hire professionals to make the investment and related decisions. Advantages Often able to bring additional money on the table when needed They also provide additional advice based on experience and important industry contacts for the firm Disadvantages May lead to the dilution of ownership Interference in company affairs Loss of control Going Public Advantages of going public To raise more capital with less dilution than occurs with private placements or venture capital To improve the balance sheet To reduce or eliminate debt (thereby enhancing the company’s net worth To obtain cash for pursuing opportunities that would otherwise be unaffordable To access other suppliers of capital and to increase bargaining power To improve credibility with customers, vendors, key people, and prospects To achieve liquidity for owners and investors To create equity incentives for new and existing employees Disadvantages of going public Requirements to conform to standard accounting and tax practices Increased accountability Lack of operating confidentiality Demand from dividends from stakeholders Lack of operating flexibility DEBT FINANCING Sources of Debt Financing Trade credit Banks Small business investment companies Sources of Debt Financing SBA loans Minority enterprise development programs Commercial finance companies Sources of Debt Capital Trade credit Commercial banks Finance companies Factors Leasing companies Trade Credit Trade credit—the ability to buy goods and services and have 30, 60, or 90 days to pay for them Major source of short-term funds for small businesses Commercial Banks Common types of financing involving the use of a bank overdrafts Term loans mortgages and equipment loans Plant improvement loans Commercial Finance Companies Frequently lend money to companies that do not have positive cash flow Will not make loans to companies unless they consider them viable risks; usually more accepting of risk than are banks Criteria for loan evaluation Character; type of person you are Capital; the amount of money you have personally invested in the business Capacity; your management ability Collateral; security you are providing or pledging Circumstances; nature of product, stage of competition etc. Coverage; insurance coverage that will protect the lender in the event of the death of the borrower. Advantages of debt financing You maintain control and ownership of the business Interest and other cost are tax deductible Inflation results in repayments of cheaper amounts. Disadvantages Procedure for accessing loans can be cumbersome and difficult High interest rates Risks that future profits will not cover repayment Must share financial and other confidential information Lender may impose certain restrictions on borrower. Factoring Factoring—a form of accounts receivable financing where the receivables are sold, at a discounted value, to a factor The factor buys the client’s receivables outright, without recourse, as soon as the client creates them, by shipment of goods to customers Cash is made available to the client as soon as proof is provided (old-line factoring) or on the average due date of the invoices (maturity factoring) Leasing Companies Leasing companies—leases common and readily resalable items such as automobiles, trucks, typewriters, and office furniture to both new and existing businesses Up front payment required Interest may be more or less than other forms of financing, depending on the equipment leased, the credit of the lessee, and the time of year Sources of funds for entrepreneurs and small firm owner-managers in The venture capital Ghana fund MASLOC The commercial banks, e.g. ADB Money lenders NGO’s Credit unions Banks ...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture