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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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Opportunity

InnovationNetworks

Capital

What is a good framework for entrepreneurship?

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• 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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• The identification, evaluation, exploration, and exploitation of a venture opportunity

• The structures around an opportunity or context

Opportunity

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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

Innovation

Networks

Capital

Entrepreneurship

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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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

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Financing Your Venture

Sources of Funding

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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

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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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5

10

15

20

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1 2 3 4 5 6 7

How Much Money They Had

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

In terms of start-up capital, including personal assets, Inc. 500 companies started with little.*

(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.

13% (A)

23% (B)

12% (C)

13% (D) 12%

(E)

13% (F)

14% (G)

2004 Inc. Magazine 500

Where the Money Came From The following sources of funds provided Inc. 500

start-up capital.

(C) Assets of family or friends (other than co-founders)

(A) Personal assets

(B) Other founders’ personal assets

(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)

2% (H)

2% (G)4% (F)

4% (E)

8% (D)

10% (C)

17% (B)

SOURCE OF

FUNDS

2004 Inc. Magazine 500

Since Start-up

of companies have raised private equity.

17%

2004 Inc. Magazine 500

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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• 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

More bootstrapping tips …

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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 don’t 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 R&D 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 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.

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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@stern.nyu.eduwww.jeffreyrobinsonphd.com

www.bctpartners.com

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