THREE REASONS START-UPS NEED FUNDING

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Dylan Benson
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2 OBJECTIVES Identify sources of funding Prioritize sources of funding Understand how sources may change Outline your personal action plan for funding your business

3 THREE REASONS START-UPS NEED FUNDING CASH FLOW CHALLENGES Inventory must be purchased Employees must be trained and paid Advertising must be paid for before cash is generated CAPITAL INVESTMENTS The cost of buying real estate, building facilities and purchasing equipment exceeds ability to provide funds on own LENGTHY PRODUCT DEVELOPMENT CYCLES Some products are under development for years before they generate earnings Up-front costs exceed a firm s ability to fund these expenses

4 QUESTIONS TO ASK YOURSELF How much money do I need? requires a business plan and financial projections How much money do I need? What is my bargaining position? What type of business is it? product, service, not-for-profit, lifestyle, or high-growth What type of capital is most appropriate?

5 SOURCES OF FUNDING Personal Funds Micro Loans Traditional Debt (bank loan) SBA Guaranteed Loan Crowd Sourcing Angel Investors Venture Capital Public Offerings (IPO)

6 EXTERNAL FUNDING SOURCES

7 PERSONAL FUNDS You need skin in the game before you seek any external funding! Sources of Personal Funding: Cash/Savings Bootstrapping Techniques (getting what you need without spending much on it) Home equity Friends and Family Credit cards Equity and stock portfolio Retirement accounts

8 BOOTSTRAPPING Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, costcutting or any means necessary. It is the most common source of start-up funding and most entrepreneurs bootstrap out of necessity.

9 EXAMPLES OF BOOTSTRAPPING Buying used instead of new equipment Leasing equipment instead of buying Sharing office space with other businesses Coordinating purchases with other businesses Obtaining payments in advance from customers Vendor financing Making due with what you have

10 PREPARING TO RAISE DEBT OR EQUITY CAPITAL STEP 1: Determine precisely how much money is needed STEP 2: Determine the type of financing or funding that is the most appropriate STEP 3: Develop a strategy for engaging potential bankers or investors

11 DEBT VS. EQUITY DEBT - Bank loan (or other lender) - Allows you to maintain ownership and control - Requires repayment with interest - Generally considered the cheapest way to grow EQUITY - Involves investors - Money is exchanged for partial ownership - Is not paid back - Means you have shareholders - Can have huge benefits beyond the money

12 DEBT Provides liquidity, NOT investment Banks are risk averse Requires The Five Cs Credit Collateral Commitment Character Cash flow Local microlenders, community banks and credit unions may be a good option

13 DEBT FUNDING APPLICATION REQUIREMENTS You may need to provide the following personal and business statements: Personal and business tax returns (typically 2 years) W-2 statements Personal and business bank statements (typically 3 months) Authorization for credit reports for all borrowers List of uses of funds List of collateral pledged and estimated value Business plan Start-ups: 3 years of financial projections Existing: Balance Sheet, Income Statement and Cash Flow Statement plus projections

14 MICROLOANS Microloans range from $500 - $50,000 and are intended for unbankable clients. Local Microloan Funds: Justine PETERSEN WE-Lend Microloan Fund AltCap Hispanic Economic Development Corporation

15 SBA GUARANTEED LOANS The SBA does not lend money, it guarantees the loan. Almost all small businesses are eligible to apply for an SBA guaranteed loan SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000 An SBA guarantee loan can be used for almost any legitimate business purchase Still requires The Five Cs

16 SOURCES OF EQUITY FUNDING Crowd Funding Angel Investors Venture Capital Private Equity Private Placement Public Offering Peer-to-Peer

17 CROWD FUNDING Crowd funded equity made legal with the JOBS act of 2012, and the SEC is developing regulations for platforms You will be able to trade cash for ownership in your company via crowd funding websites Pros: You can cast a wider net for potential investors Cons: You may not want the crowd as a part owner of your company Resources: Hundreds of others just Google: Crowd Funding websites

18 ANGEL INVESTORS Are individuals who invest their personal capital directly in startups The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur and is interested in the start-up process Business angels are valuable because of their willingness to make relatively small investments, and for their industry knowledge and market connections

19 WHAT ENTREPRENEURS SHOULD KNOW ABOUT ANGEL INVESTING Does your business fit into the following: Have you already put your own money into your venture? Have you received money from your friends, family, strategic people who know you or your industry? Do you have a business opportunity for rapid, scalable growth within a reasonable timeframe (can you reach revenues of $20 million within 5 years)? Is your management team strong enough to execute the business plan? Do you have a credible exit strategy for investors? Are you open to mentoring and coaching? Visit for more info

20 KEY TAKEAWAYS Plan for future growth There are numerous different forms of capital Know how much control you want Understand how much you need

A Pi Primer in Entrepreneurship

A Pi Primer in Entrepreneurship Prof. Dr. Ulrich Kaiser Chairof Entrepreneurship Universität Zürich Fall 2012 Content 2008 Prentice Hall Seite 2 A Pi Primer in Entrepreneurship Part III Movingfroman Ideato