Early Stage Funding Patterns of Entrepreneurship Chapter 6 Funding Sources

copyright 2003 Jack M. Kaplan  Personal and self Funding  Angel Financing  Friends and Family  Bank Loans  Programs of SBA and Government Loans  Where to Find Funding Early Stage Funding

copyright 2003 Jack M. Kaplan Personal Funding  Investing your own money - sweat equity for stock –Offers greatest return, if successful –Investors and venture capital sources usually require it –Your personal funds can be treated as equity or debt

copyright 2003 Jack M. Kaplan Moonlighting  Founder still working a regular job  Income used to support the entrepreneur during needed cash flow  When the venture begins paying as well or better- entrepreneur leaves job

copyright 2003 Jack M. Kaplan Bootstrapping Often applied to a current business that can reduce costs from current operation Usually overlooked as a source to entrepreneurs The entrepreneur becomes more efficient and cost conscious

copyright 2003 Jack M. Kaplan Protect your Investment  Specify in writing if it is a loan to the company, how the loan is payable, conversion rights or equity  Specify if the loan is payable in full upon the company receiving venture funding Personal Funds

copyright 2003 Jack M. Kaplan  Second mortgage, credit cards or sell your car OR  Get an investor to use a bank deposit or stock holdings as collateral – Use of Personal Assets

copyright 2003 Jack M. Kaplan  Well-off individuals with money to invest  Good prospects get funded  Need good contacts - contact Columbia Business School- Lang fund.  Angel Networks. Fees range from $150- $300  garage.com assists startups.Call (800) (lists 20 networks nationwide) Angels

copyright 2003 Jack M. Kaplan Friends And Family The most popular source of funds for startup capital Friends and family are not as worried about quick profits as professional investors Usually they do not investigate the business and are not familiar with all the risks The best method is to provide the same disclosure to a friend as you would a investor

copyright 2003 Jack M. Kaplan SOURCES OF CAPITAL USED IN START-UP

copyright 2003 Jack M. Kaplan Accredited Investors Accredited investor is defined as having income in excess of $200,000 in each of the two most recent years or joint income of $300,000 or Individual net worth or joint worth exceeds $1,000,000

copyright 2003 Jack M. Kaplan  Common Stock - Purest form of equity –No fixed or guaranteed return –Greatest risk and greatest return –Voting stock versus non-voting stock  Preferred Stock –Guaranteed dividends –Rights are prior to common stock rights Equity Investments

copyright 2003 Jack M. Kaplan  New York Venture Group nyvg  Mid-Atlantic Investment Network  See Stanley Pratt’s Directory for lists of Venture Capital firms - $300  Contact Venture Economics Wellesley Hills, Massachusetts (617) OR  Contact National Venture Capital Corp. Arlington, Virginia (703) Investor Networks and Contacts

copyright 2003 Jack M. Kaplan Bank Loans  Prepare a loan Proposal  Summary Page  Management team Profiles  Business Description  Financial Projections  Purpose of Loan and how spent  Amount required  Repayment Plan

copyright 2003 Jack M. Kaplan How to Apply for a Bank Loan  Prepare a loan Proposal  The four “C”s of a loan request  Character  Cash Flow  Collateral  Contribution

copyright 2003 Jack M. Kaplan Programs of the SBA  Most of the SBA loans are made by lenders( commercial Banks, savings and loans, Insurance companies)  Guaranteed by the SBA  Average loan is $100,000 plus-with a maturity of 10 years

copyright 2003 Jack M. Kaplan  The program allocates in excess of 50 million annually for scientific innovation  Phase 1-awards up to $100,000 for the purpose of investigating the feasibility of an innovation  Phase 11 –The report is reviewed and if feasible, an award up to $1,000,000  Phase 111- Funding for commercialization must come from private sources SBIR Program

copyright 2003 Jack M. Kaplan  Licensed by the SBA - Invest locally and have industry preferences  Limited to companies under $2 million in earnings and less than $6 million in net worth  Have both debt and equity investments  Do not take a majority position in the company Small Business Investment Companies

copyright 2003 Jack M. Kaplan  State programs –Most states target funds: Penn. Ben Franklin Technology Centers make grants up to $100,00 N.J. New Jersey Economic Development Agency, loans and royalty agreements –Advantages: No repayment unless the project succeeds and no equity requirements –Disadvantages: Pay royalties on sales State Development programs