Patterns of Entrepreneurship Funding Sources Early Stage Funding Patterns of Entrepreneurship Chapter 6
copyright 2003 Jack M. Kaplan Early Stage Funding Personal and self Funding Angel Financing Friends and Family Bank Loans Programs of SBA and Government Loans Where to Find Funding copyright 2003 Jack M. Kaplan
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
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
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
copyright 2003 Jack M. Kaplan Personal Funds 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 copyright 2003 Jack M. Kaplan
copyright 2003 Jack M. Kaplan Use of Personal Assets Second mortgage, credit cards or sell your car OR Get an investor to use a bank deposit or stock holdings as collateral copyright 2003 Jack M. Kaplan
copyright 2003 Jack M. Kaplan Angels 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) 577-3838 (lists 20 networks nationwide) copyright 2003 Jack M. Kaplan
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
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
copyright 2003 Jack M. Kaplan Equity Investments 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 copyright 2003 Jack M. Kaplan
copyright 2003 Jack M. Kaplan Investor Networks and Contacts New York Venture Group 212-832-nyvg Mid-Atlantic Investment Network 301-681-0163 See Stanley Pratt’s Directory for lists of Venture Capital firms - $300 Contact Venture Economics Wellesley Hills, Massachusetts (617) 431-8780 OR Contact National Venture Capital Corp. Arlington, Virginia (703) 528-4370 copyright 2003 Jack M. Kaplan
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
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
copyright 2003 Jack M. Kaplan SBIR Program 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 copyright 2003 Jack M. Kaplan
copyright 2003 Jack M. Kaplan Small Business Investment Companies 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 copyright 2003 Jack M. Kaplan
copyright 2003 Jack M. Kaplan State Development programs 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 copyright 2003 Jack M. Kaplan