Financing Your Venture Presented by Jeffrey A. Robinson, Ph.D. Assistant Professor of Management & Entrepreneurship NYU Stern School of Business

Agenda The Business Plan Two more financial consideration Review of the financial aspects of the plan Two more financial consideration Start-up Budgets and Operating Budgets Ways to Finance your Venture

Capital What is a good framework for entrepreneurship? Innovation Opportunity Innovation Networks

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)

The structures around an opportunity or context The identification, evaluation, exploration, and exploitation of a venture opportunity The structures around an opportunity or context

The cultivation and management of innovation and innovative practices The innovation of business models The protection of innovations Innovation

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

Entrepreneurship Capital Innovation Networks Opportunity The success or failure of your venture depends upon how your put these pieces together.

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

Two important statements … CFIMITYM EENASWASI

Detailing the Financial Picture for your Venture Financial Statements Detailing the Financial Picture for your Venture

Financing Requirements and Opportunity Target financings (equity and debt) Current Offering Capitalization Use of Proceeds

Financial Projections 5 year summary projections 3 year detailed, quarterly projections Balance Sheet Income Statement Cash Flow Operational Break-even Analysis

The Start-up Budget & The Operating Budget What will it take to get this venture started?

What’s the Difference? Start-Up Budget Operating 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

Financing Your Venture Sources of Funding

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

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

How Much Money They Had 2004 Inc. Magazine 500 In terms of start-up capital, including personal assets, Inc. 500 companies started with little.* 23% (B) 14% (G) 13% (A) 13% (D) 13% (F) 12% (C) 12% (E) (A) Less than $1,000 (E) $50,001 to $100,000 (B) $1,000 to $10,000 (F) $100,001 to $300,000 2004 Inc. Magazine 500 (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.

Where the Money Came From The following sources of funds provided Inc. 500 start-up capital. 2% (G) 4% (F) 4% (E) 2% (H) 8% (D) SOURCE OF FUNDS 53% (A) 10% (C) 17% (B) (A) Personal assets (B) Other founders’ personal assets (C) Assets of family or friends (other than co-founders) (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 2004 Inc. Magazine 500 (H) Formal venture capital

of companies have raised private equity. Since Start-up 17% of companies have raised private equity. 2004 Inc. Magazine 500

12% Since Start-up of companies have raised venture capital. 2004 Inc. Magazine 500

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

Bootstrap Capital Self Business Partners Friends and Family Personal Savings Credit Cards Loans against property Bank Loans Equity Investments by friends and family

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

More bootstrapping tips … 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

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

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

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

The Capital Markets Food Chain for Entrepreneurial Ventures Text Exhibit 14.1

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

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

Sources of Capital Angel Investors Venture Capitalist 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

Rate of Return Sought by Venture Capital Investors Text Exhibit 15.1

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

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.

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

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

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

Contact information Jeffrey A. Robinson, Ph.D. jrobinson@stern.nyu.edu www.jeffreyrobinsonphd.com www.bctpartners.com African American Women Entrepreneurs Research Project The Ph.D. Project – Ph.D. in Business School Venture Plan Document