Show Me the Money! Entrepreneurial Financing Built by Stambaugh/2009 Jeff Stambaugh Dillard College of Business/Rm 257A

Show Me the Loan Money! Built by Stambaugh/2009

Why Money? Built by Stambaugh/2009 ■ Start: ■ Develop / improve prototype ■ Protect IP ■ Set-up ops ■ Sustain ■ Cash to finance ops ■ Grow ■ Money to expand ops

Three Basic Sources (besides yourself) Built by Stambaugh/2009 ■ Gifts (money where repayment not required) ■ Debt (formal agreement to repay funds) ■ Equity (money received in exchange for ownership stake)

Gifts Built by Stambaugh/2009 ■ Institutional ■ Tax abatements / credits ■ Grants ■ Tx ETF, SBIR, STTR, Local 4a/4b monies ■ Family & Friends ■ Cash ■ Free use (land & labor) ■ Debt forgiveness ■ Sweetheart deals What strings are attached?

Debt Built by Stambaugh/2009 Principle: You repay me as expected on agreed terms ■ “First in line” if your business falters ■ Loans versus lines of credit ■ Commercial banks typical sources ■ SBA Guarantees CharacterCapacity ConditionsCollateral

Attractive Businesses to Banks Built by Stambaugh/2009 ■ Track record of strong cash flows ■ Low existing debt (low leverage) ■ Money used for assets versus intangibles Businesses that are already operating or where this money will allow operations to begin are best bets

Tips to Getting / Keeping a Bank Loan Built by Stambaugh/2009 ■ Know the bank ■ Know the lending officer ■ Meet “their needs” ■ Keep them informed What strings do banks typically attach?

Equity Built by Stambaugh/2009 Principle: You multiply many-fold my investment ■ Many potential sources ■ Angels / accredited investors ■ High net worth who invest for return & support; $1M net worth or $200K for 2 yrs ■ Venture Capitalists ■ Firms formed for purpose of investing in start-ups ■ IPOs What strings do equity investors typically attach?

Equity “Strings” Built by Stambaugh/2009 ■ In addition to ownership stake … ■ Seats on Board / guaranteed positions ■ Right to invest in future ■ Control over expenditures ■ Control over equity sales ■ Share price floors / “guaranteed” rate of return ■ Exit strategy Expected ROI: 20-30% (or more) over 3-7 years (based on stage of investment)

Tradeoffs of Debt and Equity Built by Stambaugh/2009 ■ Debt: retain long-term control ■ Equity: raise more money, more speculative, often requires an exit / IPO

Multi-stage Funding Built by Stambaugh/2009 ■ Seed: prototype / feasibility: A, VC ■ Start-up: start production: A, VC, B ■ First / second-stage: ramp up production capacity: VC, B ■ Mezzanine: bridge toward IPO or buyout (sometimes also preferred stock): VC

Closing Thoughts Built by Stambaugh/2009 ■ Raising money almost always harder than expected ■ Raise money before you need it ■ Smart money vs dumb money ■ Distinct advantages / disadvantages to debt and equity