1 Ch 9 Overview Introduction Sources of Capital Stock Offerings Valuation Exit Strategies

2 Exhibit 9-1 Seed Cash Stash Source: Data from Susan Greco, “A Little Goes a Long Way,” Inc. Magazine, October 2002.

3 9-1 Introduction The entrepreneurial venture requires cash to operate and grow. –In the early stages, new ventures require capital from other sources to survive. Successful entrepreneurs learn how to articulate their venture’s business model and its market potential— elevator speech. –The elevator speech is just one of the important skills that the entrepreneur must possess to be a successful fund-raiser.

4 9-2 Sources of Capital Two major sources of funds for a business are: –Debt capital: Funds obtained through borrowing Debt capital is categorized into two types: short term and long term. –Equity capital: Does not require repayment Sources of equity capital include retained earnings.

5 9-2a Short-Term Debt Financing Short-term debt: Used to finance current operations, with required payback within one year Can come from several different sources: –Friends and family Such borrowed funds bring an extra risk Money borrowed should be handled like any other loan –Commercial banks They can help with any cash flow problems and can give sound advice. Developing a close relationship with a local banker is a good idea. When an entrepreneur needs emergency funds, the banker will be more willing to help out.

6 9-2a Short-Term Debt Financing (cont.) Statistics from the U.S. Small Business Administration indicate that commercial banks lent out micro-loans. Bank loans come in many different forms: –Unsecured loans –Secured loans backed by collateral –Line of credit –A revolving credit agreement –Factoring –Floor planning is another option in bank financing –Trade credit The credit given to a firm by the trade—that is, by the suppliers that the company deals with. Entrepreneur may want to use such terms to encourage clients to pay their bills in a timely manner.

7 9-2a Short-Term Debt Financing (cont.) –Credit cards Some entrepreneurs rely on credit cards to help finance the early stages of their ventures. Using credit cards to finance a business can lead to problems if the cards are utilized without fiscal discipline. The advantages include: –Ease with which they can be obtained –Universally accepted –Convenient to use –Assists the entrepreneur in financial record keeping via monthly statements The disadvantage includes: –Relatively high rate of interest

8 9-2a Short-Term Debt Financing (cont.) –Internal funds management The venture should attempt to obtain its needed funds from internal sources. A close review of the balance sheet and accounting ratios will reveal possible sources of funds that have been overlooked. Entrepreneurs should work hand-in-hand with their accountant to ensure that funds are not tied up in noncash assets.

9 9-2b Long-Term Debt Financing Successful companies constantly refocus on their long-term goals and objectives. There are two primary sources of long-term debt: –Term loans Most term loans have three- to seven-year terms. The business signs a term loan agreement called a promissory note. It requires some form of collateral. When determining the interest rate for such loans, the bank looks at: –The length of time the loan is for –The type of collateral –The firm's credit rating –The general level of market interest

10 9-2b Long-Term Debt Financing (cont.) –SBA loans: For a smaller business, the U.S. Small Business Administration (SBA) can often be a good source of loans. The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs. To qualify for an SBA guaranty, a small business must meet the SBA’s criteria. The lender must certify that it could not provide funding on reasonable terms without an SBA guaranty. Most cases, the maximum guaranty is $1 million.

11 9-2b Long-Term Debt Financing (cont.) –Leverage: The use of long-term debt to raise needed cash is sometimes referred to as leverage. The borrowed cash acts like a lever to increase the purchasing power of the owner’s investment. It maintains higher rates of return on owners' investments. It allows the owners to create a larger firm for the same investment. It also means a continued obligation to service the debt. Judicious use of leverage can help increase owners' returns.

12 9-2c Equity Capital Equity capital: Funds invested by the owners of the venture. –Five forms of equity capital are: Retained earnings Contributions Sale of partnerships Venture capital Public sale of stock –Stock certificate –Authorized stock –Shares sold—issued stock, and unsold shares—unissued stock.

13 Valuation See Documents and Document Scanner

Exit Strategies The purpose of a venture’s exit strategy is: –To outline a method by which the early-stage investors can realize a tangible return on the capital they invested. –To suggest a proposed window in time that investors can tentatively target as their investment horizon. –There are four basic categories of exit strategies (other than and IPO) in order of occurrence: Acquisition Earn-out Debt-equity swap Merger