1. Raising Capital: Financing a Business
9/18/2018
Financing a Business

2. Topics Basic Concepts Commercial Bank- Short Term
Commercial Bank- Long Term
Non Bank Financing
Early Stage Financing
Going Public
Other
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Financing a Business

3. Basic Concepts Primary vs. Secondary Market I. Bank vs. C. Bank
Efficient Markets
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Financing a Business

4. Financial Markets Investors Stocks and Bonds Firms Money Bob Sue
securities
Primary Market
money
Secondary Market
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Financing a Business

5. How to Create Value through Financing
Fool Investors
Empirical evidence suggests that it is hard to fool investors consistently.
Reduce Costs or Increase Subsidies
Certain forms of financing have tax advantages or carry other subsidies. Some ways of raising capital are cheaper than others.
Create a New Security
Sometimes a firm can find a previously-unsatisfied clientele and issue new securities at favorable prices.
In the long-run, this value creation is relatively small, however.
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Financing a Business

6. Commercial Bank – Short Term
Short term loans
Compensation
Collateral and protection
Letter of credit (LC)
Reverse repurchase agreement (REPO)
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Financing a Business

7. Commercial Bank – Short Term Loans
Single payment loans
Installment loans
Discount loans
Credit lines or bank facility
Repayment on demand
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Financing a Business

8. Commercial Bank – Compensation
Commitment fee (1/2 %)
Compensating balances (10% in checking)
Interest rate
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Financing a Business

9. Commercial Bank – Collateral and Protection
Unsecured
Collateralized (financial strength with escape)
Asset-based loans (value of the assets)
Key executive insurance (payable to bank)
Personal guarantees
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Financing a Business

10. Commercial Bank – Letter of Credit (LC)
Guarantee by bank
Importing and exporting
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Financing a Business

11. Commercial Bank – Reverse Repurchase Agreement (REPO)
Sell T-Bill for $998
Agree to buy back the T-Bill for $1000 in 10 days
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Financing a Business

12. Commercial Bank – Longer Term Loans
Periodic repayment or interest w/ balloon
Collateral (fixed assets)
Lease financing
Mortgage financing
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Financing a Business

13. 4. Non-Bank Short-Term Financing
Account payable (implicit cost)
Commercial finance companies (risky asset backed, factoring, leases)
Factoring (credit cards)
Commercial paper (rated, 3-months, unsecured IOU from prestigious firm, $25,000 minimum)
Direct or finance paper (GE Capital Corporation or GMAC)
Indirect or dealer paper (through I. bank)
Small business administration
Guarantees to repay up to 90% of loan
Paper work! But new micro loans
Grants (i.e. Small Business Innovation Development Act)
All federal agencies with R&D budgets must spend some on small tech business
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Financing a Business

14. Stages of Financing Seed-Money Stage: Start-Up First-Round Financing
Small amount of money to prove a concept or develop a product.
Start-Up
Funds are likely to pay for marketing and product refinement.
First-Round Financing
Additional money to begin sales and manufacturing.
Second-Round Financing
Funds earmarked for working capital for a firm that is currently selling its product but still losing money.
Third-Round Financing
Financing for a firm that is at least breaking even and contemplating expansion; a.k.a. mezzanine financing.
Fourth-Round Financing
Financing for a firm that is likely to go public within 6 months; a.k.a. bridge financing.
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Financing a Business

15. 5. Early Stage Financing Bootstrapping Early equity 9/18/2018
Financing a Business

16. Bootstrapping (few resources)
Entrepreneur resources (Gates and Allen in a cheap apartment)
Few employees (subcontract, temps,…)
Lease, share, or barter
OPM (i.e. suppliers)
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Financing a Business

17. Early Equity
Personal resources(savings, cards, parents, friends and family)
Private investors
Angels
Private placement
Venture capital
Strategic alliances
Small Business Investment Company (SBIC)
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Financing a Business

18. Angels $20 – 750K Referral Former entrepreneurs, wealthy individuals
Faster than VC’s
Demand less control than VC’s
Invest smaller amounts than VC’s
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Financing a Business

19. Private Placement
SEC Regulation A (under $1.5 mill. New, no audit, less reporting)
SEC Regulation D
Rule 504 ($1 mill./yr. To any number, sophisticated or not)
Rule 505 ($5 mill./yr. To 35 accredited investors)
Rule 506 (unlimited amount to accredited and relations, but no general solicitation)
Small Corporate Offering Registration, Form SCOR U-7 (question and answer)
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Financing a Business

20. Venture Capital
The limited partnership is the dominant form of intermediation in this market.
There are four types of suppliers of venture capital:
Old-line wealthy families.
Private partnerships and corporations.
Large industrial or financial corporations have established venture-capital subsidiaries.
Individuals, typically with incomes in excess of $100,000 and net worth over $1,000,000. Often these “angels” have substantial business experience and are able to tolerate high risks.
Demand convertible preferred stock
Demand control
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Financing a Business

21. Strategic Alliances
Companies invest in other companies for strategic reasons (i.e., leverage technology).
Fast deals, good valuations
What if your product allows Adobe to increase the price of its products by $5?
What if your product allows Sprint’s fiber optic cables to carry 10% more volume?
Offer validation, introductions, promotions…
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Financing a Business

22. Small Business Investment Company (SBIC)
VC investment companies licensed by the SBA.
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Financing a Business

23. 6. Going Public (IPO vs. SEO)
Approval from board
Pick investment bank and pre-underwriting conference
Prepare and file registration statement with SEC
20-day waiting period, letter of comment, 20 more days
Road show, built a book, preliminary prospectus or red herring, syndicate registrar and transfer agent (but no selling)
Pricing (file amendment), final prospectus, purchase, tombstone
Resale
After market, stabilization, and lockup
Green shoe provision or over allotment option
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Financing a Business

24. Pick Investment Bank and Pre-Underwriting Conference
Debt, equity, or hybrid
Competitive bid or negotiated offer
Public or private
Firm commitment or best efforts
Cash offer or rights offer
Shelf registration, SEC Rule 415
Exchange (NYSE, AMSE, Nasdaq)
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Financing a Business

25. Issuing New Securities
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Financing a Business

26. Allocation of Underwriting Spread
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Financing a Business

27. Public vs Private Placement of Bonds
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Financing a Business

28. Costs
Spread (7%)
Other direct expenses (filing fees, legal fees, printing, mailing, registrar and transfer agent)
Indirect expenses (management time, accountants time)
Abnormal returns (seasoned issue price drop of around 3%)
Underpricing (why are so many content to sell assets for 85% of value?)
Green shoe option
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Financing a Business

29. The Costs of Public Offerings
Proceeds Direct Costs Underpricing
(in millions) SEOs IPOs IPOs
% 16.96% 16.36%
% 11.63% 9.65%
% 9.70% 12.48%
% 8.72% 13.65%
% 8.20% 11.31%
% 7.91% 8.91%
% 7.06% 7.16%
% 6.53% 5.70%
500 and up 3.15% 5.72% 7.53%
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Financing a Business

30. An Example of a Tombstone Advertisement
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Financing a Business

31. Average First-Day Returns by Month for SEC-Registered IPOs: 1960-2005
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Financing a Business

32. 7. Other ADR and GDR Euromarket Swaps Convertibles Warrants Junk Bond
Securitization
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Financing a Business