1. Funding a Start-up Venture
Chapter 16
Funding a Start-up Venture

2. Learning Objectives Develop a resource strategy
Characterize the nature of start-up finance
Explain funding with equity
Discuss how to finance with debt

3. Resource Strategy Categories of necessary resources Human capital
Social capital
Physical capital
Financial capital

4. Resource Strategy Process for constructing a resource base
Identify and specify required resources at various milestones in the company’s growth
Identify potential suppliers of those resources
Assess the entrepreneur’s ability to attract resources
Combine resources to create new, unique resources
Transform individual resources into organizational resources.

5. Start With A Plan The search for money Glamorous firms
Growth results from high rates of innovation
Economic core firms
Growth results from low-innovation
Ambitious firms
Growth results from simple innovations
Constrained firms
Growth results from high rates of innovation and limited resources

6. Figure 16.1: Focus of Informal Capital Compared with That of Venture Capital
Source: Gem 2003 Global Report Venture Capital, Global Entrepreneurship Monitor 2003, accessed September 2004, p.6.

7. Figure 16.2: Where is Informal Capital Invested?
Source: United States Executive report 2003, Global Entrepreneurship Monitor 2003, accessed September 2004, p.33.

8. Consider Growth Stages
Start-up funds are required
Capital required to grow on the basis of a proven concept
Mezzanine financing or bridge financing required to provide the entrepreneur with the funds the company needs to get through an initial public offering

9. Figure 16.3: States of Financing for Ventures

10. Unique Issues of High-Tech Ventures
Early seed funding supports a long period of product development
Often this early-stage money comes from government grants or foundations
Risk is too high for venture capital firms
Marketing dollars needed to create awareness for new adopters

11. Funding Start-Ups Get traction as quickly as possible
Hire as few employees as possible
Lease or share everything
Other people’s money
Bootstrapping Ethics

12. Funding with Equity Friends and family Private investors—angels
Private placement
Strategic alliances
Small business investment companies
Grants
Venture capital institutes and networks

13. Financing With Equity Equity from friends and family
The most expensive long term funding
The entrepreneur is more likely to lose control of the business
Private investors-Angels
Angels are informal risk-capital sources
Funding is between $10k-$500k
Angels are often well educated entrepreneurs who tend to invest within a short distance from home
Angels take an active role in the company

14. Financing With Equity (continued)
Private placement
Private investments obtained by selling securities in a private corporation/partnership
SEC Regulation D covers memorandum details
Advantages
Few prior assets or credit references are needed
No SEC filing needed for entrepreneurs

15. Financing With Equity (continued)
Strategic Alliances
Formal/informal partnerships with other businesses
Small Business Investment Companies-SBIC
Privately managed venture capital firms licensed by the Small Business Administration
Grants
Venture Capital Institutes and Networks

16. Financing with Debt Commercial banks Commercial finance companies
Small Business Administration loan
State-funded venture funding
Incubators
Customers and suppliers

17. Financing with Debt Commercial banks Basis of loans Character Capacity
Capital
Collateral
Condition

18. Financing With Debt (continued)
Commercial finance companies
Less regulated than banks
High finance charges
Factoring
Receivable financing in which the factor takes ownership of a receivable at a discount and then collects against it

19. Financing With Debt (continued)
Small Business Administration loan
Entrepreneur applies for up to $2M loan from his personal bank; BA guarantees that it will repay up to 75% of the loan to the commercial lender should the business default
Micro loans exist for companies to use nonprofit community development corporations rather than banks
SBA

20. Financing With Debt (continued)
State-funded venture capital
Incubators
Customers and suppliers