1. 1 Ch 11 Outline 1.Introduction 2.Seeking Capital A. From Lenders B. From Angels C. From Venture Capitalists 3.Seeking Partners 4. Seeking Resources

2. 2 11-2 Seeking Capital Various sources of capital are available to the entrepreneur, include lending institutions and equity investors. –Each of these capital sources will expect the new venture to provide a business plan.

3. 3 Bankers’ Concerns Will the loan be profitable (i.e. will they recover their principle and earn interest)? The 5 C’s of credit: 1. Character 2. Capacity 3. Capital 4. Conditions 5. Collateral

4. 4 Commercial Banks Line of Credit—Maximum amount that bank will permit firm to borrow. Revolving Line of Credit—Bank commits to an amount on a revolving basis.

5. 5 Commercial Banks Term Loans—Loans for 5-10 years—Usually to finance equipment. Chattel Mortgage—Loan collateralized by inventory or other moveable property. Real Estate Mortgage—Loan collateralized by Real Estate.

6. 6 11-2b Angel Investors (cont.) –Other documents that the entrepreneur includes with the business plan when attempting to sell stock (equity) to an angel investor include: A subscription agreement A private placement memorandum (PPM) A very brief version of the business plan known as an investor’s executive summary

7. 7 11-2b Angel Investors (cont.) –An entrepreneur who wishes to raise equity through angel financing should consider the following issues in structuring a deal with angels: Type of securities Rights of first refusal Board of director representation Negative covenants

8. 8 11-2c Venture Capital (cont.) –Venture capital funds rarely provide capital to start-up ventures. A drop-off in venture capital funding was evident in the wake of the dot-com crash beginning in early 2000. –Entrepreneurs will find greater success in obtaining venture capital if they can demonstrate a successful track record of sales to the company’s target market. The ability to generate steady revenues is called traction. –Like other industries, the venture fund industry is segmented. Seed funding is money provided to companies that need to determine the feasibility of the business concept. It can be very difficult to find VC funds interested in funding ventures of this type.

9. 9 11-3 Seeking Partners Entrepreneurs may also need a well-developed plan to entice potential alliance partners to participate with them in joint business ventures. –A new venture often lacks market “identity”—its primary market may not recognize its brand. One way to mitigate that problem is for emerging ventures to become associated with well-recognized and respected brands. –Entrepreneurs stand to gain tremendous benefits through alignment with well-known and respected brands. –To prevent potential to underestimate venture’s contribution to the relationship, the new venture’s business plan should include the benefits it will bring to its partners.

10. 10 11-3 Seeking Partners (cont.) Another type of business alignment is associated with the acquisition of customers, referred to as business development. –A software venture may align itself with firms that are already selling software products to organizations. Such firms are often called valued added resellers, or VARs. –Successful entrepreneurs establish such mutually beneficial business alliances not only by promoting the value of their own venture’s products or services but also by negotiating a contract that provides incentives for the VAR. In a third type of business alliance, a growth- oriented firm or one that has reached the mature stage develops deeper relationships with other business ventures.

11. 11 11-3 Seeking Partners (cont.) –To be successful, strategic alliances require their own business plan. When a firm is approached to consider a joint venture undertaking, the firm takes time to study the offer, the venture making the offer, and the management team running it. Process of developing a deeper understanding of the potential joint venture partner is known as due diligence. Firms also exchange financial information to determine each company’s solvency and ability to support the joint venture. A business plan is an essential part of the formation stage of a joint venture.