1. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Bootstrapping and Financing the Closely-held Company Patterns of Entrepreneurship Management 4 th Edition, Chapter 9 Funding the Venture -1 Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

2. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  Focused on early stage funding  Personal, friends and family  Angel financing and early private equity  Factoring and supplier finance Presentation Outline Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

3. Copyright 2013 Jack M. Kaplan & Anthony C. Warren SOURCES OF START-UP FUNDS Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance Note: does not add to 100% as there are overlapping sources.

4. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Ultrafast Milestones and Value Creation Funding Stages Should Match Milestones Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

5. Copyright 2013 Jack M. Kaplan & Anthony C. Warren More Suitable for the Early Stages (Covered in This Chapter) More Suitable for Later Stages (Covered in Chapter 10) Self-FundingSuper-angels Moonlighting and ConsultingInstitutional Venture Capital BootstrappingPrivate Placements Family and Friends/AngelsCorporate Debt Micro-equity, Micro-loansStrategic Partnerships Personally Secured Bank LoansMezzanine Finance Factoring and Supplier FinancingInitial Public Offerings Government Programs Comparison of Early Stage and Later Stage Sources of Finance Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

6. Copyright 2013 Jack M. Kaplan & Anthony C. Warren The Virtual Company The internet enables a new venture to develop without significant overhead costs −Internet video conferencing for meetings −Project management software such as Basecamp −Outsourced HR software −Locating experts who can work as “pay-as-you-go” consultants −No need for offices, etc. etc. Such ventures can be much more efficient in the use of funds and therefore reducing the need for capital If a sale to an existing company is planned then only the ESSENTIAL assets need be created. Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

7. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Personal Funding Investing your own money – “sweat” equity for stock –Offers greatest return, if successful –Investors and venture capital sources usually require it –Your personal funds can be treated as equity or debt Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

8. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Moonlighting Founder still working a regular job Income used to support the entrepreneur during needed cash flow When the venture begins paying as well or better - entrepreneur leaves job Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

9. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Bootstrapping A general term that refers to building value in a company without taking on outside investors or bank loans Usually overlooked as a source of resources by entrepreneurs Effective bootstrapping allows founders to retain more of their ownership Often the ONLY way to grow a company The entrepreneur becomes more efficient and cost conscious which is attractive to investors Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

10. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Protect your Investment – Document EVERY source of money and the terms.  Specify in writing if it is a loan to the company, how the loan is payable, conversion rights or equity.  Specify if the loan is payable in full upon the company receiving venture funding.  Get into the habit of documenting all financial transactions from the start to avoid later problems. Personal Funding Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

11. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  Second mortgage, credit cards, or sell your car OR  Get an investor to use a bank deposit or stock holdings as collateral for a loan Use of Personal Assets Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

12. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Friends And Family The most popular source of funds for startup capital Friends and family are not as worried about quick profits as professional investors Usually they do not investigate the business and are not familiar with all the risks The best advice is to provide the same full disclosure to a friend as you would a professional investor Document the transaction Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

13. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  Well-off individuals with money to invest  Good prospects get funded  Need good contacts found via networking  Seek local Angel Networks. Fees range from $150-$300  Seek Angel Support Networks such a Ycombinator, DreamIt Ventures  List on Angelsoft.com Angels Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

14. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Accredited Investors An accredited investor is defined as having income in excess of $200,000 in each of the two most recent years or joint income of $300,000 OR Individual net worth or joint worth exceeding $1,000,000 Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

15. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  Common Stock - Purest form of equity –No fixed or guaranteed return –Greatest risk and greatest return –Voting stock versus non-voting stock  Preferred Stock –Guaranteed dividends –Rights are prior to common stock rights especially on sale or dissolution Equity Investments Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

16. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Micro-equity and Micro-loans Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance Early stage funding and networking are offered by Micro-Equity Groups such as and These groups provide some financing, incubator support and mentoring to prepare entrepreneurs for later funding. They take a small equity position for this work. Micro-loans, which are well established for developing economies, are just gaining acceptance in the US. A number of lending networks can be found on the internet.

17. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance Factoring and Supplier Financing FACTORS provide credit to companies that are unable to access a conventional bank loan. Factors secure the loan against purchase orders received by the company. Customers pay the factor directly, who deducts high interest and fees sending the remaining amount to the company. SUPPLIERS may delay invoicing or receiving payment from a small company in order to retain the business and help through the early stages.

18. Copyright 2013 Jack M. Kaplan & Anthony C. Warren Programs of the Small Business Administration (SBA)  The Federal Government has a number of loan support programs  The rules change often so check the SBA web-site  Most of the SBA loans are made by lenders( commercial Banks, savings and loans, Insurance companies)  Guaranteed by the SBA  Average loan is $100,000 plus-with a maturity of 10 years Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

19. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  The program allocates in excess of 1 billion annually for scientific innovation  Phase 1-awards up to $150,000 for the purpose of investigating the feasibility of an innovation  Phase 11 –The report is reviewed and if feasible, an award up to $1,000,000  Phase 111- Funding for commercialization must come from private sources  Check the SBIR web-site for proposal requests SBIR Program Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

20. Copyright 2013 Jack M. Kaplan & Anthony C. Warren  Licensed by the SBA - Invest locally and have industry preferences  Limited to companies under $2 million in earnings and less than $6 million in net worth  Have both debt and equity investments  Do not take a majority position in the company  There are also many other federally funded programs authorized by congress from time to time, entrepreneurs should check on these regularly. Small Business Investment Companies etc. Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Micro- Finance Factoring/ Supplier Finance

21. Copyright 2013 Jack M. Kaplan & Anthony C. Warren State programs –Many states target funds for economic development: PA. Ben Franklin Technology Centers make grants up to $450,000 in three installments N.J. New Jersey Economic Development Agency, loans and royalty agreements –Advantages: No repayment unless the project succeeds and minimal equity conversion rights Relatively simple process May be one of only a few sources for early stage –Disadvantages: Pay royalties on sales State Development Programs Chapter 9 Personal Financing Angels Friends & Family Private Equity Government Programs Banks Micro- Finance Factoring/ Supplier Finance