1. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Sources of Financing: Debt and Equity

2. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 2 Raising Capital Raising capital to launch or expand a business is a challenge. Raising capital to launch or expand a business is a challenge. Many entrepreneurs are caught in a “credit crunch.” Many entrepreneurs are caught in a “credit crunch.” Financing needs in the $100,000 to $3 million range may be the most challenging to fill. Financing needs in the $100,000 to $3 million range may be the most challenging to fill. Ch. 13: Sources of Financing: Debt & Equity

3. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 3 The “Secrets” to Successful Financing 1.Choosing the right sources of capital is a decision that will influence a company for a lifetime. 2.The money is out there; the key is knowing where to look. 3.Raising money takes time and effort. 4.Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas. Ch. 13: Sources of Financing: Debt & Equity

4. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 4 The “Secrets” to Successful Financing 5.The Internet puts at entrepreneur’s fingertips vast resources of information that can lead to financing. 6.Be thoroughly prepared before approaching lenders and investors. 7.Entrepreneurs should not underestimate the importance of making sure that the “chemistry” among themselves, their companies, and their funding sources is good. (continued) Ch. 13: Sources of Financing: Debt & Equity

5. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 5 Financing a Business Entrepreneurs must cast a wide net to capture the financing they need to launch their businesses. Entrepreneurs must cast a wide net to capture the financing they need to launch their businesses. Layered financing – piecing together capital from multiple sources. Layered financing – piecing together capital from multiple sources. Ch. 13: Sources of Financing: Debt & Equity

6. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 6 Three Types of Capital 1. Fixed - Used to purchase the permanent or fixed assets of the business (e.g., buildings, land, equipment, and others). 2. Working - Used to support the small company's normal short-term operations (e.g., buy inventory, pay bills, wages, or salaries, and others). 3. Growth - Used to help the small business expand or change its primary direction. Capital is any form of wealth employed to produce more wealth for a firm. Ch. 13: Sources of Financing: Debt & Equity In addition to the text

7. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 7 Equity Capital Represents the personal investment of the owner(s) in the business. Represents the personal investment of the owner(s) in the business. Is called risk capital because investors assume the risk of losing their money if the business fails. Is called risk capital because investors assume the risk of losing their money if the business fails. Does not have to be repaid with interest like a loan does. Does not have to be repaid with interest like a loan does. Means that an entrepreneur must give up some ownership in the company to outside investors. Means that an entrepreneur must give up some ownership in the company to outside investors. Ch. 13: Sources of Financing: Debt & Equity

8. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 8 Debt Capital Must be repaid with interest. Must be repaid with interest. Is carried as a liability on the company’s balance sheet. Is carried as a liability on the company’s balance sheet. Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous. Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous. Can be expensive, especially for small companies, because of the risk/return tradeoff. Can be expensive, especially for small companies, because of the risk/return tradeoff. Ch. 13: Sources of Financing: Debt & Equity

9. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 9 Sources of Equity Financing Personal savings Personal savings Ch. 13: Sources of Financing: Debt & Equity

10. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 10 Personal Savings The first place an entrepreneur should look for money. The first place an entrepreneur should look for money. The most common source of equity capital for starting a business. The most common source of equity capital for starting a business. Outside investors and lenders expect entrepreneurs to put some of their own capital into the business before investing theirs. Outside investors and lenders expect entrepreneurs to put some of their own capital into the business before investing theirs. Ch. 13: Sources of Financing: Debt & Equity

11. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 11 Sources of Financing for Typical Start-Up Businesses Copyright © 2016 Pearson Education, Inc.

12. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 12 Sources of Equity Financing Personal savings Personal savings Friends and family members Friends and family members Ch. 13: Sources of Financing: Debt & Equity (continued)

13. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 13 Friends and Family Members After emptying their own pockets, entrepreneurs should turn to those most likely to invest in the business: friends and family members. After emptying their own pockets, entrepreneurs should turn to those most likely to invest in the business: friends and family members. Be careful! Inherent dangers lurk in family/friendly business deals, especially those that flop. Be careful! Inherent dangers lurk in family/friendly business deals, especially those that flop. Ch. 13: Sources of Financing: Debt & Equity

14. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 14 Friends and Family Members Guidelines for family and friendship financing: Consider the impact of the investment on everyone involved. Consider the impact of the investment on everyone involved. Keep the arrangement “strictly business.” Keep the arrangement “strictly business.” Prepare a business plan. Prepare a business plan. Settle the details up front. Settle the details up front. Never accept more than investors can afford to lose. Never accept more than investors can afford to lose. Create a written contract. Create a written contract. Treat the money as “bridge financing.” Treat the money as “bridge financing.” Develop a payment schedule that suits both parties. Develop a payment schedule that suits both parties. Have an exit plan. Have an exit plan. Ch. 13: Sources of Financing: Debt & Equity

15. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 15 Sources of Equity Financing Personal savings Personal savings Friends and family members Friends and family members Angels Angels Ch. 13: Sources of Financing: Debt & Equity (continued)

16. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 16 Angels Wealthy individuals who invest in emerging entrepreneurial companies in exchange for equity )ownership) stakes. Wealthy individuals who invest in emerging entrepreneurial companies in exchange for equity )ownership) stakes. An excellent source of “patient money” for investors needing relatively small amounts of capital typically ranging from $100,000 (sometimes less) to as much as $5 million. An excellent source of “patient money” for investors needing relatively small amounts of capital typically ranging from $100,000 (sometimes less) to as much as $5 million. Willing to invest in the early stages of a business. Willing to invest in the early stages of a business. Ch. 13: Sources of Financing: Debt & Equity

17. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 17 Angels  Average angel investment = $50,000.  Typical angel invests in 1 company per year, and the average time to close a deal is 67 days.  52% of angels’ investments lose money, but 7% produce a return more than 10 times their original investment.  Angels can be an excellent source of “patient” money. Ch. 13: Sources of Financing: Debt & Equity

18. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 18 Angels The Challenge: Finding Them! Network Network Look nearby: within a 50- to 100-mile radius Look nearby: within a 50- to 100-mile radius 7 out of 10 angels invest in companies that are within 50 miles of their homes or offices. 7 out of 10 angels invest in companies that are within 50 miles of their homes or offices. Informal angel “clusters” and networks Informal angel “clusters” and networks 265 angel groups across the U.S. 265 angel groups across the U.S. Internet Internet Ch. 13: Sources of Financing: Debt & Equity

19. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 19 Sources of Equity Financing Personal savings Personal savings Friends and family members Friends and family members Angels Angels Partners Partners Ch. 13: Sources of Financing: Debt & Equity (continued)

20. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 20 Partners Giving up personal control Giving up personal control Diluting ownership Diluting ownership Sharing profits Sharing profits “For every penny you get in the door, you have to give something up.” “For every penny you get in the door, you have to give something up.” Ch. 13: Sources of Financing: Debt & Equity

21. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 21 Sources of Equity Financing Personal savings Personal savings Friends and family members Friends and family members Angels Angels Partners Partners Venture capital companies Venture capital companies Ch. 13: Sources of Financing: Debt & Equity (continued)

22. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 22 Venture Capital Companies More than 740 venture capital firms operate across the U.S. More than 740 venture capital firms operate across the U.S. Most venture capitalists seek investments in the $3 million to $10 million range Most venture capitalists seek investments in the $3 million to $10 million range Target companies with high-growth and high-profit potential. Target companies with high-growth and high-profit potential. Business plans are subjected to an extremely rigorous review - less than 1% accepted. Business plans are subjected to an extremely rigorous review - less than 1% accepted. Ch. 13: Sources of Financing: Debt & Equity

23. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 23 Ch. 6: Franchising and the Entrepreneur

24. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 24 Venture Capital Companies Most often, venture capitalists invest in a company across several stages. Most often, venture capitalists invest in a company across several stages. On average, 98% of venture capital goes to: On average, 98% of venture capital goes to: Early stage investments (companies in the early stages of development). Early stage investments (companies in the early stages of development). Expansion stage investments (companies in the rapid growth phase). Expansion stage investments (companies in the rapid growth phase). Only 2% of venture capital goes to businesses in the startup or seed phase. Only 2% of venture capital goes to businesses in the startup or seed phase. Ch. 13: Sources of Financing: Debt & Equity (continued)

25. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch. 13: Sources of Financing: Debt & Equity FIGURE 13.4 Angel Investing and Venture Capital Investing Source: Robert Wiltbank and Warren Bocker, Returns to Angel Investors in Groups, Angel Capital Education Foundation, http://www.kauffman.org/Details.aspx?id=1032, and PWC Moneytree Report, Pricewaterhouse Coopers, https://www.pwcmonnneytree.com/MTPublic/nc/indes.jsp. 13 - 25

26. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 26 What Do Venture Capital Companies Look For? Competent management Competent management Competitive edge Competitive edge Growth industry Growth industry Viable exit strategy Viable exit strategy Intangibles factors Intangibles factors Ch. 13: Sources of Financing: Debt & Equity

27. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 27 Sources of Equity Financing Personal savings Personal savings Friends and family members Friends and family members Angels Angels Partners Partners Venture capital companies Venture capital companies Public stock sale – “going public” Public stock sale – “going public” Ch. 13: Sources of Financing: Debt & Equity (continued)

28. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 28 Going Public Initial public offering (IPO) - when a company raises capital by selling shares of its stock to the public for the first time. Initial public offering (IPO) - when a company raises capital by selling shares of its stock to the public for the first time. Since 2000, the average number of companies making IPOs each year is 173. Since 2000, the average number of companies making IPOs each year is 173. Few companies with less than $25 million in annual sales make IPOs. Few companies with less than $25 million in annual sales make IPOs. Ch. 13: Sources of Financing: Debt & Equity

29. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 29 Sources of Debt Capital Commercial banks Commercial banks Lenders of first resort for small businesses Lenders of first resort for small businesses Average micro-business loan = $7,400 Average micro-business loan = $7,400 Average small business loan = $181,000 Average small business loan = $181,000 Study: 12% of entrepreneurs receive bank loans to start their businesses. Study: 12% of entrepreneurs receive bank loans to start their businesses. Ch. 13: Sources of Financing: Debt & Equity

30. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 30 Sources of Debt Capital From Commercial Banks Short-term loans Short-term loans Home Equity Loans Home Equity Loans Commercial Loans Commercial Loans Lines of Credit Lines of Credit Asset Based Asset Based Immediate and Long-Term Loans Immediate and Long-Term Loans Installment Loans Installment Loans Term Loans Term Loans Ch. 13: Sources of Financing: Debt & Equity

31. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 31 Asset-Based Lenders Businesses can borrow money by pledging as collateral otherwise idle assets – accounts receivable, inventory, and others Businesses can borrow money by pledging as collateral otherwise idle assets – accounts receivable, inventory, and others Advance rate – the percentage of an asset’s value that a lender will lend. Advance rate – the percentage of an asset’s value that a lender will lend. Ch. 13: Sources of Financing: Debt & Equity

32. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 32 Asset-Based Borrowing Factoring - Discounting accounts receivable Factoring - Discounting accounts receivable n Floor Planning - Inventory financing Ch. 13: Sources of Financing: Debt & Equity

33. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 33 Other Sources of Debt Capital  Vendor financing (trade credit)  Equipment suppliers  Commercial finance companies  Credit Unions  Stock brokers Ch. 13: Sources of Financing: Debt & Equity

34. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 34 Internal Methods of Financing Leasing – assets rather than buying them Leasing – assets rather than buying them Rental Rental Credit cards Credit cards Ch. 13: Sources of Financing: Debt & Equity

35. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Where Do Small Businesses Get Their Financing? 13 - 35 Ch. 13: Sources of Financing: Debt & Equity

36. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Other Sources When traditional lending is not an option (typical case), then try the following: Boot Strapping Boot Strapping Grants Grants Business Case Competition Business Case Competition Futures Futures Deferring Deferring Crowd Sourcing Crowd Sourcing NOT IN BOOK!!!

37. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Boot Strapping To forgo debt or equity financing to retain 100% ownership as access to funding may be limited and desire to reduce risk. To forgo debt or equity financing to retain 100% ownership as access to funding may be limited and desire to reduce risk. Most ventures in some form start this way! Most ventures in some form start this way! Rules for success: Rules for success: Minimize operational expenses Minimize operational expenses Find low cost assets Find low cost assets Target cost effective marketing Target cost effective marketing Tips Tips Contract or Part time employees Contract or Part time employees Used equipment Used equipment Virtual space Virtual space

38. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Grants CYBF Start-Up Program ($15,000- $45,000) CYBF Start-Up Program ($15,000- $45,000) http://www.cybf.ca/cybf_programs/start-up/ http://www.cybf.ca/cybf_programs/start-up/ http://www.cybf.ca/cybf_programs/start-up/ Canada Business Network Canada Business Network http://www.canadabusiness.ca/eng/program/search/ http://www.canadabusiness.ca/eng/program/search/ http://www.canadabusiness.ca/eng/program/search/ Canada’s immigration program: Self- employed persons Canada’s immigration program: Self- employed persons http://www.cic.gc.ca/english/immigrate/business/self-employed/index.asp http://www.cic.gc.ca/english/immigrate/business/self-employed/index.asp http://www.cic.gc.ca/english/immigrate/business/self-employed/index.asp

39. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Business Case Competition BCIC-New Ventures Competition BCIC-New Ventures Competition http://www.newventuresbc.com/ http://www.newventuresbc.com/ http://www.newventuresbc.com/ National Nicol Entrepreneurship Competition National Nicol Entrepreneurship Competition http://nicol-award.com/ http://nicol-award.com/ http://nicol-award.com/ There’s more – just need to search There’s more – just need to search Listing from UofA Listing from UofA Listing from UofA Listing from UofA

40. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Futures Private Stock for family and friend Private Stock for family and friend Future products & specialty services Future products & specialty services For example, bread credits For example, bread credits

41. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Deferring Do NOT pay upfront Do NOT pay upfront Get terms from your suppliers Get terms from your suppliers 2/10 net 30 2/10 net 30 When all else fails use… Credit Cards When all else fails use… Credit Cards

42. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Crowd Funding New idea in social funding on the Internet New idea in social funding on the Internet Develop a webpage/site to request for funding Develop a webpage/site to request for funding Started by artists as early as 1997 Started by artists as early as 1997 Currently several crowd funding sites: Currently several crowd funding sites: Kickstarter.com Kickstarter.com Legal issues Legal issues

43. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 13 - 43 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Ch. 13: Sources of Financing: Debt & Equity