Chapter 10

Why do firms rarely go to banks for financing for start ups?

Banks are risk averse, and financing start-ups is risky business

What are the three reasons that most entrepreneurial ventures need to raise money during their early life?

cash flow challenges, capital investments, and lengthy product development cycles

What types of firms make most use of SBA guaranteed loans?

existing small businesses more than start-ups

What does an elevator pitch outline?

the merits of a business opportunity

What is sweat equity?

value of the time and effort a founder puts into the firm

For what type of firm are banks most useful as a source of funding?

Small businesses later in their life cycles

How much does the standard angel investor put into a single company?

10K-500K

What amount of minimum growth does a standard angel investor want from a company before acquisition?

30-40% per year

Describe the prototypical business angel?

50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives

What are the most common sources of equity funding?

Angel investors, private placement, venture capital, and initial public offerings

What is a secondary market offering?

Any later public issuance of shares

What are capital investments?

Cost of buying real estate, facilities, and equipment

Name other major sources of funding

Crowdfunding, leasing, SBIR and STTR grant programs

What are the three steps in preparing to Raise Debt or Equity Financing?

Determining precisely how much money is needed, determine the most appropriate type of funding/financing, develop a strategy for engaging potential investors

What are elevator pitches used for?

Engaging potential investors or bankers

What causes cash flow challenges?

Lag between spending to generate revenue and earning income from the firm's operations

What are personal funds?

Financial resources and sweat equity

What is bootstrapping?

Finding ways to avoid the need for external financing through creativity, ingenuity, thriftiness, cost cutting, obtaining grants, or any other means

What is an initial public offering (IPO)?

First sale of stock by a firm to the public after showing a bright future

Why might a firm decide to go public?

First, it is a way to raise equity capital to fund current and future operations. Second, an IPO raises a firm's public profile, making it easier to attract high-quality customers, alliance partners, and employees. Third, an IPO is a liquidity event that provides a mechanism for the company's stockholders, including its investors, to cash out their investments. Finally, by going public, a firm creates another form of currency that can be used to grow the company.

What is debt financing?

Getting a loan. The most common sources of debt financing are commercial banks and Small Business Administration (SBA) guaranteed loans

What are the two major disadvantages of getting a loan?

It must be repaid and lenders often impose strict conditions on loans and insist on ample collateral to fully protect their investment.

What is a venture capital firm?

Limited partnerships of money managers who raise money in "funds" to invest in start-ups and growing firms.

Explain friends and family as a source of financing

Loans, investments, or gifts

What is venture capital?

Money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential

Is the SBA a lender of last resort?

No, business must be viable

Is equity funding a loan?

No, the money that is received is not paid back. Equity investors become partial owners of the firm.

What kind of firms do banks look for?

Ones that will reliably repay loans, not home runs

What are the three sources of personal financing?

Personal funds, friends and family, and bootstrapping

What are lengthy development cycles?

Products under development for years before generating earnings, causing up-front costs

What is SBIR?

Small business innovation research

What is STTR?

Small business technology transfer

What are SBIR and STTR grants meant for?

These programs provide cash grants to entrepreneurs who are working on projects in specific areas