W212 Ch. 8

Evaluation Stages (4)

1) Initial screening 2) Evaluation of the business plan 3) Oral presentation 4) Final evaluation

Debt financing

Borrowing money for short- or long-term periods for working capital or for purchasing property and equipment The most common source of debt financing are commercial banks Usually done out of necessity

Crowdfunding AND (4) Potential Risks

-21st century phenomenon, commercial lenders are not always willing to make loans to unproven enterprises, leaving entrepreneurs desperate for funding to seek new loan options POTENTIAL RISKS: 1) Reputation: Promising something and not being able to meet expectations is a risk 2) IP Protection: Publicizing your idea could lead to someone stealing your IP 3) Donor Dilution: If you are repeatedly reaching out to the same network you could eventually run out of people who are willing to support 4) Public fear: Potential that you are scamming

Finance companies

Asset-based lenders that lend money against assets such as receivables, inventory, and equipment

Equity Financing (4 types)

1) Loan with warrants: provides the investor with the right to buy stock at a fixed price at some future date. Terms on the warrants are negotiable. 2) Convertible debentures: unsecured loans that can be converted into stock. The conversion price, the interest rate, and the provisions of the loan agreement are all areas for negotiation. 3) Preferred Stock: Equity that gives investors a preferred place among the creditors in the event the venture is dissolved. Some preferred stock issues are convertible to common stock, a feature that can make them even more attractive. 4) Common Stock: This stock usually carries the right to vote for the board of directors. If a new venture does well, common-stock investors often make a large return on their investment. These stock issues often are sold through public or private offerings.

Venture capital myths (5)

1) Venture capital firms want to own control of your company and tell you how to run the business 2) Venture capitalists are satisfied with a reasonable return on investments 3) Venture capitalists are quick to invest 4) Venture capitalists are interested in backing new ideas or high-technology inventions-management is a secondary consideration 5) Venture capitalists need only basic summary information before they make an investment

Things VCs consider when investing

1. Timing of entry 2. Key success factor stability 3. Educational capability 4. Lead time 5. Competitive rivalry 6. Entry wedge imitation 7. Scope 8. Industry-related competence OR 1. Entrepreneur's personality 2. Entrepreneur's experience 3. Product or service characteristics 4. Market characteristics 5. Financial considerations 6. Nature of the venture team

Accredited Purchaser

A category used in Regulation D that includes institutional investors; any person who buys at least $150,000 of the offered security and net worth is $1mil+; a person whose individual income was $200,000+ in each of the last two years; directors, partners, or executive officers selling securities; and certain tax-exempt organizations with more than $500,000 in assets Included in this category are institutional investors such as banks, insurance companies, venture capital firms, registered investment companies, and small-business investment companies (SBICs), wealthy individuals, and certain tax-exempt organizations with more than $5 million in assets. Everyone not covered in these descriptions is regarded as a nonaccredited purchaser.

Initial Public Offering (IPO)

A corporation's raising of capital through the sale of securities on the public markets BENEFITS: Size of capital amount, liquidity, value of shares, image HARMS: Costs, disclosure, requirements, shareholder pressure

Private Placements

A method of raising capital through securities; often used by small ventures The SEC provides Regulation D, which allows smaller firms to sell stock through what is referred to as direct public offerings (DPOs). It eases the regulations for the reports and statements required for selling stock to private parties—friends, employees, customers, relatives, and local professionals.

Peer-to-peer lending

Commonly abbreviated as P2PL is the practice of lending money to unrelated individuals, or "peers", without going through a bank or other traditional financial institution. Also known as "debt-based crowdfunding" this lending takes place online on peer-to-peer lending companies' websites using various different lending platforms Lending Club, a well-known social-lending company, has the largest loan volume among social-lending sites in the United States, matching borrowers and lenders based on loan size, risk tolerance, and social familiarity (e.g., coworkers, fellow alumni, hometown residents, etc.).

Trade credit

Credit given by a supplier who sells goods on account. A common arrangement calls for the bill to be settled within 30-90 days Many small, new businesses obtain this credit when no other form of financing is available to them. Suppliers typically offer this credit as a way to attract new customers.

Debt vs equity financing

Debt: involves a payback of the funds plus a fee (interest) for the use of the money Equity: involves the sale of some of the ownership in the venture Debt places a burden on the entrepreneur of loan repayment with interest, whereas equity financing forces the entrepreneur to relinquish some degree of control.

Direct public offerings (DPO)

Eases the regulations for the reports and statements required for selling stock to private parties - friends, employees, customers, relatives, local professionals

Angel capital

Investments in new ventures that come from wealthy individuals referred to as "business angels"

Venture Capitalists

Professional investors who invest in business ventures, providing capital for start-up, early stage, or expansion Looking for a higher rate of return than would be given by more traditional investment

Regulation D

Regulation and exemption for reports and statements required for selling stock to private parties based on the amount of money being raised

Accounts receivable financing

Short-term financing that involves either the pledge of receivables as collateral for a loan or the outright sale of receivables Usually done by commercial banks

Factoring

The process of selling accounts receivable for cash Is done primarily by commercial finance companies.

"Sophisticated" investors

Wealthy individuals who invest more or less regularly in new and early-and late stage ventures. They are knowledgeable about the technical and commercial opportunities and risks of the businesses in which they invest

Informal risk capitalists

Wealthy people in the USA are looking for investment opportunities; they are referred to as business angels or informal risk capitalists

Business angels

Wealthy people in the USA looking for investment opportunities