Entrepreneurship Barringer & Ireland Chap. 10

What are the three most common sources of equity funding?

(1) Business angels, (2) venture capital and (3) initial public offering.

What is a distinct difference between angel investors and venture capital firms?

A distinct difference between angel investors and venture capital firms is that angels tend to invest earlier in the life of a company, whereas venture capitalists come in later. The majority of venture capital money goes to follow-on funding for businesses that were originally funded by angel investor, government programs, or by some other means.

Promissory note

A promissory note details the terms of a loan agreement.

Corporate venture capital

Along with traditional venture capital, there is also corporate venture capital. This type of capital is similar to traditional venture capital except that the money comes from corporations that invest in start-ups related to their areas of interest.

What are the most common sources of equity funding?

Angel investors, private placement, venture capital, and initial public offerings are the most common sources of equity funding

Secondary market offering

Another source of equity funding is to sell stock to the public by staging an initial public offering (IPO). An IPO is the first sale of stock by a firm to the public. Any later public issuance of shares is referred to as a secondary market offering.

Single-purpose loan

There are two common types of loans. One of them is a single-purpose loan, in which a specific amount of money is borrowed that must be repaid in a fixed amount of time with interest.

What are the advantages of obtaining loans as opposed to equity funding?

There are two major advantages to obtaining a loan as opposed to equity funding. The first is that none of the ownership of the firm is surrendered - a major advantage for most entrepreneurs. The second is that interest payments on a loan are tax deductible, in contrast to dividend payments made to investors, which are not.

Lease

A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

Describe the importance of financing for entrepreneurial success

Commonly, entrepreneurs discover that trying to operate their business without borrowed funds or invested capital is difficult. Because of this, entrepreneurs need to understand the different approaches available to them to gain access to the amount of capital needed to successfully support their ventures in the pursuit of organizational success.

SBA Guaranteed Loan Program

The SBA Guaranteed loan program enables banks to loan money to qualified entrepreneurs to start or grow their business.

What kind of contribution comes from family and friends?

The family and friends type of contribution often comes in the form of loans or investments, but can also involve gifts, foregone or delayed compensation (if the friend or family work for the new venture), or reduced or free rent.

Line of credit

There are two common types of loans. One of them is a line of credit, in which a borrowing "cap" is established and borrowers can use the credit at their discretion. Line of credit require periodic interest payments.

Liquidity event

A liquidity event, is an occurrence that converts some or all of a company's stock into cash. The three most common liquidity event for a new venture are when it goes public, finds a buyer, or merges with another company.

Crowdfunding

A popular creative source of funding for new businesses is crowdfunding. Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people, typically via the internet. There are two types of crowdfunding sites: rewards-based crowdfunding and equity-based crowdfunding.

Private placement

A variation of the IPO is a private placement, which is the direct sale of an issue of securities to a large institutional investor. When a private placement is initiated, there is no public offering, and no prospectus is prepared.

Factoring

Although not really debt financing, factoring is another way that a business generate cash. Factoring is a financial transaction whereby a business sells its account receivable to a third party, called a factor, at a discount in exchange for cash.

Sarbanes-Oxley Act

Although there are many advantages to going public, it is a complicated and expensive process and subject firms to substantial costs related to SEC reporting requirements. Many of the most costly requirements were initiated by the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act is a federal law that was passed in response to corporate accounting scandals involving prominent corporations. This wide-raging act established a number of new or enhanced reporting standards for public corporations. As with all legislation, potential future changes to this law would alter its impact on firms including entrepreneurial ventures.

Accredited investor

An accredited investor is a person who is permitted to invest in higher-risk investments such as businesses start-ups. In the US, a person must have a net worth of at least 1 million dollars (not including the value of their house) or have an income of at least 200.000 dollars each year for the past two years (or 300.000 dollars together with their suppose if married) and have the expectation to make the same amount in the current year.

Elevator speech (or pitch)

An elevator speech (or pitch) is a brief, carefully constructed statement that outlive the merits of a business opportunity. Most elevator speeches are 45 seconds to 2 minutes long. Guidelines for preparing an elevator speech: Step 1) describe the opportunity 20 seconds Step 2) describe how your product or service meets the opportunity or solves the problem 20 seconds Step 3) describe your qualifications 10 seconds Step 4) describe your market 10 seconds

Due diligence

An important part of obtaining venture capital funding is going through the due diligence process, which refers to the process of investigating the merits of a potential venture and verifying the key claims made in the business plan. Firms that prove to be suitable for venture capital funding should conduct their own due diligence of the venture capitalists with whom they are working to ensure that they are a good fit. An entrepreneur should ask following questions and scrutinize the answers to them before accepting funding from a venture capital: - Do the venture capitalists have experience in our industry? - Do they take a highly active or passive management role? - Are the personalities on both sides of the table compatible? - Does the firm have deep enough pockets or sufficient contacts within the venture capital industry to provide follow-on rounds of financing? - Is the firm negotiating in good faith in regard to the percentage of our firm they want in exchange for their investment?

Investment bank

An investment bank is an insitution that acts as an underwriter or agent for a firm issuing securities. The investment bank accts as the firm's advocate and adviser and walks it through the process of going public. The most important issues the firm and its investment bank must agree on are the amount of capital needed by the firm, the type of stock to be issued, the price of the stock when I goes public, and the cost to the firm to issue the securities.

Final prospectus

An investment bank must satisfy a number of stipulations to assure the Securities and Exchangement Commission (SEC) that the offer is legitimate. During the time the SEC is investigating the potential offering, the investment bank issues a preliminary prospectus that describes the offering to the general public. The preliminary prospectus is also called the "red herring". After SEC has approved the offering, the investment bank issues the final prospectus which sets a date and issuing price for the offering.

Preliminary prospectus

An investment bank must satisfy a number of stipulations to assure the Securities and Exchangement Commission (SEC) that the offer is legitimate. During the time the SEC is investigating the potential offering, the investment bank issues a preliminary prospectus that describes the offering to the general public. The preliminary prospectus is also called the "red herring". After SEC has approved the offering, the investment bank issues the final prospectus which sets a date and issuing price for the offering.

Initial public offering (IPO)

Another source of equity funding is to sell stock to the public by staging an initial public offering (IPO). An IPO is the first sale of stock by a firm to the public.

Describe the purpose of an initial public offering (IPO). Why is an initial public offering considered to be an important milestone for an entrepreneurial firm?

Another source of equity funding is to sell stock to the public by staging an initial public offering (IPO). An IPO is the first sale of stock by a firm to the public. Any later public issuance of shares is referred to as a secondary market offering. When a company goes public, its stock is typically traded on one of the major stock exchanges. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future. Firms divide to go public for several reasons: (1) it is a way to raise equity capital to fund current and future operations. (2) An IPO raises a firm's public profile, making it easier to attract high-quality customers, alliance partners, and employees (3) an IPO is a liquidity event that provides a machanism for the company's stakeholders, including investors, to cash out their investments. (4) By going public, a firm creates another form of currency that can be used to grow the company. Although there are many advantages to going public, it is a complicated and expensive process - firms will here hire an investment bank for help.

Debt financing

Debt financing is getting a loan. In general, bank lend money, that must be repaid with interest. Bank are not investors. The most common sources of debt financing are commercial banks and Small Business Administration (SBA) guaranteed loans. As a result, bankers are interested in minimizing risk, properly collateralizing loans, and repayment, as opposed to return on investment and capital gains. The ideal candidate for at bank loan is a firm with a strong cash flow, low leverage, audited financial statements, good management, and a healthy balance sheet. A careful review of these criteria demonstrates why it is difficult for start-up to receive bank loans.

What sources of personal financing are available to entrepreneurs?

Personal funds, friends and family, and bootstrapping.

Rewards-based crowdfunding

Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward, such as being one of the first 100 people to obtain the company's products.

STTR Program

The STTR Program is a variation of the SBIR for collaborative research projects that involve small businesses and research organizations, such as universities or federal laboratories.

Describe the most common sources of debt financing

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

Venture-leasing firms

Venture-leasing firms act as brokers, bringing the parties involved in a lease together. These firms are acquainted with the producers of specialized equipment and match these producers with new ventures that are in need of the equipment. One of the responsibilities of these firms is conducting due diligence to make sure that the new venture involved will be able to make timely payments on their leases.

Explain high-net-worth

High-net-worth individual (HNWI) is a term used by some segments of the financial service industry to designate persons whose investible assets (such as stocks and bonds) exceed a given amount.

Why do start-up firms need capital investment? Can they sustain themselves without it?

Firms often need to raise money early on to fund capital investments. Although it may be possible for the venture's founders to fund its initial activities, it becomes increasingly difficult for them to do so when it comes to buying property, constructing buildings, purchasing equipment, or investing in other capital projects. Many entrepreneurial ventures are able to delay or avoid these types of expenditures by leasing space or co-opting the resources of alliance partners. However, at some point in its growth cycle, the firm's needs may become specialized enough that it makes sense to purchase capital assets rather than rent or lease them.

What should an entrepreneur do before approaching a potential investor for funding?

- Prepare a elevator speech (or pitch) - Identify the best prospects - prepare a completed business plan and make a presentation of the plan

Explain the steps in initiating a public offering for a firm.

1 step) hire an investment bank

Why is it so important to get a personal introduction before approaching a potential investor or banker?

A cardinal rule for approaching a banker or an investor is to get a personal introduction. Bankers and investors receive many business plans, and most of them end up in what often becomes an unread stack of paper in a corner in their offices. To have your business plan noticed, find someone who knows the banker or investor and ask for an introduction.

List cash flow challenges

As a firm grows, it requires an increasing amount of cash to operate as the foundation for serving its customers. The lag between spending to generate revenue and earning income from the firm's operations creates cash flows challenges. Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales.

Bootstrapping

Bootstrapping is a source of seed money for new ventures. Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary. It is the term attached to the general philosophy of minimizing start-up expenses by aggressively pursuing cost-cutting techniques and money-saving tactics. Examples: Buy used instead of new equipment; coordinate purchases with other businesses; lease equipment instead of buying; Obtain payments in advance from customers; minimize personal expenses; avoid unnecessary expenses, such as lavish office space or furniture; Buy items cheaply, but prudently; share office space or employees with other businesses; hire interns.

Business angel

Business angels are individuals who invest their personal capital directly in start-ups. The prototypical business angel, who invests in entrepreneurial start-ups, is about 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. These investors generally invest between 10.000 and 500.000 dollars in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public.

Follow-on funding

Firms that qualify for investment by venture capitalists, typically obtain their money in stages that correspond to their own stage of development. Once a venture capitalist makes an investment in a firm, subsequent investments are made in round (or stages) and are referred to as follow-on funding. Table 10.4 p 384 shows the various stages in the venture capital process, from the seed stage to buyout financing.

Explain the three most important sources of equity funding that are available to the entrepreneurial firm

Business angels, venture capital, and an initial public offering 8IPO) are the three most important sources of equity funding available to entrepreneurs. Business angels are individuals who invest their personal capital directly in start-ups. These investors tend to be high-net-worth individuals who generally invest between 10.000 dollars and 500.000 dollars in a single company. Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. Typically, venture capitalists invest at least 1 million dollars in a single company. An initial public offering (IPO) is an important milestone for a firm for four reasons: it is a way to raise equity capital, it raises a firm's public profile, it is a liquidity event, and it creates another form of currency (company stock) that can be used to grow the company.

What does debt financing involve?

Debt financing involves getting a loan or selling corporate bonds. There are two common types of loans. The first is single-purpose loan, in which a specific amount of money I borrowed that must be repaid in a fixed amount of time with interest. The second one is a line of credit, in which a borrowing "cap" is established, and borrowers can use the credit at their discretion. Lines of credit require periodic interests paid.

Burn rate

If a firm operates in the red, its negative real-time cash flow, usually computed monthly, is called its burn rate. A company's burn rate is the rate at which it is spending its capital until it reaches profitability.

Round

Once a venture capitalist makes an investment in a firm, subsequent investments are made in rounds (or stages).

Identify and describe the three sources of personal financing available to entrepreneurs

Personal funds, friends and family, and bootstrapping are the three sources of personal financing available to entrepreneurs. It is very common for entrepreneurs to use their own funds to invest in their ventures while simultaneously providing their "sweat equity" (or hard work) to keep the firm going. Entrepreneurs also receive support through funds provided by members of their family and their friends. These investments come I various forms, including loans and gifts. When bootstrapping, entrepreneurs find ways to avoid the need for external funding. Exercising their creativity and ingenuity and finding ways to reduce their firm's costs are examples of what entrepreneurs do to reduce the need for support form external funding sources. Indeed, entrepreneurs are often very creative finding ways to bootstrap to raise money or cut costs. Additional examples of bootstrapping include minimizing personal expenses and putting all profits back into the business, establishing partnerships and sharing expenses with partners, and sharing office space and/or employees with other businesses.

Sweat equity

Sweat equity represents the value of the time and effort that a founder puts into a new venture. Because many founders do not have a substantial amount of cash to put into their ventures, it is often the sweat equity that makes the most difference.

What is a Small Business Innovation Research (SBIR) grant? Why would a firm want to apply for such a grant if it qualifies for it?

The Small Business Innovation Research (SBIR) is an important source of early-stage funding for technology firms. This program as offered by the United States government, provide cash grants to entrepreneurs who are working on projects in specific areas. The SBIR program is a competitive grant program that provides over 2,5 billion dollars per year to small businesses for early-stage and development projects The payoff for successful proposals is high. The money is essentially free. It is a grant, meaning that it doesn't have to be paid back and no equity in the firm is at stake. The recipient of the grant also retains the rights to the intellectual property developed while working with the support provided by the grant. The real payoff is in phase 3, if the new venture can commercialize the research results.

SBIR Program

The Small Business Innovation Research (SBIR) is an important source of early-stage funding for technology firms. This program as offered by the United States government, provide cash grants to entrepreneurs who are working on projects in specific areas. The SBIR program is a competitive grant program that provides over 2,5 billion dollars per year to small businesses for early-stage and development projects.

Describe the nature of business angel funding. What types of people typically become business angels, and what is the unique role that business angels play in the process of funding entrepreneurial firms?

Business angels are individuals who invest their personal capital directly in start-ups. The prototypical business angel, who invests in entrepreneurial start-ups, is about 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. These investors generally invest between 10.000 and 500.000 dollars in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public. The number of angel investors has increased dramatically over the past decade. The rapid increase is due in part to the high returns that some angels report. According to the Center for Venture Research, the yield rate for angel investments in 2015 was 18 percent. This means that in 2015, an entrepreneur seeking an angel capital had a roughly 1 in 5 chance of getting an investment. Business angels are valuable because of their willingness to make relatively small investments. This gives access to equity funding to a start-up that needs just 75.000 dollars rather than the 1-million-dollars minimum investment that most venture capitalists require. Many angels are also motived by more than financial returns; they enjoy the process of mentoring a new firm. Angel investors can add tremendous value to companies through access to capital along with their expertise, networks, and guidance.

Briefly describe the SBA's 7(A) Loan Guaranty Program.

Commercial banks, savings and loans, credit unions, and other specialized lenders are eligible to participate in the SBA Guaranteed Loan Program. The most notable SBA Program available to small businesses is the 7(A) Loan Guaranty Program. This program accounts for 90 percent of the SBA's loan activity. The program operates through private-sector lenders who provide loans that are guaranteed by the SBA. The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. Although SBA guaranteed loans are utilized more heavily by existing small businesses than start-ups, they should not be dismissed as a possible source of funding.

What is the difference between equity funding and debt financing?

Equity financing (or funding) means exchanging partial ownership of a firm, usually in the form of stock, in return for funding. Equity funding is not a loan - the money that is received is not paid back. Instead, equity investor become partial owners of the firm. Most equity investors expect to get their money back, along with a substantial capital gain, through the sale of their stock. Because of the risks involved, equity investors are very demanding and fund only a small percentage of the business plan they consider. An equity investor considers a firm that has a unique business opportunity, high growth potential, a clearly defined niche market, and proven management to be an ideal candidate. Debt financing is getting a loan. In general, bank lend money, that must be repaid with interest. Bank are not investors. As a result, bankers are interested in minimizing risk, properly collateralizing loans, and repayment, as opposed to return on investment and capital gains. The ideal candidate for at bank loan is a firm with a strong cash flow, low leverage, audited financial statements, good management, and a healthy balance sheet. A careful review of these criteria demonstrates why it is difficult for start-up to receive bank loans.

Equity-based crowdfunding

Equity-based crowdfunding helps businesses raise money by tapping individuals and professional investors who provide funding in exchange for equity in the business. When it was first introduced, it was limited to accredited investors, but a revision of the JOBS Act was approved, which opened equity crowdfunding to individuals regardless of net worth or income.

Explain why most entrepreneurial ventures need to raise money during their early life

For three reasons - cash flow challenges, capital investment needs, and the reality of lengthy product development cycles - most new firms need to raise money at some point during the early part of their life. Firm growth can generate cash flow problems, typically because of the lag between the need to spend capital to generate additional revenue and the time required to earn positive returns from those investments. Founders of entrepreneurial ventures may be able to fund their firm's initial capital investment needs. But, larger investments are required to support firm growth that is the foundation for long-term success. In some instances, the time required for a product to be introduced can be lengthy. When this happens, additional investments are necessary to keep a firm going during what may be a lengthy products development cycle.

What is meant by the term burn rate? What are the consequences of experiencing a negative burn rate for a relatively long period of time?

If a firm operates in the red, its negative real-time cash flow, usually computed monthly, is called its burn rate. A company's burn rate is the rate at which it is spending its capital until it reaches profitability. A firm usually fails if it burns through all of its capital before it becomes profitable. This is why inadequate financial resources is a primary reason new firms fail. A firm can simply run out of money even it if has good products and satisfied customers.

Road show

In addition to getting the offering approved, the investment bank is responsible for drumming up support for the offering. As a part of this process, the investment bank typically takes the top management team of the firm wanting to go public on a road show, which is a whirlwind tour that consist of meeting in key cities, where the firm presents its business plan to groups of investors. A SEC regulation require that road shows presentations are taped and made available to the public. Road shows presentations can be viewed online. If enough interest in a potential public offering is created, the offering will take place on the date scheduled in the prospectus. If there isn't, the offering will be delayed of canceled. Timing and luck play a role in whether a public offering is successful.

Lengthy product development cycles

In some industries, firms need to raise money to pay the up-front costs of lengthy product development cycles. Ex. Th drug industry. The path from the research lab to the patient takes an average of 10 years. To meet those challenges, many entrepreneurs like to partner with others to launch their ventures.

Describe several creative sources of financing entrepreneurial firms may choose to use

Leasing and SBIR and ATTR grant programs, along with other types of grant programs, are examples of creative opportunities entrepreneurs can pursue to obtain financial resources. A lease is s written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment. The SBIR and STTR grant programs are important sources of early-stage funding for technology-based ventures.

Describe the three steps involved in properly preparing to raise debt or equity financing

Once a start-up's financial needs exceed what personal funds, friends and family, and bootstrapping, debt and equity are the two most common sources of funds. The steps involved in properly preparing to raise debt or equity financing: Step (1) determine precisely how much money the company needs: important for at least two reasons: First, a company doesn't want to get caught short, et it doesn't want to pay for capital it doesn't need. Second, entrepreneurs talking to a potential lender or investor make a poor impression when they appear uncertain about the amount of money required to support their venture. Step (2) Determine the most appropriate type of financing or funding: Step (3) Develop a strategy for engaging potential investors or bankers

What is the difference between rewards-based crowdfunding and equity-based crowdfunding?

Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward, such as being one of the first 100 people to obtain the company's products. Equity-based crowdfunding helps businesses raise money by tapping individuals and professional investors who provide funding in exchange for equity in the business. When it was first introduced, it was limited to accredited investors, but a revision of the JOBS Act was approved, which opened equity crowdfunding to individuals regardless of net worth or income.

What is the purpose of the investment bank in the initial public offering process?

The first step in initiating a public offering is for a firm to hire an investment bank. This because an investment bank is an institution that acts as an underwriter or agent for a firm issuing securities. The investment bank acts as the firm's advocate and advisor and walks it through the process of going public.

Limited partners

The investors who invest in venture capital funds are called limited partners.

7(A) Loan guaranty program

The sources of debt available to entrepreneurs include commercial banks, SBA guaranteed loans, and other sources such as vendor credit, factoring, peer-to-peer lending, and crowdfunding. Historically, commercial banks have been reluctant to loan funds to entrepreneurial ventures, largely because they are risk averse and because lending to smaller firms is less profitable for them compared to lending to large, established organizations. The main SBA Program available to small businesses is the 7(A) Loan Guaranty Program. This program operates through private-sector lenders providing loans that are guaranteed by the SBA. The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. A relatively new source of funding is provided when entrepreneurs raise money through crowdfunding by generating contributions from a large number of individuals. Commonly, the internet is used to generate funds in this manner.

Describe common sources of debt financing entrepreneurial firms use

The sources of debt available to entrepreneurs include commercial banks, SBA guaranteed loans, and other sources such as vendor credit, factoring, peer-to-peer lending, and crowdfunding. Historically, commercial banks have been reluctant to loan funds to entrepreneurial ventures, largely because they are risk averse and because lending to smaller firms is less profitable for them compared to lending to large, established organizations. The main SBA Program available to small businesses is the 7(A) Loan Guaranty Program. This program operates through private-sector lenders providing loans that are guaranteed by the SBA. The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. A relatively new source of funding is provided when entrepreneurs raise money through crowdfunding by generating contributions from a large number of individuals. Commonly, the internet is used to generate funds in this manner.

Identify and explain the three steps involved in properly preparing to raise debt or equity financing

The three steps involved in properly preparing to raise debt or equity financing are: Determine precisely how much money is needed, determine the type of financing or funding that is most appropriate, and develop a strategy for engaging potential investors or bankers. Cash flows statements are helpful to efforts to determine the amount of capital a firm requires at a point in time. When deciding how to finance their venture, entrepreneurs commonly choose between equity financing (in which partial ownership of the firm is exchanged for financial support) and debt financing (in which the entrepreneurs gain access to capital by taking out a loan. Entrepreneurs then develop an elevator pitch (which is a brief, carefully constructed statement outlining a business opportunity's merits), identify the best prospect to contact to seek financing, and prepare themselves to present a potential investor with an effectively developed business plan.

General partners

The venture capitalists, who manage the fund, are called general partners. The venture capitalists who manage the fund receive an annual management fee in addition to 20 to 25 percent of the profits earned by the fund. The percentage of the profits the venture capitalists receive is called the carry.

What does the vitality of the IPO market hinges largely on? And what should an entrepreneurial venture guard itself against, when going public?

The vitality of the IPO market hinges largely on the state of the overall economy and the mood of professional investors. However, even when facing a strong economy and a positive mood towards investing an entrepreneurial venture should guard itself against becoming caught up in the euphoria and rushing its IPO.

Yield rate

The yield rate is defined as the percentage of investment opportunities that are brought to the attention of angel investors that results in an investment.

Peer-to-peer lenders

There are a variety of avenues business owners can pursue to borrow money or obtain credit. One category of loans are peer-to-peer loans facilitated by peer-to-peer lenders. Peer-to-peer lenders underwrite borrowers but don't fund the loans directly. Instead they act as intermediaries between borrowers and individuals or borrowers and institutional investors. The thing to watch out for when considering peer-to-peer loans is the annual percentage rate, which in many cases is very high.

What are the three steps required to effectively engage potential investors or bankers?

There are three steps to developing a strategy for engaging potential investors or bankers. (1) First, the lead entrepreneurs in a new venture should prepare an elevator speech (or pitch) (2) the second step requires identifying and contacting the best prospects. First the new venture should carefully asses the type of financing or funding it is likely to qualify for. Then a list of potential bankers or investors should be compiled. (3) The third step is to be prepared to provide the investor or banker a completed business plan and make a presentation of the plan if requested.

What are the major disadvantages of getting a loan?

There are two major disadvantages of getting a loan. The first is that is must be repaid, which may be difficult in a start-up venture in which the entrepreneur is focused on getting the company off the ground. The second is that lenders often impose strict conditions on loans and insists on ample collateral to fully protect their investment. Even if a start-up is incorporated, a lender may require that an entrepreneur's personal assets be collateralized as a condition of the loan. In addition, a lender may place a stipulation on a loan, such that the borrower must maintain a certain cash balance, in its checking account or the loan will become due and payable.

To what extent do entrepreneurs rely on their personal funds and funds from friends and families to finance their ventures? What are the three rules of thumb that a business owner should follow when asking friends and family members for start-up funds?

Typically, the seed money that gets a company off the ground comes from the founders' own pockets. Either in the form of personal funds or funding by family and friends. There are three rules of thumb that entrepreneurs should follow when asking friends and family members for money. (1) the request should be represented in a businesslike manner, just as one would deal with a banker or investor, (2) if the help the entrepreneur receives is in the form of a loan, a promissory note should be prepared, which a repayment schedule, and the note should be signed by both parties, (3) financial help should be requested only from those who are in a legitimate position to offer assistance.

Vendor credit

Vendor credit (also known as trade credit) is the credit extended to a business by a vendor in order to allow the business to buy its products and/or services up front but defer payment until later.

What is meant be the term venture capital? Where do venture capital firms get their money. What types of firms do venture capitalists commonly want to fund. Why?

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. Venture capital firms are limited partnerships of money managers who raise money in "funds" to invest in start-ups and growing firms. The funds, or pools of money, are raised from high-net-worth individuals, pension plans, university endowments, foreign investors and similar sources. In 2015 the average fund size was 135 million dollars. The investors who invest in venture capital funds are called limited partners. The venture capitalists, who manage the fund, are called general partners. Some venture capital firms invest in specific areas. Because of the venture capital industry's lucrative nature and because in the past venture capitalists have funded high-profile successes such as Google, Facebook, Snap, and Twitter, the industry receives a great deal of attention. But actually, venture capitalists fund less than 1 percent of new firms. Venture capitalists are looking for the "home run". The result is that they do not fund the majority of business plans they receive and review. Still, venture capital is a viable alternative to equity funding. An advantage to obtaining this venture capitalists are extremely well connected in the business world and can offer a firm considerable assistance beyond funding. Once venture capitalists make an investment in a firm, subsequent investments are made in rounds (or stages) and referred to as follow-on-funding. Just because firm receives venture capital funding does not mean it will be successful.

Carry

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. The venture capitalists, who manage the fund are called general partners. The venture capitalists who manage the fund receive an annual management fee in addition to 20 to 25 percent of the profits earned by the fund. The percentage of the profits the venture capitalists receive is called the carry.

Venture capital

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. Typically, venture capitalists invest at least 1 million dollars in a single company.