Entrepreneurship Chapter 8

Types of Angel Investors

- Corporate angels - Entrepreneurial angels - Enthusiast angles - Micromanagement angels - Professional angels

Disadvantages of IPO's

- Costs - Disclosure - Requirements - Shareholder pressure

Major categories of venture capitalist screening criteria

- Entrepreneur's personality - Entrepreneur's experience - Product or service characteristics - Market characteristics - Financial considerations - Nature of the venture team

Possible dangers of P2P

- Low funding success rate - Business plan disclosure - No ongoing counseling relationship - Potential tax liability - Uncertain regulatory environment

Equity Financing

- Money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it - Requires sharing the ownership and profits with the funding source - Much safer option than for new ventures than debt financing - Owner must be willing to give up part of the ownership in return for funding

Commercial Banks Advantages

- No relinquishment of ownership is required. - More borrowing allows for potentially greater return on equity. - Low interest rates reduce the opportunity cost of borrowing.

Commercial Banks Disadvantages

- Regular (monthly) interest payments are required. - Cash-flow problems can intensify because of payback responsibilities. - Heavy use of debt can inhibit growth and development.

Advantages of IPO's

- Size of capital amount - Liquidity - Value - Image

Pros of Angel Investing

1.Angels engage in smaller financial deals. 2.Angels prefer seed stage or start-up stage 3.Angels invest in various industry sectors. 4.Angels are located in local geographic areas. 5.Angels are genuinely interested in the entrepreneur.

Cons of Angel Investing

1.Angels offer no additional investment money. 2.Angels cannot offer any national image. 3.Angels lack important contacts for future leverage. 4.Angels may want some decision making with the entrepreneur. 5.Angels are getting more sophisticated in their investment decisions.

Venture Capitalists

Valuable and powerful sources of equity funding for new ventures

Business Angel Financing

Wealthy individuals who are looking for investment opportunities.

Sophisticated Investors

Wealthy individuals who invest regularly in new and early- and late-stage ventures

Initial Public Offerings (IPOs)

new issues of common stock

Equity financing sources

public offering, private placement, investors, crowdfunding, venture capitalists, business angels

Venture Capital Myths

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

Trade Credit

Credit given by suppliers who sell goods on account

Equity Financing

Involves the sale (exchange) of some of the ownership interest in the venture in return for an unsecured investment in the firm

Commercial Banks

Make 1-5 year intermediate-term loans secured by collateral (receivables, inventories, or other assets)

Debt Financing

Secured financing of a new venture that involves a payback of the funds plus a fee (interest for the use of the money)

Crowdfunding

Seeks funding for a venture by raising monetary contributions from a large number of people, usually by the Internet

Venture Capitalist Evaluation Stages

Stage 1: Initial Screening Stage 2: Evaluation of the Business Plan Stage 3: Oral Presentation Stage 4: Final Evaluation

Rewards crowdfunding

The entrepreneur seeks a target amount of funding to launch a business concept without incurring debt or sacrificing equity and in return for the donation, the entrepreneur provides some type of gift or incentive.

Equity crowdfunding

The entrepreneur shares equity in the venture, usually in its early stages, in exchange for the money pledged.

Peer-to-Peer Lending (P2P) (debt financing)

The practice of lending money to unrelated individuals, or "peers," without going through a bank or traditional financial institution.

Debt financing sources

Trade Credit, Accounts receivable, factoring, finance companies