chapter 8 sources of capital

common sources of startup funds

1. Yone financing (YOUR OWN) 2. FFF financing (family, friends, and fools). This is external or invested 3. banks 4. angel investors 5. venture capital

how entrepreneurs value their companies

1. based on the firms potential in their chosen market 2. checking out similar companies operating in the same industry to see how they are being valued 3. projected cash flows

how do investors value startups

1. based on your experience and past success 2. based in usage of your product or service 3. progress with business (having a distribution channel set up) 4. projected cash flows

4 C's of credit

1. capacity 2. collateral 3. character 4. conditions

how to get share of angel investment

1. come with a product built and a proven business model 2. assemble a team with the requisite expertise and experience 3. create and highlight your intellectual property portfolio 4. prepare an executive summary and investor presentation 5. have a full business plan and financial model to close the deal 6. formalize the business structure before asking for funding 7. highlight existing presence on the Internet and social media

kickstarter

1. five basic rules 2. 1/16: $2 billion for over 100,000 projects 3. today: over $5.3 billion for 190,419 projects 4. Snowl 5. wonderpuff cotton candy

Venture capitalists

1. formed as fund consisting of limited partnerships 2. invest from $500,000 upwards in funding 3. fund from early stage to third stage companies 4. conduct formal due diligence 5. decisions made with committee 6. exit with returns to fund's partners

angels

1. individuals worth more than $1million 2. invest from $25k to 100k personal funds 3. fund seed or early stage companies 4. carry out informal due diligence 5. responsible for own decisions 6. exit with returns on personal investment

venture capital

1. investment of corporate funds in startup firms 2. new ventures that offer synergies 3. or a straightforward VC-type deal 4. Microsoft, Dell, Cisco, Intel

how not to present to investors

1. our numbers are conservative 2. sign our NDA 3. there's no competition 4. I'll have to get back to you on that

what VCs look for

1. potential to become a leading firm in high growth industry 2. outstanding opportunity 3. highly competent and committed management 4. founders' capital invested 5. sound business plan 6. reasonable valuation 7. viable exit or harvest strategy

crowdfunding examples

1. quirky - for inventors 2. crowdrise - nonprofit fundraising 3. gofundme - people and causes 4. gofundme scams

stages of equity capital

1. seed stage financing 2. startup financing 3. early stage financing 4. series, B, C, etc

crowdfunding

1. seeks funding for ventures by raising monetary contributions from a large number of people, usually via the Internet

types of equity capital

1. venture capital 2. angel investor 3. corporate venture capital 4. private equity

equity

advantages include: money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it, and much safer option for new ventures than debt financing, NO REQUIRED PAYMENTS

debt

advantages include: no relinquishment of ownership is required, more borrowing allows for potentially greater return on equity, and low interest rates reduce the opportunity cost of borrowing

Commercial banks

common types of financing involve these straight bank loan (no SBA involvement) small business administration (SBA) 7(a) loans

debt

disadvantages include: regular interest payments are required, cash flow problems can intensify b/c of payback responsibilities, heavy use of debt can inhibit growth and development

Equity

disadvantages include: requires sharing the ownership and profits with the funding source, and owner must be willing to give up part of the ownership in return for funding

venture capital

established 1946, American Research and Development through the 1970s, little to moderate activity growth in the 1980s, boom in the 1990s

Venture Capitalist

have invested in some of today's most famous corporate names including Apple and Intel. They get an ownership interest for money invested

debt

involves borrowing money directly

equity

means selling a stake in your company in the hopes of securing financial backing

Venture Capital

refers to investment funds or partnerships that focus on investing in promising start up and emerging companies

venture capital

regional in nature not usually for startups many specialize in particular industries bring value, other than capital

angels

smaller investments than venture capitalists individuals are more likely to invest in a startup than a group or venture capitalist add value

venture capital

supplies capital and other resources to entrepreneurs in business with high growth potential in hopes of achieving a high rate of return on invested funds

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

myth 1

venture capital firms want to own control of your company and tell you how to run the business

myth 4

venture capitalists are interested in backing new ideas or high-technology invention, management is a secondary consideration

myth 3

venture capitalists are quick to invest

myth 2

venture capitalists are satisfied with a reasonable return on investments

myth 5

venture capitalists need only basic summary information before they make an investment

angels

wealthy individuals (traditionally), usually successful entrepreneurs well educated, with substantial business experience individual or part of a group

yes

yes or bs angel groups behave much like venture capitalists, although smaller investments

Private equity firms

1.operate much like a venture capital firm 2. often buy undervalued or under-appreciated companies, improve them, and then sell them for a profit 3. like a VC, almost certainly have multiple deals going at once

crowdfunding

3 principal parts: 1. the entrepreneur who proposes the idea and/or venture to be funded 2. the individual or groups who support the idea 3. a moderating organization (kickstarter), a platform that brings the parties together to launch the idea