Chapt 8 - ENTREPRENEURSHIP

IPO

"Going public" = a corporation's raising capital through the sale of securities on the stock market (new issues of common stock) Hire investment bank(s) to privately pre-sell as many securities as possible

Seed/Venture Capital advantages

-Can make much larger investment than any other group. •Are willing to wait 6-10 years for return. •Are willing to provide further financing rounds if business is succeeding •Possess a lot of expertise and connections.

debt financing 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

debt financing disadvantages

-Regular (monthly) interest payments are required. -Continual cash-flow problems can be intensified because of payback responsibility. -Heavy use of debt can inhibit growth and development.

Seed/Venture Capital disadvantages

-Require a much longer timeframe to close (due to due diligence). •Require a much higher return. •Can fire you and take over your business if you are not doing a good job

Family & Friends (& Fools) disadvantages

-awkward holidays

Potential risks of social lending

-low funding success rate •Potential tax liability for borrower and lender •Business plan disclosure •No ongoing counseling relationship •Uncertain regulatory environment

Seed/Venture Capital

Valuable and powerful sources of equity funding for new ventures who provide: •Capital for start-ups and expansion •Market research and strategy •Management-consulting, audits & evaluation •Contacts—customers, suppliers, employees •Negotiating agreements

Angels vs VCs

entrepreneurs vs investors small/early stage firm vs large/development stage firm basic contract vs comprehensive contract monitoring post investment is more important (hands on) vs less (strategic)

Investor Model

equity stake in the business given to backers for their support

preferred stock

equity that gives investors a preferred place among the creditors in the event the venture is dissolved.

Family & Friends (& Fools) advantages

financiers are those who know and trust you •Are more lenient and understanding if you lapse

Patronage Model

funding given without the expectation of a return on the investment

reward-based model

gifts or experiences given to backers as thanks for their funding support

common stock

most basic form of ownership and is often are sold through public or private offerings

angels disadvantages

no additional $$ •No national reputation •Lack contacts of VCs •Want to be involved in venture / make decisions

Venture Capitalists (VCs)

professional investors who invest in business ventures, providing capital for start-up, early stage, or expansion and look for high rates of return

loan with warrants

provides the investor with the right to buy stock at a fixed price at some future date

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

Equity Financing Advantages

size of capital Liquidity value Image

convertible debenture

unsecured loans that can be converted into stock.

Angels

•Accredited, wealthy individuals who invest in start-ups •Entrepreneurs, retired corporate execs, professionals •Typically invest within 50 miles of venture

equity financing disadvantages

Costs Disclosure Legal Requirements Shareholder Pressure

angels advantages

Engage in smaller deals •Prefer start-up stage •Invest in various industries •Local to the venture •Genuinely interested in entrepreneur/venture

Lending Model

Funding given by backers in the form of a loan

Equity financing types of Ownership

Highest to lowest seniority Loan with warrants: Convertible debentures Preferred stock Common stock Most types carry no legal obligation for entrepreneurs to repay it.

equity financing

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

Family & Friends (& Fools)

Most likely = own parents •Most surprising = friends' parents •Other potential investors: -Friends -Old bosses/coworkers

founder's money advantages

Not beholden to anyone •Can get money on time as needed

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) Not option for a while

Venture Capitalist Evaluation Process

Stage 1: Initial Screening Stage 2: Evaluation of the Business Plan Stage 3: Oral Presentation Stage 4: Final Evaluation (After analyzing the plan and visiting with suppliers, customers, consultants, and others, the VC makes a final decision.)

Venture Capital Myths

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 investment. 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.

founder's money

Aka "Commitment financing" •Financed from own •Savings •Credit cards •Consulting jobs

founder's money disadvantages

Are personally liable for any debt •Odd jobs take time away from the business