Outline: Chapter 9
Financing Over the Life of a Venture
Common Misconceptions about
Entrepreneurial Financing
 The Diverse Nature of Business
Financing
 Financing Smaller Businesses with
Modest Growth Potential
 Financing High Growth, High Potential
Ventures

Copyright 2013 Cornwall, Vang & Hartman
Common Misconceptions about
Entrepreneurial Financing
Venture Capitalists Fund Most Businesses
 Banks Lend to Start-ups
 SBA lends money directly to
entrepreneurs
 Entrepreneurs Tend to Rely on One Single
Source of Funding
 Government Grants are a Good Source
of Money for Small Businesses

Copyright 2013 Cornwall, Vang & Hartman
The Diverse Nature of Business
Financing
The Nature of the Business Model
 Aspirations of the Entrepreneur
 The Stage of Development of the
Business Venture
 Fitting the Pieces of the Financing Puzzle
Together

Copyright 2013 Cornwall, Vang & Hartman
Financing a Small Business - Modest Growth
Figure 9.1
Pre-launch
Start-up
Growth
Transition
Bootstrapping
Self, friends, and family
Equity financing
Debt financing
Copyright 2013 Cornwall, Vang & Hartman
Financing a High-Growth, High-Potential Venture
Figure 9.2
Pre-launch
Start-up
Growth
Transition
Bootstrapping
Seed financing from angels
Equity financing from VCs
Debt financing
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 10
Start-up Financing From the Entrepreneur, Friends
and Family
Self-financing
 Advantages and Disadvantages of Selffinancing
 Friends and Family Financing
 Structure of Funds Invested

◦ Loan
◦ Equity
Copyright 2013 Cornwall, Vang & Hartman
Most Common Sources of Financing
Figure 10.1
Pre-launch
Start-up
Growth
Transition
Self, friends, and family
Copyright 2013 Cornwall, Vang & Hartman
Advantages and Disadvantages of Self-Financing
Table 10.1
Advantages
Disadvantages
Relative ease of securing funding
May limit size and scope of start-up
Avoid complexity created by adding
partners
Better alignment with
entrepreneur’s aspirations
No dilution of profits or gains
May limit ability to grow
Increases exposure to personal risk
from business failure
Entrepreneur may lack all necessary
experience, contacts, skills, and/or
knowledge
Eventual exit process is often
simpler
Copyright 2013 Cornwall, Vang & Hartman
Friends and Family Financing
Determine True Motivations
 Use a Formal Business Plan
 Provide Accurate, Objective, and Full
Information about the Business
 Keep Boundaries
 Tax Planning

Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 11
Bootstrapping
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

Why bootstrap?
Bootstrapping Administrative Overhead
Bootstrapping Employee Expenses
Bootstrapping Operating Expenses
Bootstrap Marketing
The Ethics of Bootstrapping
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Throughout the Life of a Venture
Figure 11.1
Pre-launch
Start-up
Growth
Transition
Bootstrapping
Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping
Defined as the “process of finding creative
ways exploit opportunities to launch
and grow businesses with the limited
resources available for most start-up
ventures.”
Cornwall, J. (2010). Bootstrapping. Englewood Cliffs, NJ: Pearson/Prentice-Hall.
Copyright 2013 Cornwall, Vang & Hartman
Why Bootstrap?
Often necessary for small businesses to
get started
 Difficulty in raising money for growth
 Preserves the value and wealth of a
business
 “Extend the Runway”
 Reduce risk associated with debt
financing

Copyright 2013 Cornwall, Vang & Hartman
Rules of Bootstrapping
Rule #1: Overhead matters
 Rule #2: Employee expenses are usually
the highest single recurring cost
 Rule #3: Minimize operating costs
 Rule #4: Marketing matters, but know
your customers and how they make
decisions

Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Administrative Overhead
Space
 Furnishings and office equipment
 Administrative salaries

Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Employee Expenses
Independent contractors
 Employee leasing and temporary
employees
 Student interns
 Equity compensation
 Non-monetary benefits

Copyright 2013 Cornwall, Vang & Hartman
Bootstrapping Operating Expenses
Outsourcing
 Just-in-time inventory techniques
 Effective cost accounting

Copyright 2013 Cornwall, Vang & Hartman
Bootstrap Marketing
Know your customer
 Focus on the impact of message, not
“volume”
 Focus on benefits for customer
 Understand the market niche
 Spend your marketing dollars wisely
 Marketing is a process, not an event

Copyright 2013 Cornwall, Vang & Hartman
The Basic Bootstrap Marketing Tools
Word of Mouth
 Business cards
 Blogs
 Facebook and Twitter
 Brochures
 Banners and signs
 Newsletters
 Direct mailing/e-mailing
 Publicity

Copyright 2013 Cornwall, Vang & Hartman
Word of Mouth
Motivate customers to talk about
business
 Create incentives to spread the word
 Ask customers to “sell”
 Create a “buzz” campaign
 Viral marketing

Copyright 2013 Cornwall, Vang & Hartman
Business Cards
Design is important
 Include needed data about business
 Use quality paper
 Use color
 Include description and/or slogan
 Use both side of card

Copyright 2013 Cornwall, Vang & Hartman
Blogs
Be consistent in blogging
 Do not blog merely to promote business
 Take time to create quality blog
 Be patient – blogging takes time to build
following
 Be cautious what you write!

Copyright 2013 Cornwall, Vang & Hartman
Facebook and Twitter
Replacing websites for many new
ventures
 Fans more likely to purchase
 Builds on credibility of recommendations
of friends
 Find motivational methods for people to
become friends and fans

Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 12
External Sources of Funds: Equity
Angel Investors
 Strategic Partners
 Private Placement
 Crowdfunding
 SBIC
 The Downside of Equity Financing
 Working with Outside Investors

Copyright 2013 Cornwall, Vang & Hartman
Equity Financing
Figure 12.1
Pre-launch
Start-up
Growth
Transition
Equity financing
Copyright 2013 Cornwall, Vang & Hartman
Angel Investors
Wealthy individuals who make direct
investment in entrepreneurial firms
 Seed and early stage financing
 $50,000 to $1 million investments
 Also work through Angel Networks
 Seek payoff in three to seven years
 Valuation can be difficult

Copyright 2013 Cornwall, Vang & Hartman
Strategic Partners
Larger corporations in same industry
 Lower expectations for returns
 Seeking closer relationship or acquisition
over time if entrepreneurial firm is
successful

Copyright 2013 Cornwall, Vang & Hartman
Private Placement
Large funding from many investors
 Regulated by S.E.C.
 Must be accredited investors

◦
◦
◦
◦

National bank
Corporation or trust with $5 million assets
Insider/officer in the business
Individuals with adequate income and/or
wealth
Large number of stockholders can create
challenges
Copyright 2013 Cornwall, Vang & Hartman
Crowdfunding
Began with donations through Kickstarter
and other similar websites
 Jumpstart Our Business Startup (JOBS)
Act of 2012 opened door for equity
crowdfunding
 Regulated by S.E.C.

Copyright 2013 Cornwall, Vang & Hartman
Downside of Equity Financing
Dilution of ownership
 The risk of sharks
 Dynamics of adding on new partners

Copyright 2013 Cornwall, Vang & Hartman
Working with Equity Investors
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Business plan
Confidentiality agreement
Letter of Intent
Modifications of shareholder agreements
Communication with shareholders
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 13
External Sources of Funds: Debt
Short-term debt
 Long-term debt
 Forms of debt overlooked by
entrepreneurs
 SBA backed funding
 Working with bankers
 Downside of debt
 Developing a Financing Plan

Copyright 2013 Cornwall, Vang & Hartman
Debt Financing
Figure 13.1
Pre-launch
Start-up
Growth
Transition
Debt financing
Copyright 2013 Cornwall, Vang & Hartman
Short-term Debt
Expected to be paid within one year
 Most often used to finance short-term
expenditures such as inventory, supplies,
payroll, etc.

Copyright 2013 Cornwall, Vang & Hartman
Short-term Debt
Trade debt
 Institutional Creditors

◦ Banks
◦ Asset-based lenders
◦ Factors
Copyright 2013 Cornwall, Vang & Hartman
Long-term Debt
Beyond one year
 Most often used to fund fixed asset
purchases

Copyright 2013 Cornwall, Vang & Hartman
Long-term Debt
Banks: term loans
 Leasing companies
 Real estate lenders

Copyright 2013 Cornwall, Vang & Hartman
Criteria for Lending by Bankers
Ability of the business to generate enough
cash flow to easily make interest and
principle payments
 Entrepreneur’s ability to personally pay
back the loan if the business fails
 Assets to serve as collateral

Copyright 2013 Cornwall, Vang & Hartman
Key Loan Documents
Loan proposal
 Loan document
 Personal guarantees

Copyright 2013 Cornwall, Vang & Hartman
SBA Loans
Funds provided by independent lenders
 Loan guaranty from SBA transfers risk of
borrower non-payment, up to the amount of
the guaranty, from the lender to SBA
 SBA loans are commercial bank loans
guaranteed by the SBA
 http://www.sba.gov/financing/index.html

Basic SBA Loan Programs
Basic 7(a) Loan Guaranty
 SBA’s primary business loan program
 Helps qualified small businesses obtain
financing when they might not be eligible for
business loans through normal lending
channels.
504 Loan Program
 Provides long-term, fixed-rate financing to
small businesses to acquire real estate or
machinery or equipment for expansion or
modernization.
Downside of Debt
Increased risk during economic slowdown
 Impact on proceeds from business sale
 Restrictive covenants
 Personal guarantees

Copyright 2013 Cornwall, Vang & Hartman
Example of Assets and Potential Funding Generated
Table 13.1
Estimated
value
Percentage
financed
Potential funding
generated
$50,000
70%
$35,000
Accts. Receivable (<60 $80,000
days)
70%
$56,000
Inventory
$20,000
30%
$ 6,000
Leasehold
Improvements
$10,000
50%
$ 5,000
Building
$120,000
70%
$84,000
Undeveloped Land
$40,000
40%
$16,000
Equipment
$15,000
80%
$12,000
Total of Business
Funding Sources
$335,000
Asset
Customer Purchase
Orders
$214,000
Copyright 2013 Cornwall, Vang & Hartman
Outline: Chapter 14
Financing the High Growth Business
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What Venture Capitalists and Private Equity
Funds Provide – The Four “C’s”
Integrating Profitability into the Business Plan
Stages of the Firm
Stages of Business Funding
The Dark Side of Venture Capital Financing
Initial Contact with a Venture Capitalist
Initial Public Offering (IPO)
The Process of the IPO
Copyright 2013 Cornwall, Vang & Hartman
Financing a High Growth Venture
Figure 14.1
Pre-launch
Start-up
Growth
Transition
Venture capital equity financing
Copyright 2013 Cornwall, Vang & Hartman
The “Four Cs” of Venture Capital
Capital
 Contacts
 Counsel
 Credibility

Copyright 2013 Cornwall, Vang & Hartman
Stages of High Growth Business Funding
Initial stage
 First round financing
 Second round financing
 Late round financing

Copyright 2013 Cornwall, Vang & Hartman
Initial Stage Funding
File for incorporation
 Write business plan
 Find office and development space
 Completion of initial design
 Hire key development personnel
 Complete prototype unit
 Complete prototype testing

Copyright 2013 Cornwall, Vang & Hartman
First Round Financing
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Secure key vendors
Hire key service or manufacturing personnel
Rent or build manufacturing facility
Purchase manufacturing equipment
Market testing
First sales contract
Production of first manufactured unit
First 100, 1000, 10000 units, etc.
Copyright 2013 Cornwall, Vang & Hartman
Second Round Financing
Break-even level of sales
 Development of next generation of
product

Copyright 2013 Cornwall, Vang & Hartman
Late Round Financing
Initial public offering
 Sale of business

Copyright 2013 Cornwall, Vang & Hartman
Initial Contact with a Venture Capitalist
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Funding amount
Duration
Summary of the project
Use of funding
Confirm how the transaction will be liquidated
Existing investment in the project
Names of bankers, lawyers, accountants and
consultants
Unusual or sensitive information
Copyright 2013 Cornwall, Vang & Hartman
Venture Capital Term Sheet
Amount the venture capitalist wishes to invest.
 Percentage of ownership to the venture capitalist.
 The nature of the investment such as loan, stock, warrants,
etc.
 Governance rights of the venture capitalist.
 Right to eventually register shares for a public offering.
 Remaining conditions to be met by the entrepreneur such
as periodic reports, financial statements, etc.
 An estimate of valuation of the company.
 Specific requirements on what the money is to be used
for or specific assets that must be purchased with the
funds.
Copyright 2013 Cornwall, Vang & Hartman

Initial Public Offering
Advantages
Disadvantages
Diversification and liquidity
Reporting costs
Ability to raise new cash
Disclosure of information
Valuation
Maintenance of control
Future business deals
Publicity
Copyright 2013 Cornwall, Vang & Hartman
Process of the IPO
1.
2.
3.
4.
5.
6.
Selecting an investment banking firm
The decision to underwrite or not
underwrite
Getting the paperwork in order and
certifying the price of the offering
The road show
Determine the size of the book
The first day of trading
Copyright 2013 Cornwall, Vang & Hartman