Entrepreneurship and SMEs
Sergey Anokhin, Ph.D.
Kent State University
January 16, 2009
Presentation highlights
• Approaches to entrepreneurial financing
• Sources of funds
– Personal funds
– Family and friends
– Commercial banks
– SBA loans and government grants
– R&D partnerships
– Business angels and venture capital
• Valuing your company
Approaches to entrepreneurial
financing
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Debt financing
Equity financing
Internal funds
External funds
Important considerations:
– Length of time
– Cost
– Control (what you give up)
Personal funds
• Demonstrate commitment
• Amount less important: rather, it is
percentage of total assets available to the
entrepreneur
• Cheapest, long-term source of capital
Family and friends
• Relationship financing
• Often includes equity and unwanted input
into the operations of the new venture
• More patient than other investors
• Relations with friends at stake
• Put everything in writing to keep business
and social life separate
Commercial banks
• Most common source of financing
• Requires collateral
– Business assets
– Personal assets
– Cosigner’s assets
• Types of bank loans:
– Accounts receivable (up to 80% of the value)
– Inventory loans (50%)
– Equipment loans
– Real estate loans (75%)
Conventional cash flow financing
• Lines of credit (use as needed; involves
commitment fee)
• Installment loans (seasonal financing of working
capital for 30-40 days)
• Straight commercial loans (seasonal financing,
inventory build-up, 30-90 days)
• Long-term loans (up to 10 years)
• Character loans (personal loans – used when
the business does not have track record)
Understanding bank lending
decisions
• 5 C’s of lending:
– Character
– Capacity (capability)
– Capital
– Collateral
– Conditions
Government help
• SBA guaranty loans
– Short- and long-term (up to 20 years)
– Additional reporting requirements
– Effective limit of $1 million (but no limit
technically)
– Definition of small business varies by industry
• Government grants
– SBIR grants program (11 federal agencies)
R&D partnerships
• Limited partnerships essentially
– Entrepreneurs as general partners
– Investors as limited partners
Bootstrap financing
• Factoring
• Trade credit
• Customers (obtaining letter of credit helps
you purchase materials without own cash)
• Real estate
• Leasing
Informal and formal risk capital
• Stages of business development funding
– Early-stage financing
• Seed capital
• Start-up
– Expansion or development funding
• Second stage (initial growth stage)
• Third stage (rapid sales growth/breakeven point)
• Fourth stage (preparation for IPO)
– Acquisitions and LBO financing
• Traditional acquisitions
• LBOs
• Going private
Informal risk capital market
• Business angels
• Over 100,000 business angels in the US
• $10k-$500k (average under $200k), 1-2
deals/year
• Investment preferences:
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Manufacturing (industrial/commercial)
Energy/natural resources
Service
Retail/wholesale trade
• 5-year returns: 10 times for startups, 3 times for
established firms
• Importance of referrals
Venture capital
• Long-term commitment
• All 3 stages of financing; over half goes to
expansion stage
• Contribute money, connections and skills
• Investment preferences:
– IT
– Life sciences
– Nontechnology
• California (36%) and Massachusetts (11%)
Types of VCs
• Independent
• Captive
– Government
– Pension funds/financial institutions
– Corporate
Expectations and process
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50% ROI for early-stage ventures
40% ROI for development financing
30% ROI for LBOs
VC process:
– Preliminary screening
– Agreement on principal terms
– Due diligence
– Final approval
Valuing your company
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Nature and history of the business
Industry outlook
Book value (owner’s equity)
Future earning capacity
Dividend-paying capacity
Goodwill and other intangibles
Previous sale of stock
Market price of the stocks of comparable
companies
Questions?