Financing Your Venture
Presented by
Jeffrey A. Robinson, Ph.D.
Assistant Professor of Management & Entrepreneurship
NYU Stern School of Business
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Agenda
• The Business Plan
– Review of the financial aspects of the plan
• Two more financial consideration
• Start-up Budgets and Operating Budgets
• Ways to Finance your Venture
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What is a good framework for entrepreneurship?
Opportunity
Innovatio
n
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• Capital can be acquired, exchanged &
converted
• Five forms of capital
–
–
–
–
Financial (debt, equity, etc.)
Human (skills, education)
Social (networks of people)
Cultural (social resources, family background
and knowledge of cultural nuances)
– Intellectual (IP in firms, transferable)
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• The identification, evaluation,
exploration, and exploitation
of a venture opportunity
Opportunity
• The structures around an
opportunity or context
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• The cultivation and management of innovation
and innovative practices
• The innovation of business models
• The protection of innovations
Innovatio
n
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• Networks connect people within
organizations and between organization
• Networks connect entrepreneurs to
capital, innovation, opportunities
Networks
• Networks tie everything together
• Personal Networks/Professional
Networks/ Entrepreneurial Networks
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Entrepreneurship
Opportunity
Capital
Networks
Innovatio
n
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The success or failure of your venture depends upon how your put these pieces together.
Why is this important?
• … because good entrepreneurs leverage
capital, opportunities, innovation and networks
to create viable ventures
• … because good business plans demonstrate
how an entrepreneurial team will leverage
capital, opportunities, innovation and networks
to create a new venture
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Two important statements …
• CFIMITYM
• EENASWASI
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Financial Statements
Detailing the Financial Picture for
your Venture
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Financing Requirements and
Opportunity
•
•
•
•
Target financings (equity and debt)
Current Offering
Capitalization
Use of Proceeds
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Financial Projections
• 5 year summary projections
• 3 year detailed, quarterly projections
•
Balance Sheet
•
Income Statement
•
Cash Flow Operational
•
Break-even Analysis
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The Start-up Budget
& The Operating Budget
What will it take to get this venture
started?
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What’s the Difference?
• Start-Up Budget
– How much will you need to get this venture started?
– Includes one time capital purchases and typically 36 months of operations
• Operating Budget
– How much will you need to remain in business?
– Includes the monthly expenses to run your business
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Financing Your Venture
Sources of Funding
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Traditional Ventures:
Types of Firms
• Lifestyle firms
– generally < $1M in revenues
– founders have no desire to expand
– Forged out of something you are passionate about
• Growth Firms
– $1 M to 20 M revenues, 10-20% growth
– $20M + revenues, >20% growth {gazelles}
– Founders want to expand and grow the firm
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Opportunity Recognition
• There are far more good ideas than there are
good business opportunities
• Many businesses run out of money before they
find enough customers for their good ideas
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How Much Money They Had
In terms of start-up capital, including personal assets, Inc. 500 companies started
with little.*
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23%
(B)
20
15
13%
(A)
12%
(C)
13%
(D)
12%
(E)
13%
(F)
14%
(G)
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5
0
1
2
3
4
5
(A) Less than $1,000
(E) $50,001 to $100,000
(B) $1,000 to $10,000
(F) $100,001 to $300,000
(C) $10,001 to $20,000
(G) More than $300,000
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2004 Inc. Magazine 500
(D) $20,001 to $50,000
*”Start-up capital” refers to funds raised before any product or service was delivered.
“Personal assets” includes savings, mortgage or other personal loans, credit cards, 401(k), etc.
Where the Money Came From
The following sources of funds provided Inc. 500
start-up capital.
4% (E)
2% (G)
4% (F)
2% (H)
8% (D)
10% (C)
SOURCE
OF
FUNDS
53% (A)
17% (B)
(A) Personal assets
(B) Other founders’ personal assets
(C) Assets of family or friends (other than co-founders)
(D) Commercial bank loan or line of credit
(E) Private equity investment
(F) Financing from a supplier, customer, or other business entity
(G) SBA loan or funds from other government program
(H) Formal venture capital
2004 Inc. Magazine 500
Since Start-up
17%
of companies have raised
private equity.
2004 Inc. Magazine 500
Since Start-up
12%
of companies have raised
venture capital.
2004 Inc. Magazine 500
Stages
Seed
Startup
Growth
Expansion
Harvest
Idea
Identifying Customers
Working Capital Generally Needed
Need Capital for WC as well as for equipment
and infrastructure
Always think how investors and entrepreneurs
get their money out
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Bootstrap Capital
• Self
• Business Partners
• Friends and Family
–
–
–
–
–
Personal Savings
Credit Cards
Loans against property
Bank Loans
Equity Investments by friends and family
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Bootstrap Finance (Bhide)
• Get operational quickly
• Look for quick break-even, cash-generating projects
• Offer high-value products or services that can sustain
direct personal selling
• Forget about the crack team
• Keep growth in check
• Focus on cash, not on profits, market share, or
anything else
• Cultivate banks before the business becomes
creditworthy
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More bootstrapping tips …
•
•
•
•
•
•
•
•
•
Do not buy new what you can buy used.
Do not buy used what you can lease.
Do not lease what you can borrow.
Do not borrow when you can barter.
Do not barter when you can beg.
Do not beg what you can scavenge.
Do not scavenge what you can get free.
Do not take for free what someone will pay you for.
Do not take payment for something that people will bid for.
From “10 Principles of Entrepreneurial Creation” by S. Venkataraman
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Debt or Equity
• Equity will help your grow quicker but will
result in sharing of wealth and control with
other investors
• Debt is less expensive than equity
– Quicker and easier to find
– Requires regular payments of principle and equity
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Debt VS Equity
• Always a consideration
• Debt usually less expensive than equity but
hard to get
• If you do use debt -- generally you will have to
pledge assets that are personal
– In a small business the owner personally pledges
assets
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Sources of Capital
• Government
– SBA - Small Business Administration 7 (A)
Program
– SBIC - Small Business Investment Corporation/
MESBIC
• no more than 20 percent of SBIC assets in 1 company
• MESBIC – Minority Enterprise SBIC
– 51 percent owned by socially or economically disadvantaged
minority
– SBIR – Small Business Innovation Research
Grants
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The Capital Markets Food Chain for
Entrepreneurial Ventures
Text Exhibit
14.1
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Sources of Capital
• Banks
– Amount available to entrepreneurs is highly depended on
where in the business cycle the economy happens to be
– Business loans are different than commercial real estate
loans
– Consider Community Development Banks if Social
Enterprise
– Small Business Services at local bank – i.e. Line of Credit
– Factoring -- Selling Accounts Receivables for Cash
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Sources of Capital
• Corporations
– We do not really talk much about in this course
– It is not uncommon for a former employee to get
funding from her old company if the business
would be complimentary
– Corporation may be able to use the technology
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Sources of Capital
• Angel Investors
– Private investors (often family and friends -- but
can be established member of a community)
– return 20-40 percent annually
• Venture Capitalist
– Generally don’t finance seed or startup phase
– return 30 to 60 percent annually
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Rate of Return Sought by Venture
Capital Investors
Text Exhibit 15.1
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Informal Investors
• What kind of ventures lend themselves to the use
of informal investors?
– Ventures with capital requirements of $50 K - $500 K
– Ventures with sales potential of $2 M - $20 M over 5 to
10 years
– Small established, privately held venture with sales and
profit growth of 10% to 20% per year
– Some R&D deals
– Companies with high levels of FCF within 3 or 5 years
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Source: Timmons, Chapter 14
Characteristics of Business Angels
Bill Wetzel found that business angels are mainly American selfmade entrepreneur millionaires who:
• Have made it on their own, have substantial business and
financial experience, and are likely to be in their 40s or 50s.
• Are well educated: 95% hold college degrees and 51% have
graduate degrees.
• Have technical or business education—of those who have
graduate degrees, 44% were in a technical field and 35% in
business or economics.
• Are predominantly male—over 96% are men.
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Sources of Capital
• IPO
– Usually when Angels, Venture Capitalists and
sometimes entrepreneur try to “cash out”
– Expensive
– Time Consuming
– Highly dependent on where the business cycle is
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Finding Money
• Less than 1 percent from SBA
• Angels -- Informal Capital
– Require an average of 26%/yr
– Usually local
– Accept about 30% of deals
• Banks
– Will lend but usually require collateral
– Easier to get a personal loan than a commercial
loan
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Resources and Sources
• www.sba.gov
• Angel Investor Networks/Venture Exhibitions
or Venture Fairs
• Your Business School (Entrepreneurship
Center, Alumni Network)
• Business Plan Competitions ($25 K - $100 K)
• City, State and Regional Economic
Development agencies/departments
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Contact information
Jeffrey A. Robinson, Ph.D.
jrobinson@stern.nyu.edu
www.jeffreyrobinsonphd.com
www.bctpartners.com
–African American Women Entrepreneurs Research Project
–The Ph.D. Project – Ph.D. in Business School
–Venture Plan Document
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