Preparing to Raise Debt or

Equity Financing
FIGURE 10.3

STEPS INVOLVED IN PROPERLY

PREPARING TO RAISE DEBT OR EQUITY
FINANCING

STEP 1 STEP 3
STEP 2
Determin Develop a
Determine
e strategy
the type of
precisely for
financing or
how engaging
funding that
much potential
is the most
money is investors
appropriate
needed or bankers
 Two most common alternatives
for raising money

EQUITY DEBT
FINANCING FINANCING

-means
exchanging
partial
ownership of a -is getting a
firm usually in loan
the form of
stock for
funding in
return
TABLE 10.2

MATCHING AN ENTREPRENEURIAL VENTURE’S

CHARACTERISTICS WITH THE APPROPRIATE FORM
OF FINANCING OR FUNDING
CHARACTERISTICS OF THE APPROPRIATE SOURCE OF
VENTURE FINANCING OR FUNDING

The business has high risk with an Personal funds, friends, family and
uncertain return: other forms of bootstrapping
weak cash flow
high leverage, low-to-moderate
growth
, unproven management
The business has low risk with a Debt Financing
more predictable return:
strong cash flow , low leverage,
audited financials, good
management, healthy balance sheet

The business offers a high return: Equity

unique business idea, high growth,
niche market, proven management
 THREE STEPS TO DEVELOPING A
STRATEGY FOR ENGAGING POTENTIAL
INVESTORS OR BANKERS

1. THE LEAD ENTREPRENEURS IN A

NEW VENTURE SHOULD PREPARE AN
ELEVATOR SPEECH(PITCH)- A BRIEF,
CAREFULLY CONSTRUCTED
STATEMENT THAT OUTLINES THE
MERITS OF A BUSINESS OPPORTUNITY
TABLE 10.3
GUIDELINES FOR PREPARING
AN ELEVATOR SPEECH
The elevator speech is a very brief description of your
opportunity, product idea, qualifications , and market.
Imagine that you step into an elevator in a tall building
and a potential investor is already there; you have about
60 seconds to explain our business idea.
STEP 1 Describe the opportunity or problem 20 seconds
that needs to be solved

STEP 2 Describe how your product or 20 seconds

service meets the opportunity or
solves the problem

STEP 3 Describe your qualifications 10 seconds

STEP 4 Describe your market 10 seconds

TOTAL 60 seconds
 THREE STEPS TO DEVELOPING A
STRATEGY FOR ENGAGING POTENTIAL
INVESTORS OR BANKERS

2. IDENTIFYING AND CONTACTING THE BEST

PROSPECTS.
a) THE NEW VENTURE SHOULD
CAREFULLY ASSESS THE TYPE OF
FINANCING OR FUNDING IT IS LIKELY TO
QUALIFY FOR
b) A LIST OF POTENTIAL BANKERS OR
INVESTORS SHOULD BE COMPILED
A CARDINAL RULE FOR APPROACHING
A BANKER OR AN INVESTOR IS TO GET
A PERSONAL INTRODUCTION.
FIND SOMEONE WHO KNOWS THE
BANKER OR THE INVESTOR AND ASK
FOR AN INTRODUCTION
 THREE STEPS TO DEVELOPING A
STRATEGY FOR ENGAGING POTENTIAL
INVESTORS OR BANKERS

3. BE PREPARED TO PROVIDE THE

INVESTOR OR BANKER A COMPLETED
BUSINESS PLAN AND MAKE A
PRESENTATION OF THE PLAN IF
REQUESTED.
- IT SHOULD BE AS POLISHED AS POSSIBLE
AND SHOULD DEMONSTRATE WHY THE
NEW VENTURE REPRESENTS AN
ATTRACTIVE ENDEAVOR FOR THE LENDER
OR INVESTOR
 SOURCES OF EQUITY
FUNDING

THREE MOST COMMON FORMS OF EQUITY

FUNDING
1. BUSINESS ANGELS
2. VENTURE CAPITAL
3. INITIAL PUBLIC OFFERING

LEARNING OBJECTIVE
Describe the difference between a business angel
and a venture capitalist.
BUSINESS
ANGEL MIKE MARKKULA-
OBTAINED HIS
WEALTH AS AN
EXECUTIVE IN
INTEL

-ARE INDIVIDUALS WHO INVEST

THEIR PERSONAL CAPITAL
DIRECTLY IN START-UPS $91, 000
- THE PROTOTYPICAL BUSINESS
ANGEL, WHO INVESTS IN
ENTREPRENEURIAL START-UPS , IS
ABOUT 50 YEARS OLD, HAS HIGH
INCOME AND WEALTH, IS WELL APPLE
EDUCATED, HAS SUCCEEDED AS AN
ENTREPRENEUR, AND INVESTS IN
COMPANIES THAT ARE IN THE
REGION WHERE HE OR SHE LIVES.
-IS A MONEY THAT IS INVESTED BY VENTURE CAPITAL FIRMS
IN START-UPS AND SMALL BUSINESS WITH EXCEPTIONAL
GROWTH POTENTIAL.
LIMITED PARTNERS- THE INVESTORS WHO INVEST
IN VENTURE CAPITAL FUNDS
GENERAL PARTNERS- THE VENTURE CAPITALISTS,
WHO MANAGE THE FUND
CARRY- THE PERCENTAGE OF THE PROFITS THE VENTURE
CAPITALISTS GET
FOLLOW-ON FUNDING- SUBSEQUENT
INVESTMENTS
DUE DILIGENCE PROCESS- REFERS TO THE
PROCESS OF INVESTIGATING THE MERITS OF
POTENTIAL VENTURE AND VERIFYING THE KEY
CLAIMS MADE IN THE BUSINESS PLAN
CORPORATE VENTURE CAPITAL- SIMILAR
TO TRADITIONAL VENTURE CAPITAL EXCEPT THAT
MONEY COMES FROM CORPORATIONS THAT INVEST
IN START UPS RELATED TO THEIR AREAS OF
INTEREST

If You Know Nothing About Venture Capital Watch This First Forbes.mov
STAGES OF VENTURE BUYOUT
CAPITAL FUNDING FUNDING HELP ONE COMPANY
ACQUIRE ANOTHER

MEZZANINE
EXPANSION BEFORE
FINANCING
LAUNCHING AN IPO

SECOND-
STAGE EXPANSION OF
FUNDING CAPACITY AND
FINANCING TO MARKETS
RAMP UP ITS
FIRST-
PRODUCTION
STAGE
CAPACITY
FUNDING

FUNDING IS NEEDED
START-UP
TO START
FUNDING
PRODUCTION

DEVELOPMENT OF A
SEED
PROTOTYPE AND
FUNDING
FEASIBILITY ANALYSIS
 SOURCES OF DEBT
FINANCING

DEBT FINANCING INVOLVES GETTING

A LOAN OR SELLING CORPORATE BONDS.

TWO COMMON TYPES OF LOANS

1. SINGLE PURPOSE LOAN – A SPECIFIC AMOUNT OF
MONEY IS BOROWED THAT MUST BE REPAID IN A
FIXED AMOUNT OF TIME WITH INTEREST
2. LINE OF CREDIT – A BORROWING “CAP” IS
ESTABLISHED AND BORROWERS CAN USE THE
CREDIT AT THEIR DISCRETION.
-REQUIRE PERIODIC INTEREST PAYMENTS
 MAJOR ADVANTAGES OF
OBTAINING A LOAN

1. NONE OF THEOWNERSHIP OF THE FIRM IS SURRENDERED-

MAJOR ADVANTAGE OF MOST ENTREPRENEUR
2. INTEREST PAYMENTS ON A LOAN ARE TAX DEDUCTIBLE IN
CONTRAST TO DIVIDEND PAYMENTS MADE TO INVESTORS,
WHICH AREN’T

MAJOR DISADVANTAGES OF
OBTAINING A LOAN

1. IT MUST BE REPAID, WHICH MAY BE DIFFICULT IN A START-

UP VENTURE IN WHICH THE ENTREPRENEUR IS FOCUSED
ON GETTING THE COMPANY OFF THE GROUND
2. LENDERS OFTEN IMPOSE STRICT CONDITIONS ON A LOANS
AND INSIST ON AMPLE COLLATERAL TO FULLY PROTECT
THEIR INVESTMENT
 THREE COMMON SOURCES OR
CATEGORIES OF DEBT FINANCING

1. COMMERCIAL BANKS
2. SBA GUARANTEED LOANS
3. OTHER SOURCES OF DEBT FINANCING

LEARNING OBJECTIVE
DISCUSS THE SBA GUARANTEED
LOAN PROGRAM
OTHER SOURCES OF DEBT
FINANCING
 Vendor Credit

 - (also known as trade credit) is when a vendor

extends credit to a business in order to allow the
business to buy its products and/or services up
front but defer payment until later.
 Factoring

 - is a financial transaction whereby a business sells

its accounts receivable (e.g invoices) to a third
party (called a factor) at a discount in exchange for
cash.
 Peer to peer lending

 is a financial transaction that occurs directly

between individuals or peers.
 Crowdfunding

-is a method of raising finance which is typically

suited to startups or early stage businesses, as
you’re not required to make regular repayments like
you would with a bank loan.
 Specific types of finance for
crowdfunding

Ø Reward-based crowdfunding

Ø Donation-based crowdfunding
Ø Equity based crowdfunding
CREATIVE SOURCES OF
FINANCING AND FUNDING
 Leasing

 A lease is a written agreement in which the owner

of a piece of property allows an individual or
business to use the property for a specified period
of time in exchange for payments.
 SBIR & STTR PROGRAM

SBIR (SMALL BUSINESS INNOVATION

RESEARCH)
§ intended to help certain small businesses conduct
research and development (R&D)
STTR (SMALL BUSINESS TECHNOLOGY
TRANSFER)
§ is focused primarily on the expansion of
public/private –sector partnerships to include
collaboration with non-profit research institutions,
particularly research universities