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Show Me the Money!Entrepreneurial Financing
Built by Stambaugh/2009
Jeff StambaughDillard College of Business/Rm 257A
[email protected]://faculty.mwsu.edu/business/jeff.stambaugh
Show Me the Loan Money!
Built by Stambaugh/2009
Why Money?
Built by Stambaugh/2009
■ Start:■ Develop / improve prototype■ Protect IP■ Set-up ops
■ Sustain■ Cash to finance ops
■ Grow■ Money to expand ops
Three Basic Sources (besides yourself)
Built by Stambaugh/2009
■ Gifts (money where repayment not required)■ Debt (formal agreement to repay funds)■ Equity (money received in exchange for ownership
stake)
Gifts
Built by Stambaugh/2009
■ Institutional ■ Tax abatements / credits■ Grants
■ Tx ETF, SBIR, STTR, Local 4a/4b monies■ Family & Friends
■ Cash■ Free use (land & labor)■ Debt forgiveness■ Sweetheart deals
What strings are attached?
Debt
Built by Stambaugh/2009
Principle: You repay me as expected on agreed terms■ “First in line” if your business falters■ Loans versus lines of credit■ Commercial banks typical sources
■ SBA Guarantees
Character Capacity
Conditions Collateral
Attractive Businesses to Banks
Built by Stambaugh/2009
■ Track record of strong cash flows■ Low existing debt (low leverage)■ Money used for assets versus intangibles
Businesses that are already operating or where this money will allow operations to
begin are best bets
Tips to Getting / Keeping a Bank Loan
Built by Stambaugh/2009
■ Know the bank■ Know the lending officer■ Meet “their needs”■ Keep them informed
What strings do banks typically attach?
Equity
Built by Stambaugh/2009
Principle: You multiply many-fold my investment■ Many potential sources
■ Angels / accredited investors■ High net worth who invest for return &
support; $1M net worth or $200K for 2 yrs■ Venture Capitalists
■ Firms formed for purpose of investing in start-ups
■ IPOs
What strings do equity investors typically attach?
Equity “Strings”
Built by Stambaugh/2009
■ In addition to ownership stake …■ Seats on Board / guaranteed positions■ Right to invest in future■ Control over expenditures■ Control over equity sales■ Share price floors / “guaranteed” rate of return■ Exit strategy
Expected ROI: 20-30% (or more) over 3-7 years (based on stage of investment)
Tradeoffs of Debt and Equity
Built by Stambaugh/2009
■ Debt: retain long-term control
■ Equity: raise more money, more speculative, often requires an exit / IPO
Multi-stage Funding
Built by Stambaugh/2009
■ Seed: prototype / feasibility: A, VC■ Start-up: start production: A, VC, B■ First / second-stage: ramp up production capacity:
VC, B■ Mezzanine: bridge toward IPO or buyout
(sometimes also preferred stock): VC
Closing Thoughts
Built by Stambaugh/2009
■ Raising money almost always harder than expected■ Raise money before you need it■ Smart money vs dumb money■ Distinct advantages / disadvantages to debt and
equity
