AOF Entrepreneurship

Lesson 9 Funding an Entrepreneurial Venture

AOF Entrepreneurship

Lesson 9

Funding an Entrepreneurial Venture

Teacher Resources

Resource

Description

Teacher Resource 9.1

Answer Key: Analysis of Business Plan Financials

Teacher Resource 9.2

Modeling Template: Income Statement (separate Excel file)

Teacher Resource 9.3

Presentation and Notes: Financing Options (includes separate PowerPoint file)

Teacher Resource 9.4

Multi-Pass Instructions: Financing Options

Teacher Resource 9.5

Assessment Criteria: Business Plan Financials

Teacher Resource 9.6

Key Vocabulary: Funding an Entrepreneurial Venture

Teacher Resource 9.7

Bibliography: Funding an Entrepreneurial Venture

Student Resource 9.1

Answer Key: Analysis of Business Plan Financials

How much of her own money is each owner putting into the business?

$10,000 each

How much additional money are Mika and Lauren looking for from outside investors?

$10,000

How long does it take for the company to earn more than it spends?

Six months

Why do marketing costs fluctuate from month to month?

Answers will vary. Marketing costs vary because Mika and Lauren want to have kiting exhibitions and events for the public, and those events will cause a significant increase in costs that month.

Why does gross profit increase each month? Is that a reasonable assumption?

As the weather gets warmer and the company and its services become better known, it’s reasonable to assume that business will increase each month. It could have to do with repeat business as well.

Which expenses are predictable monthly expenses?

Gas, insurance, the lease, and cell phones. Marketing and inventory costs will vary month to month but will continue to occur.

Why do there continue to be entries in the Purchases (Inventory) category?

As business increases, the need for additional inventory will also increase to accommodate the additional customers.

The business plan states that the company will break even in the sixth month. What does that mean? Does the statement about breaking even in the sixth month take into account the total start-up funding investment of $30,000?

Breaking even can mean two things. In this case, the business plan means that the company is making more than it is spending. Investors will also want to know when they can expect to get their principal investment and interest back. (That is touched on briefly in the last section of the business plan.)

If you were Mika and Lauren, how much funding would you be seeking from investors? Why?

Answers may vary. Based on the projected income statement, the start-up funding looks appropriate. In the first three months, the results of which are shown, the company spends about $20,000 and loses about $11,000. By the sixth month, the company is earning a monthly profit. But Month 6 is September, and there may be a dip in earnings that the owners will have to ride out. Further, by asking for the same funding from investors as they themselves have contributed, two things happen. First, they are taking the same risk as the investors, demonstrating their commitment to the business. Second, the owners won’t get into a situation where the investors have more equity than they do, resulting in a loss of control.

Teacher Resource 9.3

Presentation Notes: Financing Options

Before you show this presentation, use the text accompanying each slide to develop presentation notes. Writing the notes yourself enables you to approach the subject matter in a way that is comfortable to you and engaging for your students. Make this presentation as interactive as possible by stopping frequently to ask questions and encourage class discussion.

This presentation introduces the two categories of financing available to new business—debt and equity—and the main sources of funding. It also explains the importance of maintaining careful, accurate accounting practices.

Presentation notes

Investors look at many aspects of a new business when they consider whether or not to put money into it. In many cases, the factors that are important depend on what type of investor is doing the evaluation. Venture capitalists, for example, are by definition motivated by profitability. Your family, on the other hand, is more interested in whether you are successful—although getting their money back with a little extra would be okay, too.

One important factor that impartial investors will look at closely is whether you have done your homework. Having a good idea, while critical, isn’t enough. Investors will be considering whether you have the right stuff when it comes to taking that idea and making it as profitable as possible. This involves looking not only at the idea itself but also at how it will perform in the market. If you don’t know the industry—your competition, the regulations that govern it, the ease with which you can obtain raw materials, and everything else that will affect your profitability—then investors will not risk their capital on you.

Presentation notes

Accounting plays an important role in an entrepreneurial venture. Every business (big or small) needs to have some type of accounting system in place to manage its daily financial transactions and to ensure that the business runs smoothly. Maintaining an organized and accurate accounting system can help an entrepreneur assess the business’s performance and improve profits.

Accounting enables an entrepreneur to keep track of cash flow—of income and expenses. It shows what assets are left after you’ve paid your liabilities, which you learned about in Principles of Finance. This information is obviously important to investors!

Every entrepreneur should take a basic accounting course in order to understand the way it works and to be able to show investors that the books are in good order. At first entrepreneurs may be their own accountants, but as their businesses grow, many entrepreneurs hire accountants to manage this critical aspect of the business.

Presentation notes

Aside  from entrepreneurs investing their own money, the options for getting funding break down into two main categories, each with its own benefits and disadvantages.

Many businesses seek out loans: money borrowed from banks or individuals. Loans usually require the entrepreneur to offer up something as collateral, to make sure the entrepreneur is able to pay back the loan. For example, a business owner might sign a loan agreement using a car as collateral, meaning that if the business owner is not able to pay back the amount of the loan, the bank will claim the car as payment instead.

A loan requires the business owner to pay back not just the amount he or she borrows, but also any fees and interest associated with the loan, on a set schedule. The amount that needs to be repaid is based on this agreement and has nothing to do with how successful the business becomes. This means that the business owner takes on all of the risk involved. The advantage is that once the loan gets repaid, the business owner retains ownership of his or her own business and does not have to pay profits to anyone else.

In contrast, equity means that an outside investor gives money to the entrepreneur in exchange for a share in the company. In this case, the investor does not need to be repaid but is entitled to have a say in the way the business is run and earn a share of the profits if the business is successful. Getting an experienced investor on board can help a business succeed but can also be a burden.

Presentation notes

Most business owners are the first ones to back their own venture by investing what they can. These investments might come out of personal savings, personal credit cards, or mortgages on a house or car.

The next likely source for investments is friends and family, people who have a personal interest in the entrepreneur directly, while the business itself is a secondary consideration.

There are some sources of funding that have emerged since the recession of 2008. Neighbors and customers are investing locally by providing loans. New legislation allows people of more modest means to invest in start-ups; until recently, you had to earn at least $200,000 to invest in a new business. Kickstarter is a website where you describe your project, set a funding goal and deadline, and people can contribute as little as $5—but it can add up! This website is for creative ventures such as designing a new product.

Outside investors, such as banks or angels, very rarely provide financing to a new entrepreneur who hasn’t created a successful business already. Most new entrepreneurs have three options: rely on personal connections for financing, get their business started using their own start-up money, or figure out how to get started with no money at all.

Presentation notes

Your friends and family may want to support a new business venture, but their funding comes with both advantages and disadvantages.

If family or friends invest in your company, you can decide together whether this is a loan or a share purchase. Make sure everything is agreed on and put in writing, so that it is clear what rights and responsibilities each of you has to the funds and the company.

If your friends and family invest, they may feel that they have a right to guide your business, and you may feel uncomfortable if your business fails and loses their investment. Before you accept their funding, you should consider how this might affect your relationships.

You may also want to consider how their investment will affect your ability to obtain outside funding. Some investors look at family investments positively, while others may be reluctant to invest with other investors involved in the company, because multiple owners can complicate operations.

Presentation notes

Bank loans are one source of start-up funding for new businesses. Loans all need to be repaid, in contrast to stock sales, where an investor buys shares in the company. The bank doesn’t claim any share of the business, and entrepreneurs will need to repay the amounts they borrow, regardless of whether the business ever succeeds. Banks require some collateral, such as money in a savings account, stocks, or real estate, that can be claimed if the business owner forfeits on the loan.

The most common loans are set amounts of money loaned to the entrepreneur, with an interest rate attached. The entrepreneur must pay this interest on the loan, meaning the bank or other lender earns a profit on the money that it lends.

Not all loans are distinct amounts paid up front. Many entrepreneurs will use a line of credit such as a credit card, against which they can charge amounts as they are needed. Credit cards often come with a fee, and the loans must be repaid in part or wholly on a monthly basis. These might be business credit cards or personal credit cards. Using a personal credit card means the entrepreneur is putting personal finances at risk and won’t need to present a business plan to the bank.

Many other kinds of loans are also available to fund special kinds of costs such as inventory, equipment, or real estate property. If the entrepreneur can’t make payments for those items, then the bank will repossess the item.

Presentation notes

Angel investors are affluent individuals who invest their own money in entrepreneurial ventures.

Angel investors want to purchase shares of stock in a company and share in its growth and profits. If they have the right expertise in the field, they can also provide good advice to guide a new venture and help the entrepreneur succeed.

Most angel investors try to invest in local companies, and they will usually only invest in a few companies each year.

Angel investors might have their own preference for what types of companies they are interested in. Many angel investors find the new businesses that they support through a network of referral sources, such as business associates, friends, investment bankers, or other contacts.

Angels are usually well educated and invest anywhere between $10,000 to $500,000 in a new company less than five years old.

Presentation notes

Venture capital firms often have a lot of money but like to invest in specific types of businesses, such as software companies, biotechnology, or other high-stakes firms. So they are usually not the right choice for funding for smaller businesses.

Venture capital firms are usually limited partnership firms, where the partners source and pool funding in order to buy equity shares in start-up ventures. However, approaching them can be difficult since they require entrepreneurs to be highly professional and present a well-polished business plan.

They are able to provide expertise in guiding the entrepreneurs that they support but will also take on a large role in controlling how a business is operated. Getting funding can also take a while.

Presentation notes

Many other nontraditional sources are available for start-up funds, and they will depend on the type of business you want to start. You can find out about these sources by doing Internet research, by asking for assistance in a library, or by contacting regional or industry organizations.

If you want to develop a new innovation that contributes to an emerging or developing field of research, such as energy conservation, then you may qualify for a grant.

The US Small Business Administration also provides new small businesses with information about special low-interest loans that offer better rates than conventional loans.

Presentation notes

Teacher Resource 9.4

Multi-Pass Instructions: Financing Options

Note that this presentation approach will add another 5–10 minutes to the activity.

First Pass: Survey (5 Minutes)

Read the title and introduction, and note the sections of the presentation.

Examine the illustrations.

Read the headings to see how the presentation is organized.

Paraphrase the information acquired.

Second Pass: Size Up (10 Minutes)

Identify key concepts by using titles and headings, visuals, bold print, italics, and/or color codes.

Generate questions about key concepts and answer them by looking at the slides.

Paraphrase key concepts.

Third Pass: Sort Out (10 Minutes)

Answer student-generated questions and reinforce key concepts.

Teacher Resource 9.5

Assessment Criteria: Business Plan Financials

Student Name:______________________________________________________________

Date:_______________________________________________________________________

Using the following criteria, assess whether the student met each one.

Met

Partially Met

Didn’t Meet

The answers are thoughtful and thorough, and they demonstrate careful research and planning.

□

□

□

The estimates given are logical, and the explanations are clear and reasonable.

□

□

□

The answers about seasonal fluctuations and the marketing campaign demonstrate how disparate aspects of the venture are being integrated.

□

□

□

The type of investor and the kind of funding sought is a sensible choice, and the explanation shows thoughtful consideration.

□

□

□

The summary is neat and legible.

□

□

□

Additional Comments:

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

Teacher Resource 9.6

Key Vocabulary: Funding an Entrepreneurial Venture

Term

Definition

angel investor

An individual who invests in a business venture, providing capital for start-up or expansion, in exchange for a higher rate of return than would be given by more traditional investments.

debt

Money borrowed from the bank, other institutions, or individuals that must be paid back, along with fees and interest.

equity

Shares of ownership that entrepreneurs sell in their companies in exchange for funding, advice, and other benefits that can be obtained from shareholders, especially angel investors and venture capitalists, or sometimes friends and family.

financing

Funds that businesses obtain to help pay start-up and operating costs.

total cost of ownership

The costs involved in paying for equipment, supplies, and other expenses associated with owning something, in addition to the initial cost to obtain the item or start the business.

venture capital

Funds invested in new companies by limited partnership businesses that contribute advice, guidance, and funding in the hopes of earning profit on the new venture.

venture capitalist

A partner in a limited partnership firm that invests in new companies.

Teacher Resource 9.7

Bibliography: Funding an Entrepreneurial Venture

The following sources were used in the preparation of this lesson and may be useful for your reference or as classroom resources. We check and update the URLs annually to ensure that they continue to be useful.

Print

Gold, Steven. Entrepreneur’s Notebook. United States: Learning Ventures Press, 2008.

Hisrich, Robert D., Michael P. Peters, and Dean A. Shepherd. Entrepreneurship, 7th ed. New York: McGraw-Hill, 2008.

Online

“Business Startup Cost Calculator.” Business Know-How, http://www.businessknowhow.com/startup/startup.htm (accessed March 25, 2015).

Hong, Nicole. “Entrepreneurs Turn to a New Source of Funds: Their Neighbors.” The Wall Street Journal, June 11, 2014, http://www.wsj.com/articles/entrepreneurs-are-turning-to-a-new-source-of-funds-their-neighbors-1402495255 (accessed March 24, 2015).

“Income Statement Example.” Small Business Notes, http://www.smallbusinessnotes.com/business-finances/income-statement-example.html (accessed March 24, 2015).

Peterson, Laurie. “Why Venture Capital Wasn’t Right for Me and 15 Alternative Funding Sources.” Fast Company, http://www.fastcompany.com/3036130/hit-the-ground-running/why-venture-capital-wasnt-right-for-me-and-15-alternative-funding-sou (accessed March 24, 2015).

“Seven Things to Know about Kickstarter.” Kickstarter, https://www.kickstarter.com/hello (accessed March 24, 2015).

“Starting a Business.” US Small Business Administration, http://www.sba.gov/smallbusinessplanner/start/financestartup/SBA_INVPROG.html (accessed March 24, 2015).

“Starting a New Business?” Wells Fargo, https://www.wellsfargo.com/biz/products/new_biz/index (accessed March 24, 2015).

“What Lenders Look for in a Business Startup.” Late Blooming Entrepreneurs, June 2, 2011, http://latebloomingentrepreneurs.wordpress.com/2011/06/02/what-lenders-look-for-in-a-business-startup/ (accessed March 24, 2015).

Copyright © 20092015 NAF. All rights reserved.

Copyright © 2009–2015 NAF. All rights reserved.