Getting Funding or Financing: Bruce R. Barringer R. Duane Ireland
Getting Funding or Financing: Bruce R. Barringer R. Duane Ireland
Getting Funding or Financing: Bruce R. Barringer R. Duane Ireland
Getting Funding
or Financing
Bruce R. Barringer
R. Duane Ireland
• Personal Funds
– The vast majority of founders contribute personal funds,
along with sweat equity, to their ventures.
• Sweat equity represents the value of the time and effort that a
founder puts into a new venture.
• Friends and Family
– Friends and family are the second source of funds for many
new ventures.
• Bootstrapping
– A third source of seed money for a new venture is referred
to as bootstrapping.
– Bootstrapping is finding ways to avoid the need for external
financing or funding through creativity, ingenuity,
thriftiness, cost cutting, or any means necessary.
– Many entrepreneurs bootstrap out of necessity.
Obtaining payments in
Minimizing personal Avoiding unnecessary
advance from
expenses expenses
customers
Purpose
• An elevator speech is a brief,
carefully constructed statement
Elevator that outlines the merits of a
business opportunity.
Speech • There are many occasions when a
carefully constructed elevator
speech might come in handy.
• Most elevator speeches are 45
seconds to 2 minutes long.
Total 60 seconds
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10-17
Sources of Equity Funding
Initial Public
Offerings
• Business Angels
– Are individuals who invest their personal capital directly in
start-ups.
– The prototypical business angel is about 50 years old, has
high income and wealth, is well educated, has succeeded as
an entrepreneur, and is interested in the start-up process.
– The number of angel investors in the U.S. has increased
dramatically over the past decade.
• Venture Capital
– Is money that is invested by venture capital firms in start-
ups and small businesses with exceptional growth
potential.
– There are about 800 venture capital firms in the U.S.
• Venture capital firms are limited partnerships of money managers
who raise money in “funds” to invest in start-ups and growing
firms.
• The funds, or pool of money, are raised from wealthy individuals,
pension plans, university endowments, foreign investors, and
similar sources.
• The investors who invest in venture capital funds are called limited
partners. The venture capitalists are called general partners.
Reason 1 Reason 2
Reason 3 Reason 4
• Banks
– Historically, commercial banks have not been viewed as a
practical source of financing for start-up firms.
– This sentiment is not a knock against banks; it is just that
banks are risk averse, and financing start-ups is a risky
business.
• Banks are interested in firms that have a strong cash flow, low
leverage, audited financials, good management, and a healthy
balance sheet.
• 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 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.
– Prosper is the best know peer-to-peer lending network.
• Crowdfunding
– A form of raising money that takes place, usually via the
Internet, where people pool their money to support a start-
up or other initiative, usually in return for some sort of
amenity rather than loan.
– Kickstarter is a popular online crowdfunding platform.
• 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.
– The major advantage of leasing is that it enables a
company to acquire the use of assets with very little or no
down payment.
• Leasing (continued)
– Most leases involve a modest down payment and monthly
payments during the duration of the lease.
– At the end of an equipment lease, the new venture typically
has the option to stop using the equipment, purchase it for
fair market value, or renew the lease.
– Leasing is almost always more expensive than paying cash
for an item, so most entrepreneurs think of leasing as an
alternative to equity or debt financing.
• SBIR Program
– The SBIR Program is a competitive grant program that
provides over $1 billion per year to small businesses in
early-stage and development projects.
– Each year, 11 federal departments and agencies are
required by the SBIR to reserve a portion of their R&D
funds for awards to small businesses.
– Guidelines for how to apply for the grants are provided on
each agency’s Web site.
• Private Grants
– There are a limited number of grant programs available.
– Getting grants takes a little detective work.
– Granting agencies are low key, and must be sought out.
• Other Government Grants
– The federal government has grant programs beyond the
SBIR and STTR programs.
– The full spectrum of grants available is listed at
www.grants.gov.
– Be careful of grant-related scams.
• Strategic Partners
– Strategic partners are another source of capital for new
ventures.
– Many partnerships are formed to share the costs of product
or service development, to gain access to particular
resources, or to facilitate speed to market.
– Older established firms benefit by partnering with young
entrepreneurial firms by gaining access to their creative
ideas and entrepreneurial spirit.