ENTREPRENEURSHIP

FINANCING ENTREPRENEURIAL VENTURES

Dr Stephen Nhuta
Graduate School of Business Leadership
 CAPITAL REQUIREMENTS

Determining capital requirements

 Quantity of sales
 Production capacity of the venture
 The types of activities of the venture
 The length of the working capital cycle
 Competition
 Expansion of the venture
 High growth
 CAPITAL REQUIREMENTS

 Timmons three core principles of Entrepreneurial finance

 more cash is preferred
 cash sooner
 less risky cash
 Entrepreneurs often ignore above
 Understand the critical financing issues and problems
 FINANCING ISSUES
 the creation of value
 allocating risks and returns
 balance between cash, risk and time
 cover the risks
 balance the need for start up capital with preservation of equity
 evaluate risk capital
 capital infusion
 investors that add value
 HOW TO RAISE CAPITAL
 Sweat Equity
 SBIR
 Banks
 Angels
 Venture Capitalists
 personal funds
 family and friends
 suppliers and trade credit
 commercial banks
 insurance companies
 pension funds
 private equity placements
 employee equity offerings
 public equity offerings
 government programs
 LENDER EXPECTATIONS

 Good Business Track Record

 Ability to Repay
 Staying Power
 Community impact
 Collateral
 KEY ELEMENTS TO PRESENT TO
INVESTORS
 A formal Business Plan
 A concise Executive Summary
 A complete, Realistic Financials
 Know the business
 A strong Management Team
 Scalability - ability to grow without being hampered by its
structure or available resources
 DETERRING CAPITAL
REQUIREMENTS
 Capital influences ability to enter into
market/performance post entry (enter at a minimum
efficient scale)
 Economies of scale
 Capital intensity - Deters new venture formation
 Government imposed costs
 Liquidity constraints
 Lack of track record
 DETERRING CAPITAL
REQUIREMENTS
 Information asymmetries
 Lack of sufficient own capital
 Poor credit worthiness
 Poor income potential
 Business risk
 MOST COMMON PROBLEMS FOR FAILURE
TO OBTAIN CORRECT FINANCING

Incomplete/poor business plan

Lack of management knowledge and skills
High interest rates
A lack of security
Weak economic conditions
 FINANCING YOUR BUSINESS

• You’ve written your business plan, you’re excited about your

business idea, and now it’s time to get started.

• However you don’t have the financing to fully realize your dream.

• What are the options? There are numerous routes that you can
take, and each has its advantages and disadvantages.
 FINANCING YOUR BUSINESS
ENTREPRENEURIAL RESOURCES

 Entrepreneurs use their creative talents to secure necessary resources to start

their businesses

 Most start-up funds come from an entrepreneur’s personal resources;

however, there are other common sources of funding

 One of the unique talents of entrepreneurs is finding the resources to launch a

business requires the understanding of:
 Short-term needs, those associated with activities not part of normal
operations
 Long-term capital needs, relating to preparation for future growth
 FINANCING YOUR BUSINESS
BOOTSTRAPPING
 Most entrepreneurs get their businesses started by bootstrapping
 This means operating a business as frugally as possible and cutting all
unnecessary expenses, such as borrowing, leasing, and partnering to acquire
resources
 Bootstrapping involves:
 hiring as few employees as possible
 leasing anything you can
 being creative
 Bootstrapping entrepreneurs can also ask suppliers to allow for longer
payments terms, ask customers to pay in advance, or sell their accounts
receivable to a factor
 Factor - an agent who handles an entrepreneur’s accounts receivable for a fee
 SOURCES FOR START UP MONEY
 The main sources for start-up money for entrepreneurs include:
 Friends
 Family
 other resources, such as savings, credit cards, loans, and
investments
 Some sources of financing include:
 Banks
 finance companies
 investment companies
 government grants
 EQUITY FINANCING
What is equity capital

•Equity financing is the process of raising capital through the sale of shares in an
enterprise.
•Equity financing essentially refers to the sale of an ownership interest to raise
funds for business purposes. Equity financing spans a wide range of activities in
scale and scope, from a few thousand dollars raised by an entrepreneur from
friends and family, to giant  initial public offering (IPOs) running into the billions
by household names such as Google and Facebook.
•While the term is generally associated with financing by public companies listed
on an exchange, it includes financing by private companies as well. Equity
financing is distinct from debt financing, which refers to funds borrowed by a
business
•Equity funding is sometimes called risk capital - money invested in companies
where there is financial risk
 SOURCES OF EQUITY
FINANCING
Angels Investors
An angel often invests because of his or her belief in a business concept and
the founding team
Angel - a private, nonprofessional investor, such as a friend, a relative, or a
business associate, who funds start-up companies
There is no public exchange listing for their securities
Angels invest their own funds unlike venture capitalists who manage the
pooled money of others
Bear extremely high risks hence they require a very high return on investment
They take active management roles and board seats
Don't invest in lifestyle companies with limited earnings potential
 SOURCES OF EQUITY FINANCING
Venture Capital
 VC firm is interested in funding needs a sound business plan and it will begin due
diligence (investigation and analysis)
 Can use venture capital financing to raise large amounts of money to achieve its goals
 Venture capital - a source of equity financing for small businesses with exceptional
growth potential and experienced senior management
 Venture capitalists often provide managerial and technical expertise to small
businesses
 Venture capitalists individual investors or investment firms that invest venture capital
professionally
 Put money into businesses that regular banks won't finance
 Higher risk / Higher returns
 Interested in technology
 Give management assistance
 SOURCES OF EQUITY
FINANCING
 Ventures perform the following
 Identifying/evaluating business opportunities.
 Negotiating /closing the investment.
 Tracking /coaching the company.
 Providing technical/management assistance.
 Attracting additional capital/directors/ management
 Sits on Board
 Arranges Exit and Liquidation
 Organizes Partnership
 Receives Management Fee
 ADVANTAGES EQUITY FINANCING

 Less risky than a loan 

 You tap into the investor's network

 Investors don't expect a return on their investment immediately.

 Profits not channeled into loan repayment.

 More cash on hand 

 Requirement to pay back the investment

 DISADVANTAGES - EQUITY
FINANCING

 Returns more than the rate you would pay for a bank loan.

 Ownership of your company and a percentage of the profits

 Consultations before making big decisions

 Disagreements may require need to cash in your portion 

 Time and effort to find the right investor

 OTHER SOURCES OF FINANCING
Debt Capital
 Sources of debt capital are far more numerous than sources of equity
capital, but the entrepreneur must be certain the business can
generate enough cash flow to repay the loan.
 debt capital - money raised by taking out loans, which must be repaid
with interest
 Banks were once the primary source of operating capital, but today
they are much more conservative in their lending practices
 Operating capital money a business uses to support its operations in
the short term
 Working capital or capital expenditures by selling bonds, bills, or
notes
 A promise that the principal/interest on the debt will be repaid
 Collateral required as an assurance/will be forfeited
 Other forms of security required on a loan
 Debt financing through an unsecured loan
 OTHER SOURCES OF FINANCING
Advantages to debt financing
 The bank or lending institution has no say in the way you run your
company and does not have any ownership in your business.
 The business relationship ends once the money is paid back.
 The interest on the loan is tax deductible.
 Loans can be short term or long term.
 Principal and interest are known figures you can plan in a budget
Draw backs to debt financing
 Obligation to make payments
 High interest rates
 Impacts one’s credit rating
 Cash and collateral
 OTHER SOURCES OF
FINANCING
Sources of Debt Financing
 A business can usually get a line of credit from a bank, which it can
borrow against
 Line of credit - an arrangement whereby a lender agrees to lend up to a
specific amount of money at a certain interest rate for a specific period
of time
 Some businesses may seek trade credit from other companies in their
industry as a form of debt financing
 Trade credit - credit one business grants to another business for the
purchase of goods or services; a source of short-term financing
provided by one business within another business’s industry or trade
 OTHER SOURCES OF
FINANCING
Banks

Banks consider the capacity of a business to pay its debts.

Capacity - the ability of a business to pay a loan in view of its income and obligations

Banks place emphasis on a financially stable capital structure

Capital - the net worth of a business, the amount by which its assets exceed its
liabilities

Banks are more likely to lend to businesses with valuable collateral

Collateral security in the form of assets that a company pledges to a lender

Banks consider all the conditions in which the business operates

Conditions are the circumstances at the time of the loan request i.e. potential for
growth, amount of competition, location, form of ownership, and insurance
 OTHER SOURCES OF
FINANCING
Mezzanine financing:
 unsecured debt
 The tradeoff is a high interest rate
 lender has the right to convert the debt into equity
 offers quick liquidity.
Hybrid financing:
 A combination of debt and equity financing
 What is the proper combination?
 Finance theory is that in a perfect market, without taxes, the value of a firm is the same
whether it is financed completely by debt or equity or a hybrid.
 Above too theoretical since real companies do have to pay taxes, and there are costs
associated with bankruptcy./////////