FINANCING A NEW VENTURE 

Objective: Explore lender and investor perspectives relative to capital needs for nascent firms and their growth strategies. 

Key Concepts 

Goal: What are the most important precepts and prescriptions for an organization to consider regarding financing a new venture? 

Definitions 

  • A nascent entrepreneur is defined as a person who is trying to start a new business, who expects to be the owner or part owner of a new firm, or a person who has been active in trying to start the new firm in the past 12 months (1) 
  • A lender is an individual, a public group, a private group or a financial institution that makes funds available to another with the expectation that the funds will be repaid, in addition to any interest and/or fees, either in increments (as in a monthly mortgage payment) or as a lump sum (2) 
  • An investor commits time, money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit. (3) 

Financing is needed to start a business and ramp it up to profitability. There are several sources to consider when looking for start-up financing, debt (lender) and equity (investor) financing being the two major sources (4.) 

Lender Perspectives 

Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. For the creditors (those lending the funds to the business), the reward for providing the debt financing is the interest on the amount lent to the borrower (4) 

Types of Debt Financing to Consider (4): 

Friends and Relatives: great financing source, however, these investments should be made with the same formality that would be used with a commercial lender. This includes the amount borrowed, the interest rate, specific repayment terms (based on the projected cash flow of the start-up business), and collateral in case of default. 

Bonds: debt instrument issued by the company used to raise financing for a specific activity. Bonds allow the company to specify the interest rate and when the company will pay back the principal, while also allowing non-payment of the principal and interest until the bond’s maturity date. This provides risk for the investor because possibility of bankruptcy or a default is a possibility.  

Government Programs: typically, assistance in the form of a government guarantee of the repayment of a loan from a conventional lender. 

Banks and Other Commercial Lenders: the most popular source of financing and also the most difficult to attain, most lenders require a solid business plan, positive track record, and plenty of collateral. 

Commercial Finance Companies: at a rate higher than other commercial lenders, finance companies can be considered when a business is unable to secure financing from other commercial sources. Rely on ability to repay the loan versus track record and profit projections of the business. 

Investor Perspectives 

Equity financing exchanges a portion of the ownership of the business for a financial investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company’s profits (4) 

Issues Considered by the Investor (5) 

Strength of the business plan  

  • Does it seem likely to fail?  
  • Can I make my required rate of return?  
  • What are Agency issues in working with the entrepreneur (entrepreneur’s behaviors, information asymmetry)?  
  • Issues around moral hazard and adverse selection  
  • Possibility of introducing behavioral controls into the relationship (perhaps by direct participation) 
  • Transaction costs associated with the introduction of controls 

Repayment and Exit Issues You Need to Address (6): 

  • Repayment or Investment Exit Ability What evidence exists to convince me I’m going to get a return? What is your personal financial situation.  
  • Management What evidence exists that indicates that this person can manage his/her affairs well enough to allow the opportunity for a return? Have you looked at your credit history?  
  • Personal Investment What evidence exists that this person has enough of a commitment to the business so that I’ll be sure he/she wants to work hard to protect it? (If they protect theirs, they will be protecting mine!) Most lending institutions will require at least 25 percent cash/equity contributed to the total capital cost of the project.  
  • Security If all else (above) fails, what protection do I have to get my money back? What will it be worth when the business fails? 

Venture Capitalist Valuation 

Investors often look at values based on how they will achieve their required returns  

  • If the investor requires an annual return of 30% on each investment, then they will work backwards from the liquidity event.  
  • Example: if $1 million is invested now, then a VC would multiply this by the required interest rate (ex: 2.2) and the number of years to calculate their exit percentage.  
  • Assuming the firm was worth $5 million in year 5, an investor would want $2.2/$5 or 40% of the company now 

Types of Equity Financing to Consider (4): 

Personal Savings: Personal resources can include profit sharing or early retirement funds, real estate equity loans, or cash value insurance policies. 

  • Life Insurance Policies: A standard feature of many life insurance policies is the owner’s ability to borrow against the cash value of the policy. 
  • Home Equity Loans: If your home is paid for, it can be used to generate funds from the entire value of your home. 

Friends and Relatives: Personal relationships can be great a financing source, however, these investments should be made with the same formality that would be used with outside investors. 

Equity Offerings: equity offerings can raise substantial amounts of funds, and occurs when the business sells stock directly to the public 

Initial Public Offerings (IPO): used when companies have profitable operations, management stability, and strong demand for their products or services. Companies are typically in business for several years beforehand. 

Warrants: used for long term financing, warrants encourage investment by minimizing risks and maximizing potential. A warrant grants the owner of the warrant to buy issuing stock at a pre-determined price at a future date. Warrants can be issued to management in a start up company as part of a reimbursement practice. 

Angel Investor: individuals and businesses who aren’t solely economically driven, but are interested in helping small businesses survive and grow. Angel investors typically focus on earlier stage financing and smaller financing amounts 

Venture Capital: provide capital to young businesses in exchange for an ownership share of the business. Venture capitalists are more economic driven and prefer to invest in companies that have received significant equity investments from the founders and are already profitable. Often focused on short term gain  

Funds for Free from the Federal Government 

Government Grants: Federal and state governments often have financial assistance in the form of grants and/or tax credits for start-up or expanding businesses.  

The government-run website grants.gov is an excellent place to start. It has all the information you need to understand the process of obtaining funds from the federal government. The huge benefit of Carmike Grande since that you will not be required to repay a grant. This is in contrast to alone you might request from the Small Business Administration. The downside is that obtaining grants is its own Challenge and quite different than writing a business plan. It is likely that you will need input from someone who has expertise in writing Grant applications. The second downside is that being process of obtaining federal funds is not a quick one. If you desire to get your company up and running quickly then this mechanism is not going to fit your needs. 

Capital Needs & Growth Strategies (5) 

Equity Financing over Enterprise Lifecycle 

  • Concept Stage 
  • Self  
  • Family and Friends 
  • Business Start Up 
  • Angels 
  • Government Programs 
  • First Stage Expansion 
  • Some Venture Capital 
  • Bank Financing 
  • Second Stage Expansion 
  • Venture Capitalist 
  • Third Stage Expansion 
  • Acquisition 
  • IPO 

Interrogate and Extend Concepts 

Goal: Propose and answer clarifying questions about the session. These clarifying questions are intended to consider and challenge the resources, ideas, and concepts. 

Q & A #1: What should I pursue absolute control over the company direction or funds? 

The reality is that there are several scenarios: You can potentially give up so much equity that you lose interest in your organization and have little incentive to carry on.  

Starting a new venture is incredibly time-consuming and stressful. If you give up too much equity to launch your new enterprise you may end up with so little obvious potential return that it’s hard to justify the effort involved. Alternatively, you can be so focused on maintaining control that you miss opportunities to obtain the funds you all actually need to launch the company. An investor is not going to buy into your concept unless they perceive that they will receive a fair return on their investment.  

You will need to seek the middle ground where you give up some equity in exchange for sufficient funds to support the vision you have created. One solution which is effective is to ask for funds in stages. That is, only asked for as much money as you need at the exact moment. That process maximizes the value you get for the money since as the company achieves success it will be able to acquire more money at a lower cost per equity given away. 

Q & A #2 (DEVIL’S ADVOCATE): Money is money right? 

In fact, money comes and multiple forms.  

Some investors will be a poor match for your vision and goals. Imagine an investor who only cares about profit in a company where you care about sustainability and treatment of employees. You will end up in endless fights about how to save money.  

Or you may choose the investor who can give you more money to launch your company but is swamped with other activities. You may have done better with the investor who less last money but who had the time to help answer your questions and guide you in your new enterprise. 

Supplement Concepts 

Goal: Supply current, quality web links to supplementary material that support, illustrate, elaborate/expound on, typify, and challenge a concept, piece of content, or idea. 

Financing Your New Venture  

  • Why we chose the supplementary material: Financing Your New Venture provides information regarding the financing solutions available, as well as sharing when and how these solutions can be obtained, delivering the content in an accessible PowerPoint format. 
  • What is important about it: Financing is a key function in any business. Ventures that handle cash flow negatively do not last. Financing Your New Ventures provides steps to valuing your business for venture capitalists, and angel investors, while providing tips to finance your venture the best to your ability with additional resources first. 
  • What part(s) of the Learning Module it supplements: Financing Your New Venture supports the various forms of financing available, be it debt or equity, while providing tips on how to secure the financing necessary.  
  • What the key takeaways are: As a new venture you should determine if it is important to raise enough money to cover the total cumulative negative cash flow. Despite what you decide, reducing the amount needed through careful management of expenses and cash flow should be the goal. Personal funding is the most common and least expensive form of financing, but may not reap the cash necessary. Turning to debt financing doesn’t involve reducing control as equity financing does, but each have their pros and cons. If equity financing is determined to be favorable, be aware that if you want an investor, you have to show them a specific exit strategy (sometimes more than one). 

Financial Resources 

  • Why we chose the supplementary material: We hear the importance of financing for new ventures, but aren’t given the tools to manage and dictate financing services to work efficiently. 
  • What is important about it: Discusses and defines asset management and it’s place in debt and equity financing  
  • What part(s) of the Learning Module it supplements: While the various levels of financing are discussed, Financial Resources for New Ventures shares the importance of managing the financing tool chosen to make it work for the business efficiently. 
  • What the key takeaways are: Financing means more than merely obtaining money, but is very much a process of managing assets wisely to use capital efficiently.   

Planning New Venture – (2008) Planning the New Venture. In: Nurturing Science-based Ventures. Springer, London 

  • Why we chose the supplementary material: Discusses the importance of a business plan in financing your venture, providing a step by step checklist of what should be in a business plan. 
  • What is important about it: Provides information on what a business plan is, what should be included in a business plan, along with who will read the business plan. 
  • What part(s) of the Learning Module it supplements: While Learning Module E discusses investor and lender perspectives regarding financing, Planning the New Venture provides the what and how to achieving this financing, through use of the business plan. 
  • What the key takeaways are: Lenders and investors want to know that you’ve invested time, money, and effort into the life of the business before they’ll ever consider investing. A business plan shows commitment to the venture, and provides a road map to what you want to achieve, and how you plan to achieve it. 

Debt and Equity Financing – Dr. Bill Todorovic Richard T. Doermer School of Business and Management 

  • Why we chose the supplementary material: This material provides a comparison of debt and equity financing, touching on factors considered in financing along with questions lenders may ask 
  • What is important about it: Being aware of the questions lenders could ask, and factors taken into consideration for financing, venture will be better prepared and aligned for financing success. 
  • What part(s) of the Learning Module it supplements: The material supplements the detail of financing available for debt and equity financing 
  • What the key takeaways are: It’s basically high profitability vs. high financial risk 

 

 

References 

The Life Cycle of Entrepreneurial Ventures  

Lender https://www.investopedia.com/terms/l/lender.asp#ixzz505IV1Qdf  

Investing https://www.investopedia.com/terms/i/investing.asp#ixzz505JMUZbX  

Types and Sources of Financing for Start-up Businesses 

Financing Your New Venture 

Financing Your New Venture – Stephen Daze 

Social Responsibility in Entrepreneurship

In today’s retail climate, consumers are in control. Businesses are forced to be more transparent, and are being held to higher standards in regards to the who, what, where and how their products are being produced. If you’re found to take shortcuts in quality, have a negative impact on the environment, or enlist the labor of those disproportionately compensated, the public will find out and your status and sales will suffer as a result. In the age of technology news travels quickly, and for companies who aren’t socially responsible, new travels like wildfire.

Companies like Tom’s and Patagonia have set the standard on what it means to be socially responsible, each sacrificing resources for the greater good. Their effort do not go unnoticed and because the y care about others they are handsomely rewarded by consumers who appreciate their efforts and want to be involved also.

To better understand what it means to be socially responsible we’ll discuss what social responsibility is, what it means for a company to be socially responsible, sharing examples and tips to help you become social responsibility with tips.

What is Social Responsibility?

Entrepreneur defines Social Responsibility as: acting with concern and sensitivity; being aware of the impact your actions have on others, and the environment.

What does it Mean for a Business to be Socially Responsible?

There are many ways for a business to be socially responsible. Something as simple as providing a recycling system at the workplace, while also providing recyclable utensils, and motion sensor lighting shows a company is aware of their environmental impact and their desire to minimizing this impact. Teaming up with a local non-profit for a food or coat drive is also a good way for businesses to get involved in their communities.

Examples of Social Responsibility:

Tom’s Shoes: Introducing a business model many brands have adopted themselves, Tom’s donates a pair of shoes to a child in need for every shoe purchased around the world. Not only does this model provide a simple way for consumers to get involved and show their support in a simple fun way, the shoes truly make a difference in the lives of the less fortunate.

Patagonia: Much like Tom’s, Patagonia created its own way of doing things that other businesses are implementing. While Tom’s is giving away a pair of shoes for every pair purchased, Patagonia is forcing mills and factories to improve the efficiency of their machinery processes with a focus on minimizing the huge impact fashion has on the world. If factories and mills don’t meet their standards, they will discontinue doing business with the factory until improvements are made.

Patagonia also shares their factory and mills list with other brands in hopes that those that are sub-par will feel the heat losing money can bring.

How Can You Make a Difference?

As a smaller business, you most likely have fewer resources compared to brands like Tom’s and Patagonia, but despite the difference in resources you still can make your own impact in your own way.

Entrepreneur’s article on social responsibility shares these tips:

Set goals. What do you want to achieve? What do you want your company to achieve? Do you want to enter a new market? Introduce a new product? Enhance your business’s image?

Decide what cause you want to align yourself with. This may be your toughest decision, considering all the option out there: children, the environment, senior citizens, homeless people, people with disabilities–the list goes on. You might want to consider a cause that fits in with your products or services. For example, a manufacturer of women’s clothing could get involved in funding breast cancer research. Another way to narrow the field is by considering not only causes you feel strongly about, but also those that your customers consider significant.

Choose a nonprofit or other organization to partner with. Get to know the group, and make sure it’s sound, upstanding, geographically convenient and willing to cooperate with you in developing a partnership.

Design a program, and propose it to the nonprofit group. Besides laying out what you plan to accomplish, also include indicators that will measure the program’s success in tangible terms.

Negotiate an agreement with the organization. Know what they want before you sit down, and try to address their concerns upfront.

Involve employees. Unless you get employees involved from the beginning, they won’t be able to communicate the real caring involved in the campaign to customers.

Involve customers. Don’t just do something good and tell your customers about it later. Get customers involved, too. A sporting goods store could have customers bring in used equipment for a children’s shelter, then give them a 15 percent discount on new purchases. Make it easy for customer to do good; then reward them for doing it.

Paying it Forward

I’ve been fortunate enough to snag an interview from almost every entrepreneur I’ve reached out to here locally in Raleigh. With nothing to give in exchange for their time and knowledge, each person took it upon themselves to take time out of their busy schedules and pay forward the knowledge others either passed to them or they gained through trial and error to me. I am always appreciative of these exchanges and express that if there is every anything I can do to help them in return to say the word.

It wasn’t until after I noticed a pattern did I realize the effect their willingness to help me create in a way a loyalty in me for them. While I may not be a resource to them at this present moment, no one knows what the future holds and what factor I could play in their lives later down the road.

In his book “It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights and other Acts of Entrepreneurial Daring”, Steven Schussler tells a story of a time when he helped a young lady out by speaking at an engagement for her free of charge, just wanting to help out and be a resource. There was nothing in return he required of the young lady, or ever expected to receive in the future. Fast forward a a year later and he’s hoping to strike a deal with Disney for his Rainforest Café. Disney deals are one of, if not THE, hardest business deals to acquire. When going to meet with the young lady and her associates, Schussler is given the deal, a big reason being his willingness to help others achieve their goals, not expecting anything in return.

There are few better ways of connecting with someone than doing so when they are vulnerable. When you help out someone else and pay it forward, it’s a great opportunity for you to bond with them. Whether you are just helping someone for the day or you make a lifelong friend out of the situation, paying it forward opens the world to a ton of new connections, and maybe new opportunities when you least expect it (Pennsauken Golf Course Villas).

The Non-Seller’s Guide to Selling

I’m really not a fan of “selling”.

The word alone places a feeling over me that I can’t explain; a negative emotion I’d rather do without. It could be the fact I’ve only sold items and services that didn’t appeal to me personally, or how annoying it makes me feel to bother someone, but with those things in mind, I still believe the ability to sell a key function all entrepreneurs should know and understand. Recognizing its importance, we’ll learn the role it plays in selling product, sharing a vision, and solidifying an idea, and discover a few tips on selling effectively when selling isn’t naturally your “thing”?

Why is Selling Important?

Selling provides funding for your business to continue. If you aren’t willing to sell your product you’re virtually not willing to be in business for long.

Selling isn’t just about cash for product/service. Selling allows you the opportunity to convince others why your idea and product is worth looking at and investing into. If you aren’t able to convince others your idea is the best, it is but a raisin in the sun.

Selling is also the end process of all the hard work invested in getting your idea or service to market. It solidifies all the late nights and sacrifices made, the opportunity to be purchased proof of your idea turned reality.

How Should Selling Be Approached?

Think Good Thoughts

If you choose to hate selling, you’ll never be good at. Change your attitude and it give it a solid effort.

Selling Actual Helps

As I stated above, I feel like a pest whenever I cold call or solicit someone with an offer. Making the decision to never sell someone something they don’t need, and viewing selling as a way to provide someone something they actually want/didn’t know they need will improve your outlook on what the art of selling is and can be.

It’s a Conversation

For many the reason for starting a business is to work with/around the people and things that interest them on their terms. If you approach selling as a conversation between two like minded people, you’ll soon learn that selling isn’t always about the product, but the connection felt with someone about the pro

For more information on selling for non-sellers check out this article by Geoffrey James for Inc.

Tips on Creating a Business Card with Legs

If you haven’t had the opportunity to read Steven Schussler’s “It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring, you’re missing great dialogue on the important role business cards play in networking and creating a lasting impression. The founder of the Rainforest Café believes we should all leave something behind that people will remember us by and has been doing so for years with his custom creative business cards. While his are made of plastic are metal, and possible in the shape of a 1957 Chevy convertible, there are various creative ideas and alternatives that fit all styles and budgets. Today we’ll discuss what a business card is, it’s importance, and tips on creating one that won’t end up in the trash.

What is a Business Card?

A business card is a small card printed with one’s name, professional occupation, company position, business address, and other relevant contact information. They’ve been around for ages, originating back to 17th century England, where businesses would use them for advertising, as well as maps, since street numbering systems didn’t exist at the time (The Balance).

Why Are Business Cards Important?

In Japanese culture, business cards are treated as an extension of the person and are always to be treated with honor and respect. It’s pertinent to make a continuing impression, even after you’re no longer physically present, and use of business cards make this possible. It’s this element that constitutes the continued need for business cards and why they surpass social media in certain situations.

How Can I Make a Business Card with a Lasting Impression?

Keep it Simple

Less is More.

Paper Holds Weight in the Perfect Business Card

Quality is always key. Don’t spend your entire savings, but if possible splurge a little on thicker paper, plastic or metal. It’s give your card the look and feel that will have it walking into other’s hands and past the trash.

Seeing is Believing

We’re in the age of Instagram where we prefer to see and hear, rather than read. As unfortunate as this is, playing into how information is received today will only benefit you and your business card. After listing important contact information, try implementing a visual other than more words to catch the receiver’s attention.

Don’t Go Color Crazy

Color is welcome, but make sure it’s in the aesthetic and branding of the rest of your marketing materials and color story

Don’t Forget the Who, What, Where, and Why?

Design is definitely important in engaging the receiver but don’t forget to include important information like who you are, where you’re located, and how you can be contacted. Since design is important feel free to include the super important details, leaving what you can do without off. You don’t want your business card to be too crammed.

For information on creating the perfect business card check out the Creative Market, and the Creative Bloq.

Everyone Can Use a Little R&D

As entrepreneurs we want our ideas out of our head and in our hands as soon as possible. Many times, forfeiting the proper steps to ensure our ideas are the best they can be. Today we’ll discuss what research and development (R&D) is, and why it’s important for entrepreneurs to utilize.

What is R&D?

Business Dictionary defines Research and Development as a systematic activity that combines both basic and applied research aimed at discovering solutions to problems or creating new goods and knowledge. As a result of R&D, businesses and individuals may result in ownership of intellectual property such as patents.

Why is R&D Important?

R&D Can Lead to Innovation

“When a company or person conducts research and development, whether to create a new product or service or update an existing one, the desired end result is always innovation. Innovation can be defined as a new method, product or idea, so the successful application of research and development results in a new idea or product and therefore achieves innovation” (Investopedia). If not for the time taken to properly research and develop prototypes using student athletes, Phil Knight’s Nike would not exist, and the world would not know the importance of the air bubbles in the sole of a shoe.

R&D Can Save Time and Money

Upfront costs for research and development can prove costly, and as a result scares many entrepreneurs and businesses away. Viewing R&D as a tool necessary to the success and longevity of your business, and not just an unnecessary cost to doing business, will actually save you the time and money introducing to market a product not needed, or ready, will waste. R&D not only will save you from ill advised decisions, but can help a company follow or stay ahead of emerging market trends, keeping the company relevant (Investopedia).

Research and Development plays a significant role in the life of an entrepreneur. If time isn’t taken to properly flesh out the details of your idea, later using that information to mold and deliver a product that is the best it can be, you’re setting yourself up for failure. R&D helps get the kinks out, and can save you time, money, and wasted effort down the road.

The Key to Multitasking Effectively

As an entrepreneur, you’ll be required to wear many hats and perform a million different tasks on the road to establishing your venture. Having the ability to handle what’s asked of you, while others are being added are key to your success, and making efficient use of the little time we are all allotted. Today we’ll discuss the importance of multitasking and tips for improving the skill.

Many argue that multitasking isn’t really productive since the brain has to stop completion of on one task to work on another, which typically results in mistakes that end up costing you more time in the long run. Although it has it has its merit, multitasking effectively isn’t about doing multiple things at once, but more about planning out your day, coupling tasks that work together and checking those tasks off in the minimum amount of time possible. The ability to effectively multitask is important for everyone, but entrepreneurs in particular because so much of our success personally and professionally depends on what we’re able to accomplish in the time allowed. Neither side of our lives slows can be scaled back or postponed. Author Anne Bachrach shares a few tips from her article “Tips for Effective Multitasking for Entrepreneurs” below:

Group like tasks together

Attempting to cook dinner while reading an assignment is not effective multitasking. One of the two tasks will suffer as a result of the other. Cooking dinner while throwing in a load of laundry is in fact effective. Once the load is in the washer, no more thought or effort is required, leaving full attention to dinner.

Create a to-do list

Once a system is created, the difficulty surrounding multitasking will be minimized, and the time you’re left for another task will be maximized. A to-do list is vital in establishing this system. Anne states that, “creating a to-do list will help you to see the big picture of the day’s duties, helping keep you on track throughout the day, with the goal for the To-Do List to help you prioritize the “must do” tasks and complete them before your set deadline.

Defined goals with the end result

Defining your goals after deciding what must be done will help keep you motivated to stay on track

Budgeted time/schedule

Allow each task on your to-do list a specific amount of time to be completed to hold yourself accountable and prevent procrastination. Working in smaller blocks of time maximizes focus and efficiency. Completing 3 client calls in 30 minutes is easier too navigate and focus on than completing those same 3 calls in 2 hours.

Remove distractions

Distractions will hinder any plan if allowed to, so be aware of what can distract you and remove those from your workspace. If you’re prone to checking your cell phone every so often, try muting your ringer, or turning the phone off until your task is complete.

Effectively multitasking will not only improve your efficiency and work output, but will decrease the stress having a million things to do can cause. Remember to group like tasks together, place them on a to-do list, and applying a proper time for completion of each, and you’ll be on your way to a successful venture and life in no time.