| Documents You Will Need |
For equity financing..
Business
Plan & Investor Presentation
Series A & B Financing Term Sheets
For debt financing...
Bank
Loan Application - Sample 1
Bank Loan Application - Sample 2
Sample Personal Financial Statement
| Actual Funding Source Directories |
Commercial Banks (Non-Members Can View)
| Video Demonstrations |
You will need RealPlayer to view these videos - If you don't have it, click on the image below for free download.
What Investors Are Looking For (Non-Members Can View)
Business
Plan Contents
Creating a Business Plan
Explaining the Problem You Are Trying To Solve
Market, Competition, and Differentiation
Establishing the Differentiation
Reasonable Revenue Projections
Meeting With Venture Capitalists (VCs)
Steps Involved in Doing a VC Deal
Overall Due Diligence Insights
Term Sheet and Capitalization Table
Sources
of Capital
While there are many ways to fund the launch and growth of your
business, most can be boiled down to three main areas:
Equity
Capital
Debt
Financing
Other
Alternatives
Each financing approach has its own advantages and restrictions,
and the type of financing that is best for your business is dependent on
a number of factors including your company's business model, financial
state, operations, size, stage, industry, geographic reach, and other
attributes. Additionally, you should consider your own vision for the
company and the management team's sensitivities with regards to
ownership, control, and growth.
Equity Capital
Essentially, equity capital is money that is invested into a
company in exchange for an ownership interest in that company.
Traditionally, equity capital—unlike debt—is not intended to be
repaid according to a specific schedule and is not secured (or
guaranteed) by the company's assets. Instead, an equity investor (i.e.,
the individual or entity that supplies the company with the money)
expects that, within a certain time frame, the ownership percentage she
holds will be worth more than the original amount she invested.
You may be more familiar than you think with the concept of equity
capital. Millions of people are public equity investors because they own
shares in large corporations such as Microsoft and Wal-Mart, companies
whose ownership interests are priced and traded publicly. In Equity
Capital Market Landscape, however, when we say equity capital, we are
referring to private equity capital, which represents money that is
invested in private companies, or those that are not listed on the NYSE
or NASDAQ exchanges.
How
do you know if equity capital is for your company?
Public
equity capital is only for large proven companies, often with hundreds
of millions of dollars in revenues and profits. The opportunities for
companies to secure public equity capital for the first time, or to go
public in an IPO, are extremely limited.
Private
equity capital, on the other hand, can be appropriate for fast-growing,
young companies. Also, please note that for those fast-growing, young
companies that have (1) limited capital needs and (2) stable cash flow
or a substantial tangible asset base, debt financing may be a better
financing alternative.
Why
might debt financing be more appropriate?
At
first glance, it may seem like equity is a better deal for a company
than debt, but private equity investors are no fools. In fact,
experienced private equity investors usually make a 25% return on
investment (ROI), far more expensive for a company than the typical debt
interest rate of less than 15%. Additionally, private equity investors
know that an equity investment in a company is a much more risky vehicle
for their money than a loan (i.e., debt) to a company. Therefore there
are a number of checks and balances inherent in the structuring of a
private equity investment and the corresponding ownership interest.
So
why does any company seek private equity capital?
Private
equity is often the only option for a start-up company with high growth
potential. For example, TechForCash, a start-up software company,
anticipates product development expenditures of $1 million during the
two years of its life. In its third year, fourth, and fifth years, it
expects to make $1 million, $2 million, and $4 million, respectively.
Despite this remarkable growth potential, TechForCash would probably not
be able to get a loan to finance its launch. However, if TechForCash has
a strong business plan, an impressive management team, a pilot product,
and a couple of clients, a private equity investor may be willing give
the company $1 million in development capital, in exchange for, say, 25%
ownership in the company.
What
are the sources of private equity capital?
There
are many types of private equity investors, including angels, venture
capital firms, leveraged buyout firms, and large companies, all of which
are described below. Most private equity investors, regardless of type,
tend to be somewhat specialized based on factors such as investment
size, company stage, industry, and region.
Angels
In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage start-up venture life cycle. These "angel investors" will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.
Venture
Capital Firms
Venture
capital firms are pools of capital, typically organized as a limited
partnership, that invest in companies that represent the opportunity for
a high rate of return within five to seven years. The venture capitalist
may look at several hundred investment opportunities before investing in
only a few selected companies with favorable financing opportunities.
Far from being simply passive financiers, venture capitalists foster
growth in companies through their involvement in the management,
strategic marketing and planning of their invested companies. They are
entrepreneurs first, financiers second.
Leveraged
Buyout Firms
Leveraged
buyout firms specialize in helping entrepreneurs to finance the purchase
of established companies. The approach of such firms is to provide a
management team with enough equity to make a small down payment on the
purchase of a business, and then to pay the rest of the purchase price
with borrowed money. The assets of the company are used as collateral
for the loans, and the cash flow of the company is used to pay off the
debt. Because the acquired company itself is paying the freight for its
own acquisition, these investments were originally known as
"boot-strap" deals. Eventually they became known as leveraged
buyouts, or management buyouts.
Large
Corporations
One
form of investing that was popular in the 1980s and is again very
popular is corporate venturing. This is usually called "direct
investing" in portfolio companies by venture capital programs or
subsidiaries of non-financial corporations. These investment vehicles
seek to find qualified investment opportunities that are congruent with
the parent company’s strategic technology or that provide synergy or
cost savings.
These
corporate venturing programs may be loosely organized programs
affiliated with existing business development programs or may be
self-contained entities with a strategic charter and mission to make
investments congruent with the parent’s strategic mission. There are
some venture firms that specialize in advising, consulting and managing
a corporation’s venturing program.
The
typical distinction between corporate venturing and other types of
venture investment vehicles is that corporate venturing is usually
performed with corporate strategic objectives in mind, while other
venture investment vehicles have investment return or financial
objectives as their primary goal. This may be a generalization as
corporate venture programs are not immune to financial considerations,
but the distinction can be made.
The
other distinction of corporate venture programs is that they usually
invest their parent’s capital while other venture investment vehicles
invest outside investors’ capital.
Debt Financing
Debt refers to capital that is loaned by a lender to a borrower,
who is in turn obligated (1) to repay the original amount loaned--or the
principal--within a specified time period, and (2) to pay interest on
the principal.
In fact, you are probably more familiar
with debt capital than you think. Common types of debt include credit
cards and mortgages.
How
do you know if debt capital is for your company?
While
the terms under which the loan agreement is made are often in writing
and are legally enforceable, lenders seek to protect their investment by
lending debt capital only to those entities which demonstrate the
ability to repay it at a desirable interest rate. In some cases, lenders
further protect their investment by offering secured debt capital. If
secured debt capital is not repaid according to the agreed terms, a
lender may have the right to take possession of the securitized
assets--or assets that were promised to the lender in the event that the
loan was not repaid.
Therefore,
debt capital is most appropriate for those companies that can
demonstrate stable cash flow and/or those companies that have a
significant asset base.
What
are the types of debt capital?
Debt
capital ranges from credit cards and lines of credit to bank loans and
high yield debt. The type of debt that is best for your company depends
on many factors. For example, relevant factors include the amount of
capital your company needs, the size of your company, and the financial
state of the company (including the existing capitalization of the
company, or how your company is currently financed).
Where
can I find debt capital?
Depending
on the type of debt your company seeks, there are numerous sources of
debt capital, including commercial banks, credit unions, the government,
credit card companies, community organizations, and specialty finance
companies.
Other Alternatives
What are other financing options besides equity and debt?
The list of other financing options is very long, but can be
classified into the following categories:
- Personal Resources
- Other Founders and Managers
- Family and Friends
- Customers
- Suppliers
- Government Sources
- Strategic Partners and Entities
Personal
Resources
Nearly
all entrepreneurs utilize personal resources to start a business. For
example, many entrepreneurs start their business out of their homes,
using their own administrative resources such as their own telephone,
computer, furniture, vehicles, etc. In addition, before entrepreneurs
secure customers and/or receive outside funding, they typically work for
"free," meaning that they are not compensated in the
traditional sense for the time that they work. Moreover, some of them
use their savings to pay for the initial launch costs like product
development or marketing expenses. In fact, successful serial
entrepreneurs often use the financial gains resulting from their
previous ventures to launch new companies.
Other
Founders and Managers
During
the initial stages of a company's life cycle, an entrepreneur can
sometimes depend on her fellow founders and managers to support the
business. For example, other founders may be able to contribute their
own personal resources to the venture. Additionally, often other
founders and managers will work for significantly less and/or deferred
monetary compensation than they would otherwise require when helping to
launch a business.
Family
and Friends
The
support of their family and friends is often very helpful when starting
a business. Family and friends can contribute assistance similar to
those described in Personal Resources. For example, a woman beginning
her own catering firm may ask her daughters to act as servers for the
first few engagements. Alternatively, a budding software entrepreneur
receive a computer system as a birthday present from her family.
Additionally, some entrepreneurs are lucky enough to turn to Family and
Friends for significant financial support. The Friends and Family of
very well-connected entrepreneurs are often business people themselves
and can offer not only financial assistance, but also relevant business
advice and industry expertise.
Customers
Customers
are the most traditional source of capital. A new company will receive
money--or revenue--for the products and/or services that it has provided
to its customer. Ideally, the amount of the revenue is greater than the
cost of producing the products and/or services. The difference between
the revenue and the cost is profit, which can be plowed back into the
company to fund its growth. High margin products and/or services, or
goods for which the profits are relatively high as compared to the
costs, are often good sources of capital.
Many
of today's high-growth companies incur expenses either (1) prior to
being able to deliver a product or (2) at an initial level that cannot
be covered by the initial revenues. However, these companies are
sometimes able to secure advance revenue, or payment from customers for
products and/or services that are to be delivered in the future. Also,
many companies in their initial stages of development offer high margin
services, the profits of which are used to fund product development and
other expensive processes.
Suppliers
Suppliers
can be a source of capital when they deliver a product or service
necessary for a new company's development before receiving payment. For
example, if a new company orders and receives 5 computers for its
employees in June and is not required to pay for them until October, the
computer vendor is effectively a source of short-term capital. This type
of financing, which involves the Accounts Payable line of a company's
balance sheet, is a form of debt capital.
Government
Sources
Federal,
state, and local governments have many programs that promote
entrepreneurship and the advancement of technology through the
disbursement of grants and awards and other types of assistance. These
programs number in the thousands and are very diverse, and the
eligibility of a company for these resources can depend on the company's
stage, industry, location, business description, owner, and other
factors.
Strategic
Partners and Entities
Many
new companies are boosted by the support of partners that have a
strategic interest in their development and success. Strategic partners
can include large corporations, research universities, community groups,
as well as other entities. These partners can provide assistance in the
form of capital, personnel, office space, intellectual property,
intangibles, etc.
