CHAPTER 16

Chapter 16

Funding a Start-up Venture

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Learning Objectives

• Develop a resource strategy• Characterize the nature of start-up finance • Explain funding with equity • Discuss how to finance with debt


Resource Strategy

• Categories of necessary resources– Human capital– Social capital– Physical capital– Financial capital


Resource Strategy

• Process for constructing a resource base– Identify and specify required resources at

various milestones in the company’s growth– Identify potential suppliers of those

resources– Assess the entrepreneur’s

ability to attract resources– Combine resources to create new, unique

resources– Transform individual resources into

organizational resources.


Start With A Plan

• The search for money– Glamorous firms

• Growth results from high rates of innovation

– Economic core firms• Growth results from low-innovation

– Ambitious firms• Growth results from simple innovations

– Constrained firms• Growth results from high rates of innovation and limited

resources


Figure 16.1: Focus of Informal Capital Compared with That of Venture Capital

Source: Gem 2003 Global Report Venture Capital, Global Entrepreneurship Monitor 2003, www.gemconsortium.org., accessed September 2004, p.6.


Figure 16.2: Where is Informal Capital Invested?

Source: United States Executive report 2003, Global Entrepreneurship Monitor 2003, www.gemconsortium.org, accessed September 2004, p.33.


Consider Growth Stages

• Start-up funds are required • Capital required to grow on the basis of a

proven concept • Mezzanine financing or bridge financing

required to provide the entrepreneur with the funds the company needs to get through an initial public offering


Figure 16.3: States of Financing for Ventures


Unique Issues of High-Tech Ventures

• Early seed funding supports a long period of product development

• Often this early-stage money comes from government grants or foundations

• Risk is too high for venture capital firms• Marketing dollars needed to create awareness

for new adopters


Funding Start-Ups

• Get traction as quickly as possible• Hire as few employees as possible • Lease or share everything• Other people’s money • Bootstrapping Ethics


Funding with Equity

• Friends and family• Private investors—angels • Private placement • Strategic alliances • Small business investment companies • Grants • Venture capital institutes and networks


Financing With Equity

• Equity from friends and family– The most expensive long term funding– The entrepreneur is more likely to lose

control of the business• Private investors-Angels

– Angels are informal risk-capital sources– Funding is between $10k-$500k– Angels are often well educated

entrepreneurs who tend to invest within a short distance from home

– Angels take an active role in the company


Financing With Equity (continued)

• Private placement– Private investments obtained by selling

securities in a private corporation/partnership– SEC Regulation D covers memorandum

details– Advantages

• Few prior assets or credit references are needed• No SEC filing needed for entrepreneurs


Financing With Equity (continued)

• Strategic Alliances– Formal/informal partnerships with other businesses

• Small Business Investment Companies-SBIC– Privately managed venture capital firms licensed by

the Small Business Administration• Grants• Venture Capital Institutes and Networks


Financing with Debt

• Commercial banks• Commercial finance companies• Small Business Administration loan• State-funded venture funding • Incubators• Customers and suppliers


Financing with Debt

• Commercial banks– Basis of loans

• Character• Capacity• Capital • Collateral• Condition


Financing With Debt (continued)

• Commercial finance companies– Less regulated than banks– High finance charges– Factoring

• Receivable financing in which the factor takes ownership of a receivable at a discount and then collects against it



• Small Business Administration loan– Entrepreneur applies for up to $2M loan from

his personal bank; BA guarantees that it will repay up to 75% of the loan to the commercial lender should the business default

– Micro loans exist for companies to use nonprofit community development corporations rather than banks



• State-funded venture capital• Incubators• Customers and suppliers

CHAPTER 16

Documents

venture capital institutes

global report venture

required resources

focus of informal capital

states of financing

funding startups

organizational resources

venture capitalsource