AOF Entrepreneurship
Lesson 9 Funding an Entrepreneurial Venture
AOF Entrepreneurship
Lesson 9
Funding an Entrepreneurial Venture
Teacher Resources
Resource
Description
Teacher Resource 9.1
Answer Key: Analysis of Business Plan Financials
Teacher Resource 9.2
Modeling Template: Income Statement (separate Excel file)
Teacher Resource 9.3
Presentation and Notes: Financing Options (includes separate
PowerPoint file)
Teacher Resource 9.4
Multi-Pass Instructions: Financing Options
Teacher Resource 9.5
Assessment Criteria: Business Plan Financials
Teacher Resource 9.6
Key Vocabulary: Funding an Entrepreneurial Venture
Teacher Resource 9.7
Bibliography: Funding an Entrepreneurial Venture
Student Resource 9.1
Answer Key: Analysis of Business Plan Financials
How much of her own money is each owner putting into the
business?
$10,000 each
How much additional money are Mika and Lauren looking for from
outside investors?
$10,000
How long does it take for the company to earn more than it
spends?
Six months
Why do marketing costs fluctuate from month to month?
Answers will vary. Marketing costs vary because Mika and Lauren
want to have kiting exhibitions and events for the public, and
those events will cause a significant increase in costs that
month.
Why does gross profit increase each month? Is that a reasonable
assumption?
As the weather gets warmer and the company and its services
become better known, it’s reasonable to assume that business will
increase each month. It could have to do with repeat business as
well.
Which expenses are predictable monthly expenses?
Gas, insurance, the lease, and cell phones. Marketing and
inventory costs will vary month to month but will continue to
occur.
Why do there continue to be entries in the Purchases (Inventory)
category?
As business increases, the need for additional inventory will
also increase to accommodate the additional customers.
The business plan states that the company will break even in the
sixth month. What does that mean? Does the statement about breaking
even in the sixth month take into account the total start-up
funding investment of $30,000?
Breaking even can mean two things. In this case, the business
plan means that the company is making more than it is spending.
Investors will also want to know when they can expect to get their
principal investment and interest back. (That is touched on briefly
in the last section of the business plan.)
If you were Mika and Lauren, how much funding would you be
seeking from investors? Why?
Answers may vary. Based on the projected income statement, the
start-up funding looks appropriate. In the first three months, the
results of which are shown, the company spends about $20,000 and
loses about $11,000. By the sixth month, the company is earning a
monthly profit. But Month 6 is September, and there may be a dip in
earnings that the owners will have to ride out. Further, by asking
for the same funding from investors as they themselves have
contributed, two things happen. First, they are taking the same
risk as the investors, demonstrating their commitment to the
business. Second, the owners won’t get into a situation where the
investors have more equity than they do, resulting in a loss of
control.
Teacher Resource 9.3
Presentation Notes: Financing Options
Before you show this presentation, use the text accompanying
each slide to develop presentation notes. Writing the notes
yourself enables you to approach the subject matter in a way that
is comfortable to you and engaging for your students. Make this
presentation as interactive as possible by stopping frequently to
ask questions and encourage class discussion.
This presentation introduces the two categories of financing
available to new business—debt and equity—and the main sources of
funding. It also explains the importance of maintaining careful,
accurate accounting practices.
Presentation notes
Investors look at many aspects of a new business when they
consider whether or not to put money into it. In many cases, the
factors that are important depend on what type of investor is doing
the evaluation. Venture capitalists, for example, are by definition
motivated by profitability. Your family, on the other hand, is more
interested in whether you are successful—although getting their
money back with a little extra would be okay, too.
One important factor that impartial investors will look at
closely is whether you have done your homework. Having a good idea,
while critical, isn’t enough. Investors will be considering whether
you have the right stuff when it comes to taking that idea and
making it as profitable as possible. This involves looking not only
at the idea itself but also at how it will perform in the market.
If you don’t know the industry—your competition, the regulations
that govern it, the ease with which you can obtain raw materials,
and everything else that will affect your profitability—then
investors will not risk their capital on you.
Presentation notes
Accounting plays an important role in an entrepreneurial
venture. Every business (big or small) needs to have some type of
accounting system in place to manage its daily financial
transactions and to ensure that the business runs smoothly.
Maintaining an organized and accurate accounting system can help an
entrepreneur assess the business’s performance and improve
profits.
Accounting enables an entrepreneur to keep track of cash flow—of
income and expenses. It shows what assets are left after you’ve
paid your liabilities, which you learned about in Principles of
Finance. This information is obviously important to investors!
Every entrepreneur should take a basic accounting course in
order to understand the way it works and to be able to show
investors that the books are in good order. At first entrepreneurs
may be their own accountants, but as their businesses grow, many
entrepreneurs hire accountants to manage this critical aspect of
the business.
Presentation notes
Aside from entrepreneurs investing their own money, the
options for getting funding break down into two main categories,
each with its own benefits and disadvantages.
Many businesses seek out loans: money borrowed from banks or
individuals. Loans usually require the entrepreneur to offer up
something as collateral, to make sure the entrepreneur is able to
pay back the loan. For example, a business owner might sign a loan
agreement using a car as collateral, meaning that if the business
owner is not able to pay back the amount of the loan, the bank will
claim the car as payment instead.
A loan requires the business owner to pay back not just the
amount he or she borrows, but also any fees and interest associated
with the loan, on a set schedule. The amount that needs to be
repaid is based on this agreement and has nothing to do with how
successful the business becomes. This means that the business owner
takes on all of the risk involved. The advantage is that once the
loan gets repaid, the business owner retains ownership of his or
her own business and does not have to pay profits to anyone
else.
In contrast, equity means that an outside investor gives money
to the entrepreneur in exchange for a share in the company. In this
case, the investor does not need to be repaid but is entitled to
have a say in the way the business is run and earn a share of the
profits if the business is successful. Getting an experienced
investor on board can help a business succeed but can also be a
burden.
Presentation notes
Most business owners are the first ones to back their own
venture by investing what they can. These investments might come
out of personal savings, personal credit cards, or mortgages on a
house or car.
The next likely source for investments is friends and family,
people who have a personal interest in the entrepreneur directly,
while the business itself is a secondary consideration.
There are some sources of funding that have emerged since the
recession of 2008. Neighbors and customers are investing locally by
providing loans. New legislation allows people of more modest means
to invest in start-ups; until recently, you had to earn at least
$200,000 to invest in a new business. Kickstarter is a website
where you describe your project, set a funding goal and deadline,
and people can contribute as little as $5—but it can add up! This
website is for creative ventures such as designing a new
product.
Outside investors, such as banks or angels, very rarely provide
financing to a new entrepreneur who hasn’t created a successful
business already. Most new entrepreneurs have three options: rely
on personal connections for financing, get their business started
using their own start-up money, or figure out how to get started
with no money at all.
Presentation notes
Your friends and family may want to support a new business
venture, but their funding comes with both advantages and
disadvantages.
If family or friends invest in your company, you can decide
together whether this is a loan or a share purchase. Make sure
everything is agreed on and put in writing, so that it is clear
what rights and responsibilities each of you has to the funds and
the company.
If your friends and family invest, they may feel that they have
a right to guide your business, and you may feel uncomfortable if
your business fails and loses their investment. Before you accept
their funding, you should consider how this might affect your
relationships.
You may also want to consider how their investment will affect
your ability to obtain outside funding. Some investors look at
family investments positively, while others may be reluctant to
invest with other investors involved in the company, because
multiple owners can complicate operations.
Presentation notes
Bank loans are one source of start-up funding for new
businesses. Loans all need to be repaid, in contrast to stock
sales, where an investor buys shares in the company. The bank
doesn’t claim any share of the business, and entrepreneurs will
need to repay the amounts they borrow, regardless of whether the
business ever succeeds. Banks require some collateral, such as
money in a savings account, stocks, or real estate, that can be
claimed if the business owner forfeits on the loan.
The most common loans are set amounts of money loaned to the
entrepreneur, with an interest rate attached. The entrepreneur must
pay this interest on the loan, meaning the bank or other lender
earns a profit on the money that it lends.
Not all loans are distinct amounts paid up front. Many
entrepreneurs will use a line of credit such as a credit card,
against which they can charge amounts as they are needed. Credit
cards often come with a fee, and the loans must be repaid in part
or wholly on a monthly basis. These might be business credit cards
or personal credit cards. Using a personal credit card means the
entrepreneur is putting personal finances at risk and won’t need to
present a business plan to the bank.
Many other kinds of loans are also available to fund special
kinds of costs such as inventory, equipment, or real estate
property. If the entrepreneur can’t make payments for those items,
then the bank will repossess the item.
Presentation notes
Angel investors are affluent individuals who invest their own
money in entrepreneurial ventures.
Angel investors want to purchase shares of stock in a company
and share in its growth and profits. If they have the right
expertise in the field, they can also provide good advice to guide
a new venture and help the entrepreneur succeed.
Most angel investors try to invest in local companies, and they
will usually only invest in a few companies each year.
Angel investors might have their own preference for what types
of companies they are interested in. Many angel investors find the
new businesses that they support through a network of referral
sources, such as business associates, friends, investment bankers,
or other contacts.
Angels are usually well educated and invest anywhere between
$10,000 to $500,000 in a new company less than five years old.
Presentation notes
Venture capital firms often have a lot of money but like to
invest in specific types of businesses, such as software companies,
biotechnology, or other high-stakes firms. So they are usually not
the right choice for funding for smaller businesses.
Venture capital firms are usually limited partnership firms,
where the partners source and pool funding in order to buy equity
shares in start-up ventures. However, approaching them can be
difficult since they require entrepreneurs to be highly
professional and present a well-polished business plan.
They are able to provide expertise in guiding the entrepreneurs
that they support but will also take on a large role in controlling
how a business is operated. Getting funding can also take a
while.
Presentation notes
Many other nontraditional sources are available for start-up
funds, and they will depend on the type of business you want to
start. You can find out about these sources by doing Internet
research, by asking for assistance in a library, or by contacting
regional or industry organizations.
If you want to develop a new innovation that contributes to an
emerging or developing field of research, such as energy
conservation, then you may qualify for a grant.
The US Small Business Administration also provides new small
businesses with information about special low-interest loans that
offer better rates than conventional loans.
Presentation notes
Teacher Resource 9.4
Multi-Pass Instructions: Financing Options
Note that this presentation approach will add another 5–10
minutes to the activity.
First Pass: Survey (5 Minutes)
Read the title and introduction, and note the sections of the
presentation.
Examine the illustrations.
Read the headings to see how the presentation is organized.
Paraphrase the information acquired.
Second Pass: Size Up (10 Minutes)
Identify key concepts by using titles and headings, visuals,
bold print, italics, and/or color codes.
Generate questions about key concepts and answer them by looking
at the slides.
Paraphrase key concepts.
Third Pass: Sort Out (10 Minutes)
Answer student-generated questions and reinforce key
concepts.
Teacher Resource 9.5
Assessment Criteria: Business Plan Financials
Student
Name:______________________________________________________________
Date:_______________________________________________________________________
Using the following criteria, assess whether the student met
each one.
Met
Partially Met
Didn’t Meet
The answers are thoughtful and thorough, and they demonstrate
careful research and planning.
□
□
□
The estimates given are logical, and the explanations are clear
and reasonable.
□
□
□
The answers about seasonal fluctuations and the marketing
campaign demonstrate how disparate aspects of the venture are being
integrated.
□
□
□
The type of investor and the kind of funding sought is a
sensible choice, and the explanation shows thoughtful
consideration.
□
□
□
The summary is neat and legible.
□
□
□
Additional Comments:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Teacher Resource 9.6
Key Vocabulary: Funding an Entrepreneurial Venture
Term
Definition
angel investor
An individual who invests in a business venture, providing
capital for start-up or expansion, in exchange for a higher rate of
return than would be given by more traditional investments.
debt
Money borrowed from the bank, other institutions, or individuals
that must be paid back, along with fees and interest.
equity
Shares of ownership that entrepreneurs sell in their companies
in exchange for funding, advice, and other benefits that can be
obtained from shareholders, especially angel investors and venture
capitalists, or sometimes friends and family.
financing
Funds that businesses obtain to help pay start-up and operating
costs.
total cost of ownership
The costs involved in paying for equipment, supplies, and other
expenses associated with owning something, in addition to the
initial cost to obtain the item or start the business.
venture capital
Funds invested in new companies by limited partnership
businesses that contribute advice, guidance, and funding in the
hopes of earning profit on the new venture.
venture capitalist
A partner in a limited partnership firm that invests in new
companies.
Teacher Resource 9.7
Bibliography: Funding an Entrepreneurial Venture
The following sources were used in the preparation of this
lesson and may be useful for your reference or as classroom
resources. We check and update the URLs annually to ensure that
they continue to be useful.
Print
Gold, Steven. Entrepreneur’s Notebook. United States: Learning
Ventures Press, 2008.
Hisrich, Robert D., Michael P. Peters, and Dean A. Shepherd.
Entrepreneurship, 7th ed. New York: McGraw-Hill, 2008.
Online
“Business Startup Cost Calculator.” Business Know-How,
http://www.businessknowhow.com/startup/startup.htm (accessed March
25, 2015).
Hong, Nicole. “Entrepreneurs Turn to a New Source of Funds:
Their Neighbors.” The Wall Street Journal, June 11, 2014,
http://www.wsj.com/articles/entrepreneurs-are-turning-to-a-new-source-of-funds-their-neighbors-1402495255
(accessed March 24, 2015).
“Income Statement Example.” Small Business Notes,
http://www.smallbusinessnotes.com/business-finances/income-statement-example.html
(accessed March 24, 2015).
Peterson, Laurie. “Why Venture Capital Wasn’t Right for Me and
15 Alternative Funding Sources.” Fast Company,
http://www.fastcompany.com/3036130/hit-the-ground-running/why-venture-capital-wasnt-right-for-me-and-15-alternative-funding-sou
(accessed March 24, 2015).
“Seven Things to Know about Kickstarter.” Kickstarter,
https://www.kickstarter.com/hello (accessed March 24, 2015).
“Starting a Business.” US Small Business Administration,
http://www.sba.gov/smallbusinessplanner/start/financestartup/SBA_INVPROG.html
(accessed March 24, 2015).
“Starting a New Business?” Wells Fargo,
https://www.wellsfargo.com/biz/products/new_biz/index (accessed
March 24, 2015).
“What Lenders Look for in a Business Startup.” Late Blooming
Entrepreneurs, June 2, 2011,
http://latebloomingentrepreneurs.wordpress.com/2011/06/02/what-lenders-look-for-in-a-business-startup/
(accessed March 24, 2015).
Copyright © 20092015 NAF. All rights reserved.
Copyright © 2009–2015 NAF. All rights reserved.