GETTING FINANCING OR FUNDING

The Importance of Getting Financing or Funding

Commonly, though, entrepreneurs discover that operating without investment capital or borrowed money is more difficult than they anticipated. Because of this, it is important for entrepreneurs to understand the role of investment capital in the survival and subsequent success of a new firm.

Why Most New Ventures Need Funding

🙌 Cash Flow Challenges :

Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales.

🙌 Capital Investments :

The cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firm's ability to provide funds for these needs on its own.

🙌 Lengthy Product Development Cycles :

Some products are under development for years before they generate earnings. The up-front costs often exceed a firm's ability to fund these activities on its own.

Sources of Personal Financing

😊 Personal Funds :

Involves both financial resources and sweat equity. Sweat equity represents the value of the time and effort that a founder puts into a firm.

😊 Friends and Family :

Often comes in the form of loans or investments, but can also involve outright gifts, foregone or delayed compensation, or reduced or free rent.

😊 Bootstrapping :

Finding ways to avoid the need for external financing through creativity, ingenuity, thriftiness, cost-cutting, obtaining grants, or any other means.

Preparing to Raise Debt or Equity Financing

1. Determine precisely how much money the company need
   By constructing and analyzing documented cash flow statements and projections for needed capital expenditures.
2. Determine the most appropriate type of financing or funding
   - Equity financing means exchanging partial ownership of a firm, usually in the form of stock, in return for funding.
   - Debt financing is getting a loan.
3. Developing a strategy for engaging potential investors or bankers
   - the lead entrepreneurs in a new venture should prepare an elevator speech.
   - more deliberate and requires identifying and contacting the best prospects.
   - provide the investor or banker a completed business plan and make a presentation of the plan if requested.

Sources of Equity Funding

💦 Business Angels

Business angels are individuals who invest their personal capital directly in start-ups. The prototypical business angel, who invests in entrepreneurial start-ups, is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives. These investors generally invest between $10,000 and $500,000 in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public. Many angels are also motivated by more than financial returns, they enjoy the process of mentoring a new firm. Most angels remain fairly anonymous and are matched up with entrepreneurs through referrals.

💦 Venture Capital

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. The majority of venture capital money goes to follow on funding for businesses that were originally funded by angel investors, government programs, or by some other means. Venture capital firms are limited partnerships of money managers who raise money in "funds" to invest in start-ups and growing firms. An important part of obtaining venture capital funding is going through the due diligence process, which refers to the process of investigating the merits of a potential venture and verifying the key claims made in the business plan. A corporate venture capital is similar to traditional venture capital except that the money comes from corporations that invest in start-ups related to their areas of interest.

💦 Initial Public Offering

an IPO is the firs sale of stock by a firm to the public. Firms decide to go public for several reasons :

• it is a way to raise equity capital to fund current and future operations.
• an IPO raises a firm's public profile, making it easier to attract high-quality customers, alliance partners, and employees.
• an IPO is liquidity event that provides a mechanism for the company's stockholders, including its investors, to cash out their investments.
• a firm crates another form of currency that can be used to grow the company.

Sources of Debt Financing

💧 Commercial Banks

Two reasons that banks have historically been reluctant o lend money to start-ups :

- banks are risk averse. In addition, banks frequently have internal controls and regulatory restrictions prohibiting them from making high-risk loans.

- lending to small firms is not as profitable as lending to large firms, which have been the staple clients of commercial banks. Research shows that a firm's size is an important factor in determining its access to debt capital. 

💧 SBA Guaranteed Loans

The main SBA program available to small businesses is referred to as the 7(A) Loan Guaranty Program. This program operates through private-sector lenders providing loans hat are guaranteed by the SBA. The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels.

💧 Other Sources

Vendor credit is when a vendor extends credit to a business in order to allow the business to buy its products and / or services up front but defer payment until later. A common type of alternative lending is the merchant cash advance. The lender provides a business a lump sum of money in exchange for a share of future sales that covers he payment amount plus fees. Another type of alternative lending is peer-to-peer loans. Peer-to-peer lending is a financial transaction that occurs directly between individuals or "peers".

Creative Sources of Financing and Funding

↣ Crowdfunding

Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people, typically via the Internet. Two types of crowdfunding :

- Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward (example: Kickstarter, Indiegogo, RocketHub.)

- Equity-based crowdfunding helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business. (example: FundersClub, Crowdfunder.com, Circle Up)

↣ Leasing

A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. It enables a company to acquire the use of assets with very little or no down payment. Venture-leasing firms that act as brokers, bringing the parties involved in a lease together. These firms are acquainted with the producers of specialized equipment and match these producers with new ventures that are in need of the equipment.

↣ SBIR and STTR Grant Programs

These programs provide cash grants to entrepreneurs who are working on projects in specific areas. SBIR Program is a competitive grant program that provides over $2.5 billion per year to small businesses for early-stage and development projects.
- Phase I is a six-month feasibility study in which the business must demonstrate the technical feasibility of the proposed innovation.
- Phase II awards for up to $1 million are granted for as long as tow years to successful Phase I companies.
- Phase III is he period during which Phase II innovations move from the research and development lab to the marketplace. 

STTR Program is a variation of the SBIR for collaborative research projects that involove small businesses and research organizations, such as universities or federal laboratories.