THE ENTREPRENEUR SEARCH FOR CAPITAL Every entrepreneur planning a new venture confronts the dilemma of where to find

start-up capital. Entrepreneurs usually are not aware that numerous possibilities and combi-nations of financial packages may be appropriate for new ventures. It is important, therefore, to understand not only the various sources of capital but also the expectations and requirements of these sources. Without this understanding, an entre-preneur may be frustrated with attempts to find appropriate start-up capital. DEBT VERSUS EQUITY The use of debt to finance a new venture involves a payback of the funds plus a fee (inter-est) for the use of the money. Equity financing involves the sale of some of the ownership in the venture. DEBT FINANCING Many new ventures find that debt financing is necessary. Short-term borrowing (one year or less) is often required for working capital and is repaid out of the proceeds from sales. Longterm debt (term loans of one to five years or long-term loans maturing in more than five years) is used to finance the purchase of property or equipment, with the purchased asset serving as collateral for the loans. The most common sources of debt financing are commercial banks. Banks are not the only source of debt financing. Sometimes a new venture can obtain long-term financing for a particular piece of equipment from the manufacturer, which will take a portion of the purchase price in the form of a long-term note. Manufacturers are most willing to do this when an active market exists for their used equipment, so if the machinery must be repossessed, it can be resold. Also, new ventures sometimes can ob-tain short-term debt financing by negotiating extended credit terms with suppliers. How-ever, this kind of trade credit restricts the venture's flexibility with selecting suppliers and may reduce its ability to negotiate supplier prices. Debt financing has both advantages and disadvantages. ADVANTAGES No relinquis hment of ownership is required. More borrowing allows for potentially greater return on equity. During periods of low interest rates, the opportunity cost is justified since the cost of borrowing is low. DISADVANTAGES Regular (monthly) interest payments are required. Continual cash-flow problems can be intensified because of payback responsibility. Heavy use of debt can inhibit growth and development. OTHER DEBT-FINANCING SOURCES Trade credit is credit given by suppliers who sell goods on account. Accounts receivable financing is short-term financing that involves either the pledge of receivables as collateral for a loan or the sale of receivables (factoring). Factoring is the sale of accounts receivable. Finance companies are asset-based lenders that lend money against assets such as re-ceivables, inventory, and equipment. Loan with warrants, which provides the investor with the right to buy stock at a fixed price at some future date. Convertible debentures, which are unsecured loans that can be converted into stock. Preferred stock, which is equity that gives investors a preferred place among the credi-tors in the event the venture, is dissolved. Common stock, which is the most basic form of ownership. EQUITY FINANCING Equity financing is money invested in the venture with no legal obligation for entrepre-neurs to repay the principal amount or pay interest on it. Public Offerings Going public are a term used to refer to a corporation's raising capital through the sale of securities on the public markets. Here are some of the advan-tages to this approach: Size of capital amount. Selling securities is one of the fastest ways to raise large sums of capital in a short period of time. Liquidity. The public market provides liquidity for owners since they can readily sell their stock. Value. The marketplace puts a value on the company's stock, which in turn allows value to be placed on the corporation. Image. The image of a publicly traded corporation often is stronger in the eyes of sup-pliers, financiers, and customers. These figures reflect the tremendous volatility that exists within the stock market, and, thus, entrepreneurs should be aware of the concerns confronting them when pursuing the IPO market. In addition, many new ventures have begun to recognize some other disad-vantages of going public. A few of these follow: Costs. The expenses involved with a public offering arc significantly higher than for other sources of capital. Accounting fees, legal fees, and prospectus printing and distri-bution, as well as the cost of underwriting the stock, can result in high costs. Disclosure. Detailed disclosures of the company's affairs must be made public. New-venture firms often prefer to keep such information private. Requirements. The paperwork involved with SEC regulations, as well as continuing performance information, drains large amounts of time, energy, and money from man-agement. Many new ventures consider these elements better invested in helping the company grow. Shareholder pressure. Management decisions are sometimes short term in nature in order to maintain a good performance record for earnings and dividends to the share-holders. This pressure can lead to a failure to give adequate consideration to the com-pany's long-term growth and improvement. PRIVATE PLACEMENTS Another method of raising capital is through the private placement of securities. Small ventures often use this approach. The SEC provides Regulation D, which eases the regulations for the reports and state-ments required for selling stock to private parties friends, employees, customers, relatives, local professionals. Regulation D defines four separate exemptions, which are based on the amount of money being raised. Along with their accompanying rule, these exemptions follow: 1. Rule 504aplacements of less than $500,000: No specific disclosure/information re-quirements and no limits on the kind or type of purchasers exist. This makes marketing offerings of this size easier than it was heretofore. 2. Rule 504placements up to $1,000,000: Again, no specific disclosure/information re-quirements and no limits on the kind or type of purchasers exist.

3. Rule 505placements of up to $5 million: The criteria for a public offering exemp-tion are somewhat more difficult to meet than those for smaller offerings. Sales of se-curities can be made to not more than 35 no accredited purchasers and to an unlimited number of accredited purchasers. If purchasers are no accredited as well as accred-ited, then the company must follow specified information disclosure requirements. Investors must have the opportunity to obtain additional information about the com-pany and its management. 4. Rule 506placements in excess of $5 million; Sales can be made to no more than 35 no accredited purchasers and an unlimited number of accredited purchasers. However, the no accredited purchasers must be "sophisticated" in investment matters. Also, the specific disclosure requirements are more detailed than those for offerings between $500,000 and $5 million. Investors must have the opportunity to obtain additional in-formation about the company and its management

THE VENTURE CAPITAL MARKET Venture capitalists are a valuable and powerful source of equity funding for new ven-tures. These experienced professionals provide a full range of financial services for new or growing ventures, including the following: Capital for start-ups and expansion Market research and strategy for businesses that do not have their own marketing departments Management-consulting functions and management audit and evaluation Contacts with prospective customers, suppliers, and other important businesspeople Assistance in negotiating technical agreements Help in establishing management and accounting controls Help in employee recruitment and development of employee agreements Help in risk management and the establishment of an effective insurance program Counselling and guidance in complying with a myriad of government regulations DISPELLING VENTURE CAPITAL MYTHS Because many people have mistaken ideas about the role and function of venture capital-ists, a number of myths have sprung up about venture capitalists. Some of these, along with their rebuttals, follow. MYTH 1: VENTURE CAPITAL FIRMS WANT TO OWN CONTROL OF YOUR COM-PANY AND TELL YOU HOW TO RUN THE BUSINESS MYTH 2: VENTURE CAPITALISTS ARE SATISFIED WITH A REASONABLE RETURN ON INVESTMENTS MYTH 3: VENTURE CAPITALISTS ARE QUICK TO INVEST MYTH 4: VENTURE CAPITALISTS ARE INTERESTED IN BACKING NEW IDEAS OR HIGH-TECHNOLOGY INVENTIONSMANAGEMENT IS A SECONDARY CON-SIDERATION MYTH 5: VENTURE CAPITALISTS NEED ONLY BASIC SUMMARY INFORMATION BEFORE THEY MAKE AN INVESTMENT CRITERIA FOR EVALUATING NEW VENTURE PROPOSALS Timing of entry Key success factor stability Educational capability Lead time Competitive rivalry Entry wedge imitation Scope Industry-related competence Another set of researchers develop 28 of these criteria and group into 6 major categories Entrepreneurs personality Entrepreneurs experience Product of service characteristics Market characteristics Financial considerations Nature of the venture team The evaluation process typically takes place in stages. The four most common stages follow: Stage 1: Initial screening. This is a quick review of the basic venture to see if it meets the venture capitalist's particular interests. Stage 2: Evaluation of the business plan. This is where a detailed reading of the plan is done in order to evaluate the factors mentioned earlier. Stage 3: Oral presentation. The entrepreneur verbally presents the plan to the venture capitalist. Stage 4: Final evaluation. After analysing the plan and visiting with suppliers, cus-tomers, consultants, and others, the venture capitalist makes a final decision. INFORMAL RISK CAPITAL"ANGEL" FINANCING Not all venture capital is raised through formal sources such as public and private place-ments. Many wealthy people in the United States are looking for investment opportunities. They are referred to as business angels or informal risk capitalists. These individuals constitute a huge potential investment pool, as the following calculations show: The Forbes 400 richest people in America represent a combined net wo rth of approxi-mately $125 billion (an average of $315 million per person). Forty percent of the 400 are self-made millionaires, with a combined net worth of ap-proximately $50 billion. If 10 percent of the self-made wealth were available for venture financing, the pool of funds would amount to $5 billion. More than 500,000 individuals in America have a net worth in excess of $1 million. If 40 percent of these individuals were interested in venture financing, 200,000 million-aires would be available. Assuming only one-half of those 200,000 millionaires would actually consider invest-ment in new ventures at a rate of $50,000 per person, 100,000 investors would provide a pool of $5 billion. If the typical deal took four investors with $50,000 each (from the pool of $5 billion), then a potential 25,000 ventures could be funded at $200,000 apiece. Types of Angel Investors Angel investors can be classified into five basic groups: Corporate angels. Entrepreneurial angels Enthusiast angels. Micromanagement angels. Professional angels