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131
Sources Of Funds
Start-up
Personal
Beginning of Production ?
Banks Government
Venture Capitalist
Amount
Customers/Suppliers
133
Sources of Financing
Sources of Financing
Other Venture Capital Mortgaged Property Private Investors Bank Loans Friends Personal Charge Cards Partners Family Members Personal Savings
0 10 20 30 40 50 60 70 80
Venture upside potential and anticipated exit timing. Venture anticipated growth rate
Venture age and stage of development.
135
Debt or Equity?
Entrepreneurs typically prefer debt
Allows them to appropriate as much as of the benefit as possible + retain sole control Can default
High interest rate to offset risk will stifle growth or cause default
137
HIGH
Potential Profitability
LOW
Financial Risk/Control
Fig. 13.1
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No debt $28,000
income on
total assets of $200,000
Equity: Owners get to keep all of the profits in return for accepting the risk of lower returns
1310
$100,000 debt (10% cost) $28,000 income on total assets of $200,000 14% return equals on assets ($28,000 $200,000) $100,000 equity 18% return on $100,000 ($18,000 $100,000)
Debt is Risky: Lenders have first claim on profits and must be paid even if there are no profits.
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The reality: VCs invest in industries with double digit growth in the middle of the S-curve
Appropriate management team Specialty funds (earlier and later stages on the Scurve) Limits the risk to management risk Produces attractive exit opportunities
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VC fills a void
Gap between innovation and traditional sources of debt Risk inherent in startups typically justify interest rates higher than allowed by law
VCs must balance high returns for their investors against sufficient upside potential for entrepreneurs to keep them motivated
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10X return on capital over 5 years VCs management fees and high growth funds
Fund structured with limited and general partners and a life of 7-10 years
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100
150
200
250
50
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
Year
95 96 97 98 99 00 01 02
Angels
Well to do private individuals
Geography and industry specific
1326
Finding Angels
Private Individuals Professionals (lawyers, accountants, bankers) Local small business development centers Internet associations (e.g., Technology Capital Network at MIT)
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Small business investment centers (SBICs) Small Business Innovative Research (SBIR) State and Local Government Assistance
1330
Amount of credit available is dependent on type of firm and suppliers willingness to extend credit
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Discussion?
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Strategy Refinement
Market niche Suppliers and customers Diversification or specialization Reduce fixed costs Plan for contingency
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Management Refinement
1356
Increase Your Effectiveness and Efficiency Be Creative Pursue different sources of capital
1357
Building to Grow
1358
Good Team
Increase Value
Contingency Plan Best Case Scenario Worst Case Scenario Most Likely Scenario
1359
Drive Systems/Gears/Couplings
Contingency Plan get the timing right Emphasize long term growth Manage your risk factor
1361
Sales growth 400-500% Single supplier No substitutes Great financial ratios Cash flow problems May go bankrupt in couple of years
1363