Sources of Capital For Entrepreneurs

Debt Versus Equity

The use of debt to finance a new venture involves a payback of the funds plus a fee (interest for the use of the money. Equity financing involves the sale of some of the ownership in the venture.

Debt Financing
Commercial Banks Other Debt-Financing Sources:
Trade Credit Accounts Receivable Financing Factoring Finance Companies

Source of Finance Throughout the Evolution of the Entrepreneurial Firm

High

Level of Investment Risk Assumed by Investor

Founder, friends, and family

Business Angels Venture Capitalists

Nonfinancial corporations Equity markets

Commercial banks Seed Start-Up Early Growth Established

Low

Stage of Development of the Entrepreneurial Firm

Equity Financing

Public Offerings
Going public is a term used to refer to a corporations raising capital through the sale of securities on the public markets. Here are some of the advantages to this approach: Size of capital amount Liquidity Value Image (new issues, referred to as initial public offerings IPOs)

Public Offerings
Disadvantages of going public: Costs Disclosure Requirements Shareholder pressure

Sophisticated Investors
Sophisticated investors are wealthy individuals who invest more or less regularly in new and early- and latestage ventures. They are knowledgeable about the technical and commercial opportunities and risks of the business in which they invest.

The Venture Capital Market

Dispelling Venture Capital Myths

Myth 1: Venture capital firms want to own control of your company and tell you how to run the business. Myth 2: Venture capitalists are satisfied with a reasonable return on investment. Myth 3: Venture capitalists are quick to invest Myth 4: Venture capitalists are interested in backing new ideas or high-technology inventions management is a secondary consideration. Myth 5: Venture capitalists need only basic summary information before they make an investment.

Criteria for Evaluating New-Venture Proposals

Venture Capitalist Screening Criteria

Venture Capital Firm Requirements Nature of the Proposed Business Economic Environment of Proposed Industry Proposed Business Strategy Financial Information on the Proposed Business Proposal Characteristics Entrepreneur/Team Characteristics

Informal Risk Capital Angel Financing

Many wealthy people are looking for investment opportunities. They are referred to as business angels or informal risk capitalists.

Types of Angel Investors

Corporate Angels Entrepreneurial Angels Enthusiast Angles Micromanagement Angels Professional Angels

The Pros and Cons of Business Angel Investments

Angels Characteristics
Value-adding Geographically dispersed More permissive investors Investment Characteristics Seek Smaller Deals Prefer start-up & early stage Invest in all industry sectors Like high-tech firms

Added Bonuses
Leveraging effect Give loan guarantees No high fees

Advantages

Business Angels
Disadvantages

Little follow-on money

Want a say in firm

Could turn out to be devils

No national reputation to leverage