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ADM 3313

Financing
Your Venture
Stephen Daze

Financing: Debt, Equity and Bootstrapping

1. Debt: cash now for repayment (with interest)


later.
2. Equity: cash for a piece of the business.
3. Bootstrapping: piecing it together on your
own.
http://www.youtube.com/watch?v=U470xXKfDyE

1. Debt
Debt:

cash now for repayment (with


interest) later

Loans
Lines of credit
Mortgages
Credit cards
Etc.

Characteristics
Money

lent to you with expectation of it


being returned with interest
Terms are determined in advance
Different banks have different products
but they are all pretty similar

Banks Consider the Following


1. Repayment Ability
What evidence exists to convince me I'm going to get paid back?
Personal financial situation.
2. Management
What evidence exists that indicates that this person can manage
his/her affairs well enough to allow the opportunity for payback?
Credit history?
3. Personal Investment
What evidence exists that this person has enough of a commitment
to the business so that I'll be sure he/she wants to work hard to
protect it? (If they protect theirs, they will be protecting mine!) Most
lending institutions will require at least 25 percent cash/equity
contributed to the total capital cost of the project.
4. Security
If all else (above) fails, what protection do I have to get my money
back? What will it be worth when the business fails?

Q. What is missing from this list?

Sources of financing
Canada

Small Business Financing:

http://www.canadabusiness.ca/eng/
Business

Development Bank:

http://www.bdc.ca/en/Pages/home.aspx
Banks:

http://www.royalbank.ca/busindex.html
http://
www.tdcanadatrust.com/products-services/banking/inde
x-banking.jsp
https://www.cibc.com/ca/small-business.html

Summer

Company:

http://
www.ontariocanada.com/ontcan/1medt/sma
llbiz/en/sb_ye_summerco_en.jsp
Canadian Youth Business Foundation
http://www.cybf.ca/

2. Equity
Equity:

cash for a piece of the business

Investment

Angel Investment
Venture Capital

Share purchase (IPO)

Friends and Family(love money) may also be

considered charity

Venture Capital
Firms

specifically designed to pool large sums of


money and invest in risky asset class
Have Limited Partners in their fund to report to
Have to invest the money or return it
Specific business model = specific types of deals
Have a specific criteria related to:

Industry
Type and size of deal
Size of return necessary (1/10 = successful)

Venture Capital

Key Issues

Process
Due Diligence
Valuation
Term Sheet
Exit

Entrepreneur Considerations
Ownership %
Long term ownership (exit)
Control

11

Angel Investors
Typically

invest between $25,000 - $100,000


Very hands-on and usually have a passion for
their projects
Not as cut and dry as Venture Capitalists
Think of what they do as a hobby they do not
need to invest in a company, they choose to
Investments are often limited to their
geographic reach
Look for investment where business is close to
launch or release

Angel Investors Upping Their


Ante in Canada, Say NACO and
BDC Venture Capital
The

survey, released in September, looked at investment


activity in 2012 by 20 angel groupsaround two-thirds of
identifiable angel groups in Canada. Those groups made a
combined 139 investments last year, a 96% increase over
the 71 reported investments in 2011. Of those deals, 102
were new.
Despite the steep increase in deal volume, however, the
total dollar value of these was only up 13%. According to
the survey, thats due to a decline in the average
investment: from $506,679 in 2012 to $313,935.
http://
www.techvibes.com/blog/angel-investors-upping-their-ante-in-canada-2013-11-0
9

13

Decision Criteria for Investors

Rank
by
Angels

Rank
by VC

Enthusiasm of entrepreneur

Trustworthiness of
entrepreneur

Sales potential of product

Expertise of entrepreneur

Liked entrepreneur upon


meeting

Growth potential of market

Quality of product

10

Perceived investor financial


rewards

Niche market

16

Track record of entrepreneur

10
11Osnabrugge & Robinson
* Angel Investing

14

The Funding Food Chain

Financing

Types

Seed
Capital

Sources

Personal
Love Money
Angels

Start Up
Financing

First
Stage

Second
Stage

Mezzanine

Bridge
Financing

IPO

Angels

Angels

Venture
Capital

Venture
Capital

Venture
Capital
Banks

Financial
Markets

15

More Information
Canadian Venture Capital Association (
www.cvca.ca)
National Venture Capital Association (
www.nvca.org)
BDC Venture
http://www.angelinvestor.ca/
What I learned, pitch deck:
http://www.techvibes.com/blog/investo
r-deck-transparency-and-lessons-learn
ed-2014-01-16?goback=%2Egde_5037848_m
ember_5829679035365490689
#%21

3. Bootstrapping
o
o

Piecing it together on your own!


A means of financing a company
through the creative acquisition and
use of resources without raising cash
from independent investors

Q: What were some strategies you used


during the Cash Flow exercise that helped
you preserve your cash and bank
account balance?

Advantages

It forces you to concentrate on selling to bring


cash into the business
Minimizes expenses, lessens the need for cash
Founders retain greater authority, control and
flexibility
Equity is expensive especially at startup
Positions the company for external financing in
the future

Disadvantages

May not generate enough cash to grow


at the desired rate
Limits potential sales, market share and
overall competitive position
Provides insufficient support for high
growth and capital intensive businesses

Strategies for Success

Leverage Government
Programs
IRAP

(Industrial Research Assistance


Program)
SR&ED Tax Credits (Scientific Research
and Experimental Development)
Other Federal and Provincial Programs

Look for:
Fed

Dev Ontario
Ministry of Economic Development and
Employment

Get operational quickly

Get up and running rather than waiting


for the home run
Look for cash generating products or
services, i.e. consulting by day
Take on opportunities that might not be
part of the strategic plan
A business that is making money builds
credibility

Go find a customer

Reach out to customers from day one

Get out and sell before the product is


ready

Use personal passion and salesmanship


to substitute for big marketing budgets

Offer products with tangible


advantages over competitors

Keep growth in check

Expand at a rate that you can control


Manage within your financial means
Facilitates development of
management skills under less pressure
First-mover advantages are often
short-lived
Keep your finger on the pulse of
performance

Focus on cash

Cash is king not profits, market share or


other metrics
Create healthy margins from day one
Say no to loss making strategies to
build market share or a customer base
Understand cash flow cash position,
monthly burn, timeline

Form alliances for

Market penetration
Sales/marketing channels
Product credibility
Joint bidding on projects
Accelerate time to market
Geographic expansion
Business experience
Enhance company status

Work with Customers

Ask customers to prepay fees or provide


advances
Get customers to fund customization work
(and let you own the IP)
Deliver invoices with the goods, pay
attention to collections
Dont do business with dead beats and
dreamers
Market with no money website, biz cards,
tradeshows, cold calls

Work with Suppliers


Suppliers:
Ask

for credit
Deal with service providers for low
rates
Make use of below market rent space
Barter your products or services
Dont abuse them

Bootstrapping methods have various


levels of value potential and application
Your

team:

Forgo, reduce or delay compensation


(sweat equity)
Employ relatives and friends at below
market salaries
Look for volunteers and co-op students
Pay with stock or stock options
Work from home

You:

Use personal savings, credit cards and


loans
Forgo, reduce or delay compensation
(sweat equity)
Work from home
Develop product at night and weekends
while working elsewhere
Wear lots of hats

Other:
Buy

used equipment (auctions)


Borrow equipment from other
businesses
Share business premises with others
Know where to save and when to
spend
Eliminate unnecessary expenditures

Financing Options
1. Debt: cash now for repayment (with
interest) later.
2. Equity: cash for a piece of the business.
3. Bootstrapping: piecing it together on
your own.

http://

ecorner.stanford.edu/authorMaterialInf
o.html?mid=2392