Financing a

New Venture
Stephen Daze
Dom Herrick Entrepreneur in Residence and
Visiting Professor
uOttawa, Telfer School of Management
Where do Entrepreneurs get their Money?

1. Their own money (#1 source.)

2. Debt: cash now for repayment (with interest) later.

3. Equity: cash from others for a piece of the business.

4. Bootstrapping: piecing it together on their own.

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Perspective

​- There is no right answer; each case is different.

​- Good luck: funding a business can be the biggest

challenge for early start-ups.

​- Likely scenario is a patchwork of funding solutions.

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1. Personal Contribution

​Founder’s own money and accounted for as either:

-Owners equity – to be drawn out at a later time.

-As a loan to the business – to be repaid at a later time.

Pros Cons
You decide and have Funds may be limited.
control.
You maintain ownership. You assume all the risk.
You are 100% invested! Loans may complicate
future funding.

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2. Debt

​Debt: cash now for repayment (with interest) later. Looks

like:
Pros Cons
​- Credit card - Flexible terms. - Interest rates can be high
- Can access it when you - Banks are typically risk
​- Line of credit need it. adverse.
- May be able to get what - If you fail, you still owe the
​- Loan you need. bank.

​- Mortgage (for property)

​- Not exactly debt: Fund receivables (factoring)

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Banks Consider the Following

1. Repayment Ability (Credit History): What evidence exists to convince them that
they will get paid back? What is your personal financial situation (“Credit Score”)?

2. Management: What evidence exists that indicates that this person can manage
his/her affairs and this type of business well enough to allow the opportunity for
payback?

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 they have to get my money
back? What will it be worth when the business fails?

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Example Sources

​Canada Small Business Financing: [Link]

​Business Development Bank: [Link]

​Futurpreneur: [Link]

​See also any major bank website.

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3. Equity

​Equity: cash for a piece of the business. Comes in

the form of either, or combination of:
​- Investment (angel or venture capital)

​- Share offering: Initial Public Offering

​- Friends, Family and Fools (Could also be listed

under a “Charity” category!)

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Venture Capital

​- Firms specifically designed to pool large sums of money

and invest in risky asset class.

​- Money for the fund comes from “Limited Partners.”

​- Have to invest the money or return it.

​- Specific business model for the fund with specific criteria

related to things such as: industry; size of deal; stage of
business; type of product; it will usually be pretty specific.

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VC Explained

- Investment Thesis
- LP’s
- Term Sheet
- Valuation
- Due Diligence
- Economics of the Deal
- Exit

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Venture Capital

VC Checklist Entrepreneur Checklist

1. The fit (portfolio/investment 1. Ownership %

thesis) 2. Control
2. Defensible or unfair advantage 3. Value added (smart
3. Traction and replicability money?)
4. Economics of the business: 4. Valuation
gross margins, marginal cost, 5. Exit eventuality
scale; of the deal: valuation
5. The team
6. Exit possibilities
7. Due diligence

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Some Perspective

1,170,000 Employer Businesses In Canada

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Massive markets; scalable technology; high margins.

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Angel Investors

​- Typically invest between $25,000 - $100,000.

​- Very hands-on and usually have a passion for their projects.
​- Deal requirements are 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.
​- Tend to invest earlier but also looking for investment where business is
close to launch or release.

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Angel Investing Explained

- Investment Thesis
- LP’s
- Term Sheet
- Valuation
- Due Diligence
- Economics of the Deal
- Exit

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More Information

​Canadian Venture Capital Association ([Link])

​National Angel Capital Association ([Link]

​(USA) National Venture Capital Association ([Link])

​BDC Venture

​[Link]

​What I learned, pitch deck:

[Link]
14-01-16?goback=%2Egde_5037848_member_5829679035365490689#%
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4. Bootstrapping

- A means of financing a company through the creative

acquisition and use of resources without raising cash from
independent investors or taking on debt.
- Using creativity and ingenuity to launch and grow a
business with few available resources.
- Maximising sales and minimising expenses however you
can.
- Living the mantra: Cash is King!

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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.

- Better positions the company for external financing in the

future if necessary.

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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.

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Strategies for Success

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Leverage Government Programs

​- IRAP (Industrial Research Assistance Program)

​- SR&ED Tax Credits (Scientific Research and Experimental Development)

​- Other Federal and Provincial Programs

• Ontario Centres of Excellence (OCE)

• Smart Start Fund; others..
• Fed Dev Ontario
• Investment Accelerator Fund (IAF)
​- Numerous job/employment programs
- [Link]
- [Link]
- [Link]
- [Link]
- [Link]

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Leverage Incubators and Competitions

[Link]
[Link]

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Get Operational Quickly

• Get up and running: GO FIND A CUSTOMER!

• Kickstarter/Crowdfunding campaigns to pre sell.

• 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.

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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 your cash flow – cash position, monthly burn,
timelines.

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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.
​- Don’t do business with dead beats and dreamers.
​- Market with no money – website, biz cards, tradeshows,
cold calls.

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Work with Suppliers

​- Ask for credit.

​- Deal with service providers for low rates.
​- Make use of below market rent space.
​- Barter your products or services.
​- Don’t abuse them.

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Your Team

​- Forgo, reduce or delay compensation (sweat equity).

​- Employ relatives and friends at below market salaries.
​- Look for volunteers, work term and co-op students.
​- Pay with stock or stock options.
​- Work from home.

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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.

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Other Strategies

​- Form alliances with other businesses and ventures.

​- Buy used equipment (auctions).
​- Look for free trials before buying.
​- Borrow equipment from other businesses.
​- Share business premises with others.
​- Know where to save and when to spend.
​- Eliminate unnecessary expenditures.

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How can we apply these lessons to NFP’s and social
ventures?

​1. Government programs and incubators: [Link].

​2. Get operational quickly: get on with fulfilling even a small part of your mission
to build credibility and learn. Think big, start small.

​3. Cash: focus on minimizing expenses. Question every expense.

​4. Clients: look for ways to work with clients without cash expenditures right now.

​5. Suppliers: look to see if they can extend credit to you, or sponsor your
activities.

​6. Team: finds ways to utilize volunteers before you make the commitment to
hire. Find employees to work for the cause first and a paycheck second.

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 Things to Know about Social Ventures

Social ventures don’t fit the economic models necessary for traditional equity (angels
venture capital) investment. Understand your target funder.

Funding programs are variable based on government priorities. Currently there is very
little. Don’t count on them, but stay tuned for future government of Canada
announcements.

Grant funding is offered by charitable, philanthropic, and government bodies who do not
expect a financial return but are instead investing in the social outcome that the social
enterprise promises. (eg. Bill and Melinda; Michael and Susan Dell; Ottawa Community
Foundation, United Way, etc.) Become expert in writing grant applications.

Impact investments are investments made with the intention to generate positive,
measurable social and environmental impact alongside a financial return. Know how to
measure your impact.

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Where do Entrepreneurs get their Money?

1. Their own money (#1 source.)

2. Debt: cash now for repayment (with interest) later.

3. Equity: cash from others for a piece of the business.

4. Bootstrapping: piecing it together on their own.

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Questions?

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