Chapter 6
Getting Funding
or Financing
Bruce R. Barringer
R. Duane Ireland
Copyright ©2016 Pearson Education, Inc. 10-1
Chapter Objectives
1. Describe the importance of financing for entrepreneurial success.
2. Identify and describe the three sources of personal financing available to
entrepreneurs.
3. Identify and explain the three steps involved in properly preparing to raise debt or
equity financing.
4. Explain the three most important sources of equity funding.
6. Describe common sources of debt financing entrepreneurial firms use.
7. Describe several creative sources of financing entrepreneurial firms may choose
to use.
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The Importance of Getting
Financing or Funding
• The Nature of the Funding and Financing Process
• Few people deal with the process of raising investment capital until they need
to raise capital for their own firm.
• Many entrepreneurs go about the task of raising capital haphazardly because they lack
experience in this area.
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Why Most New Ventures Need
Financing or Funding
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Options for Raising Money for a
New Venture
Personal Funds Equity Capital
Debt Financing Creative Sources
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Sources of Personal Financing
1 of 2
• Personal Funds
• The vast majority of founders contribute personal funds,
along with sweat equity, to their ventures.
• Sweat equity represents the value of the time and effort that a
founder puts into a new venture.
• Friends and Family
• Friends and family are the second source of funds for many
new ventures.
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Sources of Personal Financing
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• Bootstrapping
• A third source of seed money for a new venture is referred to
as bootstrapping.
• Bootstrapping is finding ways to avoid the external financing
or funding through creativity, thriftiness, cost cutting, or any
means necessary.
• By bootstrapping your startup, you don’t have to worry that
you're taking your company in someone else's prescribed
direction.
• It gives you creative control of the direction of your
company.
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Examples of Bootstrapping Methods
Buy used instead of Coordinate purchases Lease equipment
new equipment. with other businesses. instead of buying.
Obtain payments in
Minimize personal Avoid unnecessary
advance from
expenses. expenses.
customers.
Share office space or
Buy items cheaply but
employees with other Hire interns.
prudently.
businesses.
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Preparing to Raise Debt or Equity Financing
1 of 2
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Preparing to Raise Debt or Equity Financing
2 of 2
Two Most Common Alternatives
Equity Funding Debt Financing
Equity finance is to issue new Is getting a loan.
shares in exchange for a cash
investment. The business
receives the money it needs and
the investor owns a share in the
company.
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Matching a New Venture’s Characteristics with
the Appropriate Form of Financing or Funding
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Preparing an Elevator Speech
1 of 2
Purpose
• An elevator speech is a brief,
carefully constructed statement
Elevator that outlines the merits of a
business opportunity.
Speech • There are many occasions when a
carefully constructed elevator
speech might come in handy.
• Most elevator speeches are
around 60 seconds long.
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Preparing an Elevator Speech
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Step 1 Describe the opportunity or problem 20 seconds
that needs to be solved.
Step 2 Describe how your product meets the 20 seconds
opportunity or solves the problem.
Step 3 Describe your qualifications. 10 seconds
Describe your market.
Step 4 10 seconds
Total 60 seconds
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Sources of Equity Funding
Business Angels Venture Capital
Initial Public
Offerings
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Business Angels
• Business Angels
• Are individuals who invest their personal capital directly in start-ups.
• The prototypical business angel are senior in age, have high income and
wealth, are well educated, have succeeded as an entrepreneur, and are
interested in the start-up process.
• Business angels are difficult to find.
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Venture Capital
1 of 3
• Venture Capital
• Is the money invested by venture capital firms in small businesses with
exceptional growth potential.
• Venture capitalists invest money in start-ups in “stages,” meaning that not all
the money that is invested is disbursed at the same time.
• Venture capital firms have a limited partnerships of money as they take a minority stake
—50% ownership or less—when they invest in companies.
• The investors of venture capital funds are called limited partners.
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Differences between Business Angels and
Venture Capital Firms
• Venture capital firms fund few start ups in comparison to business angels.
• On average, VC firms will invest a larger amount of money than angel investors,
but VC investors will also get a higher equity stake in the company.
• Angel investors are generally more interested in startups with an interesting idea,
whereas a VC firm focuses upon the growth potential.
• VC firms usually demand that they have some level of operational control, whereas
angel investors prefer to be passive investors.
• Angels tend to invest earlier in the life of a company, whereas venture capitalists
come in later.
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Initial Public Offering
1 of 2
• An initial public offering (IPO) is a company’s first sale of stock to the public.
When a company goes public, its stock is traded.
• Most entrepreneurial firms that go public trade heavily toward technology,
biotech, and small-company stocks.
• An IPO is an important milestone for a firm. A firm is not able to go public
until it has demonstrated that it is viable and has a bright future.
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Initial Public Offering
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Reasons that Motivate Firms to Go Public
– Is a way to raise equity capital to fund current and future operations.
– Raises a firm’s public profile, making it easier to attract high-quality customers
and business partners.
– Creates a form of currency that can be used to grow the company.
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Sources of Debt Financing
Commercial Banks
SBA Guaranteed Loans
Other sources
Vendor Credit
Factoring
Peer to peer credit
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Commercial Banks
• Historically, commercial banks have not been viewed as a practical source of
financing for start-up firms, as banks are risk aversive, and financing start-ups
is a risky business.
• Banks are interested in firms that have a strong cash flow, audited financials, good
management, and a healthy balance sheet.
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SBA Guaranteed Loans
1 of 2
• The SBA Guaranteed Loan Program
• With an SBA loan guarantee, if a borrower fails to repay the loan, the lender can recover
50 to 85 percent of the outstanding loan balance from the SBA. The borrower, however,
remains obligated for the full amount due. This reduces the lender's risk so they are more
willing to approve the loan.
• Small Business Administration helps small businesses get funding by reducing lender risk.
These SBA-backed loans make it easier for small businesses to expand business.
• Almost all small businesses are eligible to apply for an SBA guaranteed loan.
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Other Sources of Debt Financing
• Vendor Credit
• Also known as trade credit, is when a vendor extends credit to a business in order to allow the
business to buy its products and/or services up front but defer payment until later.
• Peer-to-Peer Lending
• Peer-to-peer lending (P2P) is a way for people to lend money to individuals or businesses.
The lender receives interest and get his money back when the loan is repaid.
• Is a financial transaction that occurs directly between individuals or peers.
• Be sure to watch out for high interest rates, usually between 12 percent to 25 percent.
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Creative Sources of Financing or Funding
Crowdfunding Leasing
SBIR and STTR Other Grant
Programs Programs
Strategic Partners
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Crowd funding
• Crowd funding
• Crowd funding is the practice of funding a project or new venture by raising
monetary contributions from a large number of people (the “crowd”) typically via
the Internet.
• Types of Crowd funding Programs
• Equity-based crowd funding helps businesses raise money by tapping individuals
who provide funding in exchange for equity in the business.
• Equity-based crowd funding sites include Funders Club, Crowdfunder.com, and Circle Up.
• Rewards-based crowd funding allows entrepreneurs to raise money in exchange
for some type of amenity or reward.
• The most popular rewards-based crowd funding sites are Kickstarter, and RocketHub.
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Leasing
• Leasing
• A lease is a written agreement in which the owner of a piece of property allows an
individual or business to use the property for a specified period of time in
exchange for payments.
• The major advantage of leasing is that it enables a company to acquire the use of
assets with very little or no down payment.
• Most leases involve a modest down payment and monthly payments during the
duration of the lease.
• At the end of an equipment lease, the new venture typically has the option to stop
using the equipment, purchase it for fair market value, or renew the lease.
• Leasing is almost always more expensive than paying cash for an item.
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SBIR and STTR Grants
• SBIR and STTR Programs
• The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer
(STTR) programs are two important sources of early-stage funding for technology firms.
• These programs provide cash grants to entrepreneurs who are working on projects in specific
areas.
• The main difference between the SBIR and the STTR programs is that the STTR program
requires the participation of researchers working at universities or other research
institutions.
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Other Grant Programs
• Private Grants
• There are a limited number of grant programs available.
• Getting grants takes a little detective work as granting agencies must be soughted
out.
• Other Government Grants
• The federal government has grant programs beyond the SBIR and STTR programs.
• The full spectrum of grants available is listed at www.grants.gov.
• Be careful of grant-related scams.
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Strategic Partners
• Strategic Partners
• Strategic partners are another source of capital for new ventures.
• Many partnerships are formed to share the costs of product or service
development, to gain access to particular resources, or to facilitate speed to market.
• Older established firms benefit by partnering with young entrepreneurial firms by
gaining access to their creative ideas and entrepreneurial spirit.
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Strategic Partners
2 of 2
• Biotech firms often partner
with large drug companies
to conduct clinical trials and
bring new products to
market.
• The biotech firms benefit by
obtaining funding from their
partners, and the partners
benefit by having additional
products to sell.
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