Raising Money

Sources of Finance

Raising Money

• How will we finance the opportunity?• Where will the money come from?

Typical New Venture Funding Sources

• Angel Investors• Venture Capitalists• Private Equity• Public Equity• Banks• Self-financing

Angel Investors

• Who are they?– Wealthy individuals– Often successful entrepreneurs

• What drives their investment decision?– A belief that the entrepreneur has done the

homework– A belief that the idea holds great upside potential

• Where does their money come from?– Usually funded from personal savings

Venture Capital Investors

• Who are they?– Professionally managed investment vehicles– Usually in the form of a limited partnership

• What do they expect to get?– Equity– Significant return on investment (~ 30% CAR)– A clearly pre-defined exit for 5 – 7 years later

• Where does their money come from?– Pension funds– Wealthy individuals

Private Equity Investors• Who are they?

– Professionally managed investment vehicles– Can be in the form of a limited partnership, also mutual funds

• What drives their investment decision?– Track record of the business – A belief that market conditions allow for expansion of the

business• Where does their money come from?

– Pension funds– Insurance companies– Mutual funds

Public Equity Investors

• Who are they?– Retail investors• Individuals

– Institutional investors• Pension funds, mutual funds, corporations

• What drives their investment decision?– Retail investors• Emotion, hot tips, their own analysis

– Institutional investors• Investment policy (hurdle rates, sector & country

allocations, etc.)

Banks

• Who are they?– Lending institutions

• What drives their investment decision?– The creditworthiness of the borrower• Ability of the business to service the loan (make

payments of interest & principal)• Collateral (can be supplied by a third party)

• Where does their money come from?– Depositors

What do these investors look for in common?

• Significant shareholder value growth (“$”) for expansion capital or reliable cash earnings – Consideration of: transparency, honesty, creativity,

responsibility, accountability, teamwork, etc.– Appropriate industry, investment size, stage of

company development – can vary depending on risk tolerance and desired ROI

Pros and Cons

• Advantages:– allows companies to access situations otherwise

closed to “high risk” investments– someone to share the risk– ensures better analytical discipline– access to investor’s network of financiers, customers,

suppliers advisers

Pros and Cons

• Disadvantages:– high cost of funding if successful– partial loss of control– extra reporting requirements

Self-finance

• From where?– Family– Friends– The entrepreneur

• What drives their investment decision?– Based on a belief in, or relationship with, the

entrepreneur– Based on a belief that the idea is at least feasible

• Where does their money come from?– Usually funded from personal savings or new

borrowings (mortgage on real estate)

Funds are often applied to different purposesSource PurposeSelf finance Initial start-up funds

Angel Investors Initial start-up funds

Venture Capitalists Just after start-up

Private Equity Longer-term growth of an established company

Public Equity Capital investment requirements of an established company, exit for VCs

Banks Financing for most operating needs

Do all businesses have to raise money?

The answer is ‘No’ but instead…

You can Bootstrap!

Invest Run Business Generate Cash

Redeploy

Bootstrap

• Get operational quickly. Look for quick, break-even, cash-generating products

• Consider high-value products or services that you can sell directly

• Don't chase high-priced talent

Source: "Bootstrap Finance," 1992 HBR article by Amar Bhide, Columbia University

Bootstrap

• Keep growth in check• Focus on cash, not profits, market share, or anything else• Cultivate banks before the business becomes

creditworthy

Source: "Bootstrap Finance," 1992 HBR article by Amar Bhide, Columbia University

How to Bootstrap?

• Do not buy new what you can buy used, • Do not buy used what you can lease,• Do not lease what you can borrow, • Do not borrow what you can barter, • Do not barter what you can beg, • Do not beg what you can scavenge, • Do not scavenge what you can get free,• Do not take for free what some one can pay you for!

Some Final Lessons on Raising Money

• The longer you wait (and the more developed the opportunity), the less the cost of capital (less risk to the investor)

• Seek money BEFORE you need it• Investors will probably give their money in stages,

providing you achieve pre-negotiated targets• Not all ventures require venture capital • Bootstrap when possible

How to Approach Investors

• Research potential investors• Only approach appropriate investors• Prepare a very good Business Plan • Prepare and rehearse a very good presentation (no set

standard: 30 seconds / 40-45 mins)• Be clear about what you need (how much, when, what

for) and have some idea about what you’re prepared to offer (% of equity)

• Progress your venture as much as you can on your own before approaching investors

All materials used in this session are available in the NEN CD Kick-Starting the Entrepreneurial Campus

under Inside the Classroom – section “Entrepreneurship Concepts”, subsection “Finance and Fundraising”