Financing a Small Business Part II

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Financing a Small Business Part II Equity
Financing Planning for Capital
The ABCs from Start to Finance
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Equity or Risk Capital

• Equity capital represents the personal investment
  of the owner(s)it is often called RISK capital
• It is called RISK because the investors assume
  the primary risk of losing their funds if the
  business fails
• In the 1990s entrepreneurs began to turn more to
  equity financing to get their businesses up
  running
• Apart from personal savings, family and friends,
  equity capital is tough for a start-up to obtain

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Equity Financing

• Most frequently used to fund emerging businesses
  and to provide seed start-up for the early
  stage and expansion ventures
• For businesses in their 2nd and 3rd level of
  business development
• Start-up businesses often have challenges
  attracting traditional equity investment
• Start-ups often use the 3 Fs for equity
  investment

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The Equity Ladder

• Start with your personal savings lenders
  investors EXPECT you to reach into your pockets
  first!
• 2. Three out of four start-ups tap their family
  members for capital followed by friends.
• Entrepreneurs can take on partners to expand the
  capital foundation of their business.
• 4. Angels fill a significant gap in the seed
  capital market.
• Venture Capitalists Capitalist Firms purchase
  equity positions in young businesses that have
  high-growth potential
• Going Public- Public Stock Sale

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Tips for Tapping the Family Friends for Funds

• Consider the impact the investment will have on
  everyone
• Keep the arrangement strictly business
• Keep it professional!
• Settle the details upfront
• Create a written documentput the agreement in
  writing
• Treat the money as bridge financing
• Develop a payment schedule

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Angel Overview

• Angels are normally wealthy individuals, often
  entrepreneurs themselves, who invest in business
  start-ups
• Angels have a personal interest in the
  industry and are willing to put money into
  companies before venture capitalists and
  institutions. They often fund in clusters and
  can be patient to wait for a ROI.
• Angels are more likely to fund in the range from
  10,000 - 2 million (VCs are more 3 million)
• Joe Bezos, CEO Amazon, attracted 1.2 million
  in Angel financing to start Amazon.com but only
  after he had tapped-out his friends family

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Where to find Angels
Make the right contacts, network in the
industry Most angels will look for businesses
they know something about Internet sightings
include Angelmoney.com, Garage.com, Jumpstart
Investments, Angel Investing WomenAngels.net,
ACE-Net (sba.gov), Bay Area Regional
Technological Alliance
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Howdy Partner!Partners for Your Equity

• Consider the Risks before taking on a partner
  for your business.
• Follow the UPA (Unified Partnership Agreement
  Act) in sharing in management profit losses.
• A limited partner cannot share in the day to
  day operations and management if the business
  fails they lose ONLY what they have invested in
  it.
• Most partnership agreements restrict how a
  partner can dispose of their interest. Dissolving
  can be a difficult process.

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Venture Capital Firms

• Traditional VC is hard to getthey are looking
  for companies that grow REALLY Big, REALLY Fast!
• Many Large Corporations are in the VC business of
  financing smaller businesses
• Foreign Corporations are also investing in
  smaller US businesses
• VCs normally expect a ROI of 300-500 over 5 to
  7 years!!
• VCs lend in the area of 1- ??? Million
• (although smaller products are there)

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Venture Capitalist Sources

• Venture Capital Marketplace- www.vcmarketplace.com
  
• SBA- SBIC Program (Small Business Investment
  Companies)- small VCs provide seed funding with
  SBA guarantees-
• Pratts Guide to Venture Capital Sources (no
  relation..sorry)
• National Venture Capital Association www.nvca.org

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Planning For Your Capital NeedsHaving the
appropriate business -financial plan is
critical!

• Business Plan Types Uses
• Financing- must support ability to repay
• Investment- illustrates strengths potential of
  business in order to capture market share.
• Describes the equity investment and structure
• Composite (existing)- often used by existing
  businesses for on-going financing
• Start-up (projected)- details the projected
  strengths and needs of a new business. The plan
  MUST BE able to support the assumptions
• Other types- Strategic, Marketing, Operational

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Ten Most Common Mistakes Found in Financial
Business Plans

• Too Long
• No Competition Indicated
• Unreasonable Expectations Projections
• Unreasonable Financial Projections
• Unrealistic Profitability for Investors
• Management Skills not demonstrated
• Unrealistic projections of products services
• Lack of Knowledge of Industry
• Inadequate Calculations
• NOT Clear to the reader

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Outline of a Typical Small Business Financing
Business Plan

• Cover Page
• Cover Letter Statement of Purpose
• Table of Contents
• Executive Summary
• Description of Business
• Market Analysis
• Management
• Operations
• Use of Funds
• Financial Information
• Supporting Information (resumes, agreements)

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Checklist for getting it all together!

• Every bank or organization will have a slightly
  different list of everything that is needed.
• Here is a basic list
• Applicant Information Sheet
• Current Personal Financial Statement (for all
  partners)
• Schedule of Real Estate Owned
• Personal Tax Returns- 3 years (or business if in
  business)
• Signed Credit Authorization
• Current Financial Statement
• Business Debt Schedule
• If new business, business plan and projections
  for first 12 months
• If purchasing, Purchase agreement
• If franchising, Franchise agreement

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Where to go for Help!

• Your local banker
• The SBDC
• The SBA
• Local Consultants
• US Hispanic Chamber of Commerce
• Business Plan Pro (software)
• Bplans.com

Just a few places to startThere are a lot of
resources available!