FOUNDATIONS OF ENTREPRENEURSHP

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FOUNDATIONS OFENTREPRENEURSHP
CLASS SIX ACQUIRING FINANCIAL CAPITAL

• Elikem Nutifafa Kuenyehia
• Management Consultant Corporate Lawyer

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Agenda For Class Six

• Recap of Class five
• Acquiring Financial Resources
• Give you opportunity to ask questions

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Distinct Stages for Capital

• Founding Stage
• Initial vision for business.
• Development of strategy
• May require capital for research, concept
  development etc
• Entrepreneur friends/family
• Seed Stage
• Money required to start the business (seed)
• Typically comes from friends family, bank
  loans, etc...

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Distinct Stages for Capital

• Growth stage
• Where you need to fund business to enable it
  sustain its growth
• Stage where you are likely to get the most
  interest from investors
• Harvest Stage
• Where founders seek to harvest their investment
• Trade Sale, Sale to other investors, IPO etc

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Considerations in seeking capital

• Be clear what you need money for, how much
• Starting point should be b/plan cash flow
  statements
• Give consideration to Fixed Capital vs. Working
  Capital
• From whom you raise capital is more important
  than the terms
• Investors typically want to see that the
  entrepreneur has his skin in the game

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Acquiring Financial Resources

• SOURCES OF CAPITAL
• Equity Capital
• Personal Savings
• Friends Family
• Angel Investors
• Stock market
• Debt Capital

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Equity v Debt Capital

• Equity capital is an investment in the ownership
  through the purchase of shares
• Debt capital is money that is borrowed and which
  must be repaid over time. Usually doesnt include
  any share ownership

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Sources of Funding

• Self funding/Bootstrapping
• Friends Family
• Angels
• Venture Capital
• Stock market
• Bank Financing
• Lease Financing
• Corporate profit/Internal sources

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Self funding

• Self funding
• Cheapest Form of Capital
• No other associated costs other than opportunity
  cost
• Shows your skin is in the game
• More savings you have, the less equity you have
  to give up
• Generally 'unreliable' source takes long time
  to save/inflation etc
• Takes away 'survival money'

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Friends Family

• Relying on personal relationships to fund venture
• Friends Family more patient and less meddlesome
  than other investors
• Can put strain on underlying relationship
• Particularly when business is not going well
• Maybe difficult to raise huge sums through this
  route
• Friends Family should be able to accommodate
  losses.
• Unrealistic or misunderstood expectations
• Clarify!

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Angels

• Basically a good guy with money who can be
  persuaded to invest in your venture
• Typically retired entrepreneurs
• Might be investing for reasons other than returns
• Smart Money - can add significant value to
  entrepreneur's business

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Venture Capital

• Venture Capitalists
• finance new growing businesses
• Acquire equity in ailing companies with prospects
• Bring smart money, contacts and active hands on
  management
• Invest for medium term
• Exit is important

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Why Some Cannot Access VC funding

• No knowledge of what VCs offer
• Poor corporate governance
• Unwillingness to give up control
• Lack of transparency/honesty
• No business plan/corporate plan

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Equity Capital

• Shareholders acquire shares in the company
• For partnerships, you invest in the partnership
• May give investor say in the direction of company
• Adv for entrepreneur is that he does not have to
  repay
• Shareholders get paid dividends out of profits
• Involves parting with ownership
• 50 of something is better than 100 of nothing

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Debt Capital

• Overdrafts
• Term loans
• Floating rate vs Fixed rate
• Demand vs. Fixed Maturity
• Secured vs. Unsecured

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Stock Exchange

• IPO provides medium to long term capital needs of
  company
• IPO initial public offer
• A company is listed when its shares are approved
  to be bought and sold on the Stock Exchange
• Must appoint a licensed dealing member of GSE to
  sponsor application and take through listing
  process
• Both existing and new shares can be listed on
  exchange

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Stock Exchange

• GSE has three official lists
• First Official List
• Second Official List
• Third Official List
• Minimum capital requirements
• FOL 100M
• SOL 50M
• TOL 25M
• Minimum public float
• Shares offered to public should not have a market
  value of less than 30M for FOL, 15M for SOL and
  5M for TOL
• 25 or more of Companys shares should be issued
  to public
• Spread of shareholders
• Spread of shareholders at close of IPO should be
  adequate (in opinion of GSE)

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Stock Exchange

• Minimum Period of existence
• TOL one year but can be waived
• Profitability
• SOL/TOL must have strong potential to be
  profitable
• Management Directors
• Evidence that management possesses requisite
  expertise
• Character and integrity of management directors
  must be acceptable to GSE

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TIPS

• Real Money Needs Real Structures
• -A worthy vessel is needed for a worthy cause
• -The scheduling of repayment of investments and
  reporting of profits may require specific
  management skill this will be demonstrated this
  through complex projections
• -Corporate governance structures give investors
  some confidence that their money will be put to
  good use and that their returns will be managed
  and delivered

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TIPS (contd)

• Personal Investment
• Most investors want to know how much the
  promoters have put into the venture
• The smaller your personal investment, the smaller
  the share you retain after others invest
• Structure friendly investments as part of your
  personal investment

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TIPS (contd)

• Financial Reporting
• Income Statement net income
• Cash Flow Projection net cash
• Balance Sheet Projection net worth
• 1 year, 2 years, 5 years
• Unlike what youd imagine, you need these reports
  even more than your potential investors do

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TIPS (contd)

• What Do Financial Reports Demonstrate?
• Fundamental understanding of your business
• How long it will take to break even
• What your profit margins are likely to be
• How much money you need (and when youll need it)