Copyright 2013 Jack M. Kaplan & Anthony C. Warren Bootstrapping and Financing the Closely-held...

Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Bootstrapping and Financing the

Closely-held Company

Patterns of Entrepreneurship Management4th Edition, Chapter 9

Funding the Venture -1

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance

Factoring/Supplier Finance


Focused on early stage funding

Personal, friends and family

Angel financing and early private equity

Factoring and supplier finance

Presentation Outline

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



73%31%18%16%

10%4%2%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Personal Savings

Bank Loans

Family

Mortgaged Property

Friends

State/Federal Guaranteed Loans

Venture Capital

SOURCES OF START-UP FUNDS

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance


Note: does not add to 100% as there are overlapping sources.


Ultrafast Milestones and Value Creation

Funding Stages Should Match Milestones

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



More Suitable for the Early Stages

(Covered in

This Chapter)

More Suitable for Later Stages

(Covered in Chapter 10)

Self-Funding Super-angels

Moonlighting and Consulting Institutional Venture Capital

Bootstrapping Private Placements

Family and Friends/Angels Corporate Debt

Micro-equity, Micro-loans Strategic Partnerships

Personally Secured Bank Loans Mezzanine Finance

Factoring and Supplier Financing Initial Public Offerings

Government Programs

Comparison of Early Stage and Later Stage Sources of Finance

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



The Virtual Company

• The internet enables a new venture to develop without significant overhead costs

− Internet video conferencing for meetings

− Project management software such as Basecamp

− Outsourced HR software

− Locating experts who can work as “pay-as-you-go” consultants

− No need for offices, etc. etc.• Such ventures can be much more efficient in the use of funds and

therefore reducing the need for capital• If a sale to an existing company is planned then only the

ESSENTIAL assets need be created.

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Personal Funding

Investing your own money – “sweat” equity for stock

– Offers greatest return, if successful

– Investors and venture capital sources usually require it

– Your personal funds can be treated as equity or debt

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Moonlighting

• Founder still working a regular job

• Income used to support the entrepreneur during needed cash flow

• When the venture begins paying as well or better - entrepreneur leaves job

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Bootstrapping

• A general term that refers to building value in a company without taking on outside investors or bank loans

• Usually overlooked as a source of resources by entrepreneurs

• Effective bootstrapping allows founders to retain more of their ownership

• Often the ONLY way to grow a company• The entrepreneur becomes more efficient and

cost conscious which is attractive to investors

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Protect your Investment – Document EVERY source of money and the terms.

Specify in writing if it is a loan to the company, how the loan is payable, conversion rights or equity.

Specify if the loan is payable in full upon the company receiving venture funding.Get into the habit of documenting all financial transactions from the start to avoid later problems.

Personal FundingChapter

9Personal Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Second mortgage, credit cards, or sell your car

OR

Get an investor to use a bank deposit or stock holdings as collateral for a loan

Use of Personal Assets

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Friends And Family

• The most popular source of funds for startup capital

• Friends and family are not as worried about quick profits as professional investors

• Usually they do not investigate the business and are not familiar with all the risks

• The best advice is to provide the same full disclosure to a friend as you would a professional investor

• Document the transaction

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Well-off individuals with money to invest

Good prospects get funded

Need good contacts found via networking

Seek local Angel Networks. Fees range from $150-$300

Seek Angel Support Networks such a Ycombinator, DreamIt Ventures

List on Angelsoft.com

Angels

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Accredited Investors

• An accredited investor is defined as having income in excess of $200,000 in each of the two most recent years or joint income of $300,000

OR• Individual net worth or joint worth exceeding

$1,000,000

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Common Stock - Purest form of equity

– No fixed or guaranteed return– Greatest risk and greatest return– Voting stock versus non-voting stock

Preferred Stock– Guaranteed dividends– Rights are prior to common stock

rights especially on sale or dissolution

Equity Investments

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Micro-equity and Micro-loans

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance


Early stage funding and networking are offered by Micro-EquityGroups such as and

These groups provide some financing, incubator support and mentoring to prepare entrepreneurs for later funding. They take a small equity position for this work.

Micro-loans, which are well established for developing economies, are just gaining acceptance in the US. A number of lending networks can be found on the internet.


Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance


Factoring and Supplier Financing

FACTORS provide credit to companies that are unable to access a conventional bank loan. Factors secure the loan against purchase orders received by the company. Customers pay the factor directly, who deducts high interest and fees sending the remaining amount to the company.

SUPPLIERS may delay invoicing or receiving payment from a small company in order to retain the business and help through the early stages.


Programs of the Small Business Administration

(SBA) The Federal Government has a number of

loan support programs The rules change often so check the SBA

web-site Most of the SBA loans are made by

lenders( commercial Banks, savings and loans, Insurance companies)

Guaranteed by the SBA Average loan is $100,000 plus-with a

maturity of 10 years

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



The program allocates in excess of 1 billion annually for scientific innovation

Phase 1-awards up to $150,000 for the purpose of investigating the feasibility of an innovation

Phase 11 –The report is reviewed and if feasible, an award up to $1,000,000

Phase 111- Funding for commercialization must come from private sources

Check the SBIR web-site for proposal requests

SBIR Program

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



Licensed by the SBA - Invest locally and have industry preferences

Limited to companies under $2 million in earnings and less than $6 million in net worth

Have both debt and equity investments

Do not take a majority position in the company

There are also many other federally funded programs authorized by congress from time to time, entrepreneurs should check on these regularly.

Small Business Investment Companies etc.

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Micro-Finance



State programs

– Many states target funds for economic development:

PA. Ben Franklin Technology Centers make grants up to $450,000 in three installments

N.J. New Jersey Economic Development Agency, loans and royalty agreements

– Advantages:

No repayment unless the project succeeds and

minimal equity conversion rights

Relatively simple process

May be one of only a few sources for early stage

– Disadvantages:

Pay royalties on sales

State Development Programs

Chapter 9Personal

Financing

Angels

Friends & Family

Private Equity

Government

Programs

Banks

Micro-Finance


Copyright 2013 Jack M. Kaplan & Anthony C. Warren Bootstrapping and Financing the Closely-held...

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