Lesson plan chapter 09 funding

Be an Entrepreneur

Chap 09

The Entrepreneur

The Business Plan

The Enterprise•Epilogue

Be an Entrepreneur

CHAPTER 09

Secure Funding

Chapter 9 overview

• In chapter 9, we look at the ways to find money for your business.

• We talk about raising money and securing the necessary funding. • You need long-term investment capital for buying

machines and factories (the fixed assets). • You also need short-term working capital for

buying raw materials.

Chapter 9 overview

• The young entrepreneur may have winning plans and impressive projects, but he still needs to find the money to start the enterprise. • The first and logical source of funding is personal

savings and personal assets. • Afterwards comes investment money from

relatives or friends.

Chapter 9 overview

• When funding comes from other people, you can distinguish between many kinds of external investors. • Some investors are kind and patient; • many are brutal and impatient.

Chapter 9 overview

• Venture capital (such as funds from angel investors) usually comes in at an early stage in the company’s development.

• Later on, larger-sized private-equity investors come in to bring the company to a higher level.

Chapter 9 overview

• After some years of successful operation, the company will be able to approach a bank for further financing.

Chapter 9 overview

• An aggressive bank can provide long-term capital on easy terms, based on an impressive business plan alone.

Chapter 9 overview

• A conservative bank would provide small amounts of short-term loans if there is collateral.

• Collateral is property that could be confiscated in case of non-payment of loans.

Chapter 9 overview

• At a later stage, the business owner may be able to sell some shares of stock to raise big money for a corporate expansion.

Coverage of the Chapter

Part One. How to access funding• Easy or difficult?• Personal resources• Size of the initial financing • Steps from start to finish• Sources of funding


Part Two. Where to Access the Funds• Your personal money • Family as a source of funding• Friends & Contacts• Angel Investors• Venture Capitalist• Private-Equity Fund


Part Three: Two general types of capital• Loans from banks and lending institutions• Stock Financing: from equity investors.

Icebreaker Glossary. Video. Story:

how to access funding. steps

personal money. friends or family.

Story: Drager of Phanta Media.

various sources of funding

angel investors. venture capital.

Story: Cisco systems. ARDC.

Summary. Case analysis.

Activities

Learning Objectives

• Learn how to secure the financial resources to start a business

• Understand the steps you must take to determine the necessary funding

• Know where to seek the necessary funding

Learning Objectives

• Determine if you can supply funding with your own money

• Discuss the pros and cons of using your personal money for business

Learning Objectives

• Learn the pros and cons of tapping your family as a source of funding

• Appreciate the reasons why angel investors invest in unknown start-up companies

• Know how to make convincing presentations to venture capitalists to ask for funding

Learning Objectives

• Understand the motivation of private-equity funders

• Understand the types of debt financing: secured and unsecured loans.

• Understand the pros and cons of stock financing

Central Idea

Secure funding for your business

Story from Real Life

Starting a small business is a lot like having a new baby, just as business owner Mark Drager discovered.

"Both consume all of your time, money and energy!" he says.


Drager is President of Phanta Media (www.phantamedia.com), a Toronto-area multimedia company providing a full range of video, graphics, and interactive marketing services.

The company helps businesses communicate with prospects, clients, and staff.


Drager decided it was time to be his own boss in late 2006.

He launched his media communications firm about the same time he had a daughter.

He also had to ask his mother for some money to start the business.


"Borrowing money from family members is very motivating because failure is not an option…you have to pay them back!" recalls Drager.


Drager did not regret giving up his career and predictable income.

Although spending long hours building his company and raising a daughter at the same time is not easy, he says he is happier than ever before.

"It's so rewarding to be focused on these things that matter so much to me," he says.

Glossary

Angel investor: a rich individual who invests in early-

stage companies in exchange for equity ownership in the business.

Bankruptcy: declaration that the company is unable

to pay back its loans.

Glossary

Bear Market: when prices are falling, as if a bear was

clawing them down.

Bull Market: a market where prices have been rising

for many weeks or months already, like a bull charging up a hill.

Glossary

Capitalization: funds used to start operating your

company.

Collateral: property or other belongings that the

bank can confiscate if you fail to pay your loan.

Glossary

Common shares: certificates of part-ownership in a

company. Common shares have voting rights.

Glossary

Convertible debenture: With a convertible debenture, the

venture capitalist makes a loan and then retains the option to convert the loan to shares in the company, at a future date.

Glossary

Dividend: money paid regularly to a company’s

shareholders or owners.

Equity: ownership or part-ownership.

Glossary

Equity firms: an investment company formed by cash

contributions from shareholders.

Glossary

High-Growth Stage: strong growth in sales and profits in the

first few years of the life of a company

INC 500 and INC 5000: the fastest growing companies in

America, as monitored by a business magazine.

Glossary

Investee company: a company that has received

investment money from an investor.

Leveraged firms: a kind of venture capital company that

borrows money from government or private sources.

Glossary

Mortgage: a loan based on the value of your house

or your land. If you fail to pay the loan, the lender may confiscate your house or your land.

Niche: specialized area, or specialty.

Glossary

Paradox: a mystery or contradiction.

Pitch: A presentation to investors for the

purpose of obtaining investment funds

Glossary

Preferred shares: are investments that have a fixed

annual dividend. They behave almost like loans that

require an annual profit-sharing. They do not usually have voting rights.

Glossary

Private-equity firms: Private-equity funds are collected sums

of money that are intended to be invested in young & promising private companies.

The aim is to capture the “high-growth stage” in young companies.

Glossary

Subordinate: less important than something “senior”

as in “subordinated debt” or “senior debt.”

Glossary

Subordinated debt: debt that will be paid only after certain

senior creditors have already been paid.

Glossary

Venture capital funds: a pile of money that was assembled for

investing in new ventures. The fund may be advised or

administered by a venture capital firm.

Glossary

Venture capital firms: a company that channels investments

to new ventures.

Points to Remember

• Without funding or capital, your business idea—no matter how good it is—will not amount to anything.

Points to Remember

• To get funding, you need to determine how much money you need, convince an investor that your company will be profitable, that it needs the amount you say it needs, offer him incentives, profit-sharing or collateral, and make arrangements to pay back the borrowed money or give cash dividends as return on investment.

Points to Remember

• Sources of funding for your business include personal savings, loans, assets, money from relatives and friends, venture capital firms, private-equity firms, banks or lenders and other equity investors.

Points to Remember

• You should consider investing your own money in your business to show your investor you believe in your company.

• After all, your personal savings is the easiest to manage and access and the accounting process is simpler. Disadvantage: you might not have enough, or you

might need the money for yourself or your family.

Points to Remember

When tapping your family and friends for funding, the advantage is that their funds are easily accessible and they may charge lower profit-sharing. The problem with this method is the large

probability of personal risk that when your business loses money, your relatives and friends may lose money too, and this might put a strain on your relationship.

Points to Remember

• Angel investors put money in start-ups to enjoy the huge pay-offs and the sense of mission and adventure in supporting a company before it grows big.

• Private-equity funds put money in small firms to capture the “high-growth” stage.

Subsets and subsets

Equity Capital: public and private.

Private Equity: late-stage and early-stage.

Venture Capital (early stage): individual and institutional

Angel Investors: Individuals in early-stage venture capital

Points to Remember

• Secured loans are backed up by collaterals like fixed assets or real property.

• Unsecured loans do not require collateral, but need to be paid back in a short period of time and are granted only to creditworthy customers.

Points to Remember

The advantages of stock financing are the following: a corporation is not legally obligated to make

payments to stockholders; listed stock improves the credit rating of the

company; stocks are attractive to some investors because

they give capital gains that are higher than inflation.

Points to Remember

Disadvantages of stock financing: common stock owners get voting rights. (They

might vote against you.)Control over the company will be transferred to the

new stockholders, if they have majority. Shareholders share in the profits of the company

through dividends for a very long time.

Ask Yourself

• Would I target first the source of funding that is “easy to access”?

• Am I confident enough about my new business venture to ask for funding from my relatives?

Ask Yourself

• Am I too shy to approach relatives? Do I prefer to approach strangers?

• Am I confident enough about my new business venture to ask for funding from perfect strangers? (They may be high-level professionals, but they are strangers, nonetheless.)

Ask Yourself

• How much are my personal savings? • Do I have any assets that I could bring

into a new business venture? (For example, your own sports equipment could be displayed in a shop that rents out sports equipment.)

Ask Yourself

• Would I be able to borrow from a bank at all? Can I find someone who can guarantee my bank loan?If I truly believe in the value of my new

business venture, would I risk 100% of my personal money in it?

If not 100%, what percent of my money would I risk in the new venture?

Ask Yourself

• I was told that it would be difficult to raise money from venture capitalists. Will that stop me from trying?

• Am I persistent enough to keep on trying even if things are already very difficult?

Ask Yourself

• Can you develop yourself to be strong inside, so that nothing in the outside world can make you sad for very long?

Ask Yourself

• Do I have good credit standing?• Have I always paid back money that I

have borrowed from other people?

Ask Yourself

• Since I don’t know much about the stock market, will I study all about it?

• Will I start learning more about the stock market (all over the world) in my spare time?

Ask Yourself

• Do I realize that the attitude of a true winner is: “Nothing can stop me. I should at least give it a try. I should at least try my best.”

Exercises

• Turn to your student workbook

Review Questions

Why it is important to secure the financial resources to be able to start a business.What are the steps to take to

determine the necessary funding?Where can one seek the necessary

funding?

Review Questions

Can you supply funding from your own personal money?What are the pros and cons of using my

personal money for business.What are the pros and cons of tapping

your family as a source of funding?

Review Questions

What are the reasons why angel investors invest in unknown start-up companies?

Will I be able to make convincing presentations to venture capitalists to ask for funding?

Review Questions

What is the motivation of private-equity funders for making investments?

Review Questions

What are secured loans and unsecured loans?

What are the pros and cons of stock financing?

Case Study questions

• What does this story say about the profits that can be made by investing in young companies?

• When William Simon raised $80 million, of which only $1million was rumored to have been contributed by the investors, what does that mean?


• Does it mean that William Simon borrowed $79 million from a bank?

• Do you think it is more likely that William Simon raised $79 million in private-equity investment?


• What is a leveraged buyout?

• Once it was revealed that the profits could be large, did many people follow William Simon’s example in organizing leveraged buyouts?

NEXT CHAPTER: 10

Hire People

Chapter 10 overview

In chapter 10, we discuss the important step of hiring managers and hiring staff for a start-up business.

It may be necessary to hire specialists: people with unique skills and talents.

Chapter 10 overview

The business owner, the boss, must manage his team closely.

Under close supervision, each worker should know what to do, what is expected of him, and how to do a good job.

All workers should be productive.

Chapter 10 overview

In case the number of workers is large, the boss must find some way to supervise them all through department heads or team leaders.

Chapter 10 overview

At some point, the chairman and president of the company must appoint a chief operating officer (COO) who would direct day-to-day operations.

Chapter 10 overview

The COO coordinates the marketing, production, finance, and accounting.

The chairman and chief executive officer (CEO) should concentrate on big issues.

Chapter 10 overview

The job of the chairman or CEO, is to make sure that the company continues to have a bright future given the opportunities and threats in the environment.

Chapter 10 overview

The sum total of skills and talents of a company can be said to be its “human capital.” Human capital is the human component

that makes the firm productive. It is the “brain” that organizes the material

resources of the firm to make the firm profitable.

Chapter 10 overview

We tackle the question: Is appropriate to hire friends to work for us, or work with us, in the business?

Lesson plan chapter 09 funding

Economy & Finance

Transcript of Lesson plan chapter 09 funding