Entrepreneurship 1: Lecture 9Sources of Funding

Avimanyu (Avi) Datta, Ph.D.

Some Hard FactsFew Entrepreneurs have all the

money they needEntrepreneurs have to be willing

to accept risksDon’t expect to get a loan from

the bank. Are you credit/Investment worthyHave to give up something to get

something

Some Hard FactsRaising money takes

considerable timeYou will need to be a salesperson

to get fundingRaising funds also takes

resilienceNot all money is alike: Smart Vs

DumbYou need an “F-plan”

Startup FinancingBootstrapping

◦Self-funding◦Finding unique and inventive ways to

acquire resources without borrowing money

Informal investors◦Friends◦Family members◦Angel investors

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Startup Financing (continued)Friends and family members

◦Know and trust entrepreneur◦Stand by during tough times◦Invest in entrepreneur rather than

business idea◦Downside is potential risk to

relationships Business misunderstandings Business failure

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Startup Financing (continued)

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Informal Investors Advantages DisadvantagesFriends and family members

Deal with family and friend investors just as you would any investor.

Require legal documentation for any investment transaction.

Confirm that family and friend investors understand the risks involved with a startup and can afford to lose their investment.

Next to self-funding, may be the easiest way to fund startup expenses.

Investors know and trust the entrepreneur.

Investors are likely to be supportive during hard times.

Investment is in the entrepreneur and his or her abilities, not the new business idea.

Possible strain on personal relationships because of business misunderstandings.

Potential loss of investment by those who may be least able to afford the loss.

Startup Financing (continued)Angel investors

◦Individuals with money and time who enjoy the excitement of early-stage investing

◦Not averse to taking risks◦Primarily interested in business idea◦Angel investment club members

Accredited investors with minimum net worth of $1M or annual income of $200,000 or household income of $300,000 over the last two years

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Startup Financing (continued)

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Informal Investors Advantages DisadvantagesAngel investors

Wealthy individuals who enjoy the excitement of investing in new business ideas.Typically invest in the new business idea, not the entrepreneur and his or her abilities.Primarily interested in how a new business idea fills a marketplace need

Typically offer the first significant funding for a startup.

May offer business advice, mentoring, or access to other investors.

E-business idea may be required to pass a very rigorous screening process.

Some angel investors focus on a single industry, such as technology.Individual angel investors typically invest relatively small amounts in several new businesses.

Startup Financing (continued)Venture capitalist investors (VCs)

◦Professional investment company◦Provide funds for startup businesses

in exchange for equity position◦Raise funds from endowments,

insurance companies, and pension funds

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Startup Financing (continued)Venture capitalist investors (VCs)

(continued)◦Take many forms

Traditional partnerships Government-sponsored investment

companies Corporate funding programs by high-tech

companies

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Startup Financing (continued)Venture capitalist investors (VCs)

(continued) ◦E-business startup VC funding

examples Draper Fisher Jurvetson (DFJ) and Hotmail Kleiner Perkins Caufield & Byers and

Google Small Business Investment Companies

(SBIC)and America Online

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Startup Financing (continued)

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Professional Investors Advantages DisadvantagesVenture capitalist firms

Traditional partnerships or professionally managed investment companies.

Government-sponsored investment companies.

Corporate funding programs to augment internal research and development efforts.

Provide access to hundreds of millions of dollars.

May offer extensive knowledge about a specific industry.

May offer access to important industry contacts.

Focus is often on a specific industry or geographical area.

Generally require a large equity position in a new business in exchange for an investment.

Often require a seat on the board of directors and to be actively involved in major business decisions.

A business plan may not get noticed unless it is submitted through a trusted third party.

Pitching Your E-Business To InvestorsFirst meeting with investors is a

sales meetingBring a pitch document

◦Short marketing document based on Executive Summary portion of business plan Highlights market need Shows how startup meets that need Indicates potential profits Shows how management team can make

it happen4-13

Pitching Your E-Business To Investors (continued)Learn as much as possible about

potential investors before the pitch meeting

Be prepared for investor questions about◦Business idea◦Target market◦Competitors◦Critical marketplace issues

Do not fake answers; if you don’t know, simply say so and move on

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Pitching Your E-Business To Investors (continued)During the pitch meeting

Be on timeBe preparedBe enthusiasticBring all necessary equipment and documentsUse a pitch document (a brief marketing

document based on the executive summary portion of the e-business plan) to direct the meeting.

Differentiate yourself and management team from your competitors

Create the feeling that your e-business idea is a viable, exciting investor opportunity

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Business IncubatorsNurture startup businesses

◦Offer development, administrative, and support services Office space Telecommunication hookups Reception and conference room facilities Computer networks Advisory services Access to potential investors Web site design and hosting Clerical support

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Business Incubators (continued)Non-profit organizations or

commercial businesses◦Offer a quick “leg up” for

entrepreneurs needing administrative and support services

◦Provide access to knowledgeable professionals, advisors, potential investors

◦Cost to entrepreneur Fees for services Loss of equity 4-

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Business Incubators (continued)Advantages

◦“One-stop solution” for many startup problems

◦Easy access to professional advice◦Venue for interacting with other

startupsDisadvantages

◦May be hefty fees for services◦Giving up share of ownership equity

to others4-18

Business Incubators (continued)

Non-profit business incubators ◦Generally cooperative venture between a

university and local community◦Examples

Austin Technology Incubator (ATI) Advanced Technology Development Center

(ATDC) Houston Technology Center Illinois Technology Enterprise Center (ITEC) Women’s Technology Cluster (WTC)

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Business Incubators (continued)Commercial business incubators

◦Businesses that provide incubation services for a fee and usually a large equity position

◦Examples Batavia Industrial Center (BIC) Idealab eCompanies

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Business Incubators (continued)Self-incubation

◦Participating in a members-only group of entrepreneurs Share practical experience Access to contacts Sell or barter products and services with

members◦Example

Starve Ups

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Business Incubators (continued)Self-incubation

◦Participating in a members-only group of entrepreneurs Share practical experience Access to contacts Sell or barter products and services with

members◦Example

Starve Ups

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