FINANCING YO

UR NEW

VENTURE

S T E P H E N DA Z E

D O M HE R R I C

K EN T R E P R E N E U R I N

RE S I D

E N C E

A N D

V I SI T

I NG P

R O F E S S O R

U O T T A W A , TE L F E R S

C H O O L OF M

A N A G E M E N T

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WHERE DO ENTREPRENEURS GET THEIR MONEY?

1. Their own money (owners equity or loans to the business.)

2. Debt: cash now for repayment (with interest) later.

3. Equity: cash from others for a piece of the business.

4. Bootstrapping: piecing it together on your own.

1. PERSONAL CONTRIBUTIONEither in the form of either:- Owners equity – to be drawn out at a later

time.- As a loan to the business – to be repaid at a

later time.

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2. DEBTDebt: cash now for repayment (with

interest) later Loans Lines of credit Mortgages Credit cards Etc.

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CHARACTERISTICS- Money lent to you with expectation of it being

returned with interest.- Terms are determined in advance.- Different banks have different products – but

they are all pretty similar.

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BANKS CONSIDER THE FOLLOWING1. Repayment Ability

What evidence exists to convince me I'm going to get paid back? Personal financial situation.

2. ManagementWhat evidence exists that indicates that this person can manage his/her affairs well enough to allow the opportunity for payback? Credit history?

3. Personal Investment What evidence exists that this person has enough of a commitment to the business so that I'll be sure he/she wants to work hard to protect it? (If they protect theirs, they will be protecting mine!) Most lending institutions will require at least 25 percent cash/equity contributed to the total capital cost of the project.

4. SecurityIf all else (above) fails, what protection do I have to get my money back? What will it be worth when the business fails?

Q. What is missing from this list?

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Canada Small Business Financing:http://www.canadabusiness.ca/eng/

Business Development Bank:http://www.bdc.ca/en/Pages/home.aspx

Banks: http://www.royalbank.ca/busindex.html http://www.tdcanadatrust.com/products-services/banking/index-banking.jsp https://www.cibc.com/ca/small-business.htmlSummer Company:http://www.ontariocanada.com/ontcan/1medt/smallbiz/en/sb_ye_summerco_en.jsp

Futurpreneur: http://www.futurpreneur.ca/

Sources

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3. EQUITYEquity: cash for a piece of the

business Investment

Angel Investment Venture Capital

Share purchase (IPO) Friends and Family (“love money”) – may also be

considered a loan or charity!

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VENTURE CAPITAL- Firms specifically designed to pool large sums of money and

invest in risky asset class.- Money for the fund comes from “Limited Partners.”- Have to invest the money or return it.- Specific business model for the fund with specific criteria

related to things such as: Industry Type and size of deal Stage

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VENTURE CAPITALKey Issues Process

Due Diligence Valuation Term Sheet Exit

Entrepreneur Considerations Ownership % Long term ownership (exit) Control

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ANGEL INVESTORS- Typically invest between $25,000 - $100,000.- Very hands-on and usually have a passion for their

projects.- Deal requirements are not as cut and dry as Venture

Capitalists.- Think of what they do as a hobby – they do not need to

invest in a company, they choose to.- Investments are often limited to their geographic reach.- Tend to invest earlier but also looking for investment

where business is close to launch or release.

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ANGEL INVESTORS UPPING THEIR ANTE IN CANADA, SAY NACO AND BDC VENTURE CAPITALThe survey, released in September, looked at investment activity in

2012 by 20 angel groups—around two-thirds of identifiable angel groups in Canada. Those groups made a combined 139 investments last year, a 96% increase over the 71 reported investments in 2011. Of those deals, 102 were new.

Despite the steep increase in deal volume, however, the total dollar value of these was only up 13%. According to the survey, that’s due to a decline in the average investment: from $506,679 in 2012 to $313,935.

http://www.techvibes.com/blog/angel-investors-upping-their-ante-in-canada-2013-11-09

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DECISION CRITERIA FOR INVESTORS

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Rank by

AngelsRank by VC

Enthusiasm of entrepreneur 1 1Trustworthiness of entrepreneur 2 2Sales potential of product 3 6Expertise of entrepreneur 4 5Liked entrepreneur upon meeting 5 7Growth potential of market 6 3Quality of product 7 10Perceived investor financial rewards 8 4Niche market 9 16Track record of entrepreneur 10 11

* Angel Investing, Osnabrugge & Robinson

THE FUNDING FOOD CHAIN

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Seed Capital

Financing

$

Start UpFinancing

First Stage

SecondStage

Mezzanine BridgeFinancing

Types

SourcesPersonal

Love MoneyAngels

Angels Angels VentureCapital

VentureCapital

VentureCapitalBanks

IPO

FinancialMarkets

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MORE INFORMATIONCanadian Venture Capital Association (www.cvca.ca)National Venture Capital Association (www.nvca.org)BDC Venturehttp://www.angelinvestor.ca/What I learned, pitch deck:

http://www.techvibes.com/blog/investor-deck-transparency-and-lessons-learned-2014-01-16?goback=%2Egde_5037848_member_5829679035365490689#%21

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4. BOOTSTRAPPINGo Piecing it together on your own!o A means of financing a company through the

creative acquisition and use of resources without raising cash from independent investors.

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Q: What were some strategies you used during the Cash Flow exercise that helped you preserve your “cash” and bank account balance?

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ADVANTAGES• It forces you to concentrate on selling to bring cash

into the business.• Minimizes expenses, lessens the need for cash.• Founders retain greater authority, control and

flexibility.• Equity is expensive especially at startup.• Better positions the company for external financing in

the future if necessary.

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DISADVANTAGES• May not generate enough cash to grow at

the desired rate.• Limits potential sales, market share and

overall competitive position.• Provides insufficient support for high growth

and capital intensive businesses.

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STRATEGIES FOR SUCCESS

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LEVERAGE GOVERNMENT PROGRAMS- IRAP (Industrial Research Assistance Program)- SR&ED Tax Credits (Scientific Research and Experimental

Development)- Other Federal and Provincial Programs- Ontario Centres of Excellence- Investment Accelerator Fund

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- http://www.nrc-cnrc.gc.ca/eng/irap/index.html- http://www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html- http://www.feddevontario.gc.ca/eic/site/723.nsf/eng/h_00122.html- http://www.oce-ontario.org/- http://www.marsdd.com/funding/investment-accelerator-fund/

GET OPERATIONAL QUICKLY• Get up and running rather than waiting for

the home run.• Look for cash generating products or

services, i.e. consulting by day.• Take on opportunities that might not be part

of the strategic plan.• A business that is making money builds

credibility.

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GO FIND A CUSTOMER• Reach out to customers from day one.

• Get out and sell (perhaps before the product is ready.)

• Use personal passion and salesmanship to substitute for big marketing budgets.

• Offer products with tangible advantages over competitors.

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FOCUS ON CASH• Cash is king – not profits, market share or other metrics.

• Create healthy margins from day one.• Say “no” to loss making strategies to build market share or a customer base.

• Understand your cash flow – cash position, monthly burn, timelines.

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FORM ALLIANCES FOR• Market penetration• Sales/marketing channels• Product credibility• Joint bidding on projects• Accelerate time to market• Geographic expansion• Business experience• Enhance company status

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WORK WITH CUSTOMERS Ask customers to prepay fees or provide advances. Get customers to fund customization work (and let you

own the IP). Deliver invoices with the goods, pay attention to

collections. Don’t do business with dead beats and dreamers. Market with no money – website, biz cards, tradeshows,

cold calls.

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WORK WITH SUPPLIERS Ask for credit.Deal with service providers for low rates.Make use of below market rent space.Barter your products or services.Don’t abuse them.

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YOUR TEAMForgo, reduce or delay compensation (sweat equity).

Employ relatives and friends at below market salaries.

Look for volunteers, work term and co-op students.

Pay with stock or stock options.Work from home.

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YOUUse personal savings, credit cards and loans.Forgo, reduce or delay compensation (sweat equity).

Work from home.Develop product at night and weekends while working elsewhere.

Wear lots of hats.

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OTHERBuy used equipment (auctions).Borrow equipment from other businesses.Share business premises with others.Know where to save and when to spend.Eliminate unnecessary expenditures.

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WHERE DO ENTREPRENEURS GET THEIR MONEY?

1. Their own money.

2. Debt from banks: cash now for repayment (with interest) later.

3. Equity: cash from others for a piece of the business.

4. Bootstrapping: piecing it together on your own.

PARTING THOUGHTS?