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A primer in Entrepreneurship
Prof. Dr. Ulrich Kaiser
Institute for Strategy and Business Economics Institute for Strategy and Business Economics
University of Zurich
Spring semester 2008
Chapter 9: Building a New Venture Team
Table of Contents
I. Creating a New Venture Team
A. The Founder or Founders
B R iti d S l ti K E l B. Recruiting and Selecting Key Employees
C. The Role of the Board of Directors
II. Rounding Out the Team – The Role of Professional Advisors
A. Board of Advisors
B. Lenders and Investors
C. Other Professionals
University of Zurich
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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I. Creating a New Venture Team
1. A new venture team is the group of founders, key employees, and advisers
that move a new venture from an idea to a fully?functioning firm.
2. Usually the team doesn’t come together all at once. Instead, it is built as
the new firm can afford to hire additional personnel.
3. The team also involves more than paid employees. Many firms have
boards of directors, boards of advisers, and professionals on whom they , , p y
rely for direction and advice.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
Liabilities of Newness
1. New ventures have a high propensity to fail.
2. The high failure rate is due in part to what researchers call the liability of
newness, which refers to the fact that companies often falter because
the people who start the firms can’t adjust quickly enough to their new
roles and because the firm lacks a “track record” with outside buyers and
sellers.
3. Assembling a talented and experienced new venture team is one path g p p
that firms can take to overcome these limitations.
University of Zurich
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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I. Creating a New Venture Team
Elements of a New Venture Team
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Ulrich Kaiser
A primer in Entrepreneurship
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I. Creating a New Venture Team
1 Si f F di T
A. The Founder or Founders
1. Size of Founding Team
a. The first decision that most founders face is whether to start a firm on their
own or whether to build an initial founding team. Studies show that teams
or partners start 50 to 70 percent of all new firms (CH: 47 percent).
b. It is generally believed that new ventures started by a team have an
advantage over those started by an individual, because a team brings more
talent, resources, ideas, and professional contacts to a new venture than talent, resources, ideas, and professional contacts to a new venture than
does a sole entrepreneur.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
S l f t ff t th l f t th t i t ti fi
A. The Founder or Founders
c. Several factors affect the value of a team that is starting a new firm.
i. First, teams that have worked together before, as opposed to
teams that are working together for the first time, have an
edge.
ii. Second, if the members of the team are heterogeneous,
meaning that they are diverse in terms of their abilities and
experiences, rather than homogeneous, meaning that their experiences, rather than homogeneous, meaning that their
areas of expertise are very similar to one another, they are
likely to have different points of view about important issues.
These different points of view are likely to generate debate and These different points of view are likely to generate debate and
constructive conflict.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
a. One reason the founders are so important is that in the early
d f th fi th i k l d kill d i days of the firm, their knowledge, skills, and experiences are
the most valuable resource the firm has.
b. Several features are thought to be significant to a founder’s
success. These factors include:
The level of the founder’s education
Prior entrepreneurial experience
Relevant industry experience y p
Networking (the depth of the founder’s professional network)
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
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A primer in Entrepreneurship
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I. Creating a New Venture Team
1 Founders differ in terms of how they approach the task of recruiting and
B. Recruiting and Selecting Key Employees
1. Founders differ in terms of how they approach the task of recruiting and
selecting key employees. Some founders draw on their network of
contacts to identify candidates for key positions, while others use
ti h fi executive search firms.
2. An executive search firm is a company that specializes in helping other
companies recruit and select key personnel.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
3 Many founders worry about hiring the wrong person for a key role
B. Recruiting and Selecting Key Employees
3. Many founders worry about hiring the wrong person for a key role.
Because most new firms are strapped for cash, every team member
must make a valuable contribution, so it’s not good enough to hire
h i ll i t d d b t h d ’t i l fit th j b someone who is well?intended but who doesn’t precisely fit the job.
4. Some founders approach the task of hiring by creating a formal hiring
plan. Others approach the task more informally, and hire personnel as
funds become available and opportunities emerge.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
1 If a ne ent re organi es as a corporation it is legall req ired to ha e a board of
C. The Role of the Board of Directors
1. If a new venture organizes as a corporation, it is legally required to have a board of
directors – a panel of individuals who are elected by a corporation’s shareholders
to oversee the management of the firm.
2. A board is typically made up of both inside and outside directors. An inside
director is a person who is also an officer of the firm. An outside director is
someone who is not employed by the firm.
3. A board of directors has three formal responsibilities: appoint the officers of the p pp
firm, declare dividends, and oversee the affairs of the corporation. http://wwwubs com/1/g/media overview/media switzerland/images/boardofdirectohttp://www.ubs.com/1/g/media_overview/media_switzerland/images/boardofdirecto
rs.html
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A primer in Entrepreneurship
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I. Creating a New Venture Team
4 If h dl d l ’ b d f di t b i t t
C. The Role of the Board of Directors
4. If handled properly, a company’s board of directors can be an important
part of its new venture team. Two ways a board of directors can help a
new firm get off to a good start and develop what, it is hoped, will
become a sustainable competitive advantage are by providing guidance
and lending legitimacy.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
C. The Role of the Board of Directors
Ways a Board of Directors Can Help a New Venture Get Off to a
Function Importance of Function
Good Start
Function Importance of Function
Provide
Although a board of directors has formal governance
responsibilities, its most useful role is to provide
Provide
Guidance
responsibilities, its most useful role is to provide
guidance and support to the firm’s managers. Many
founders and CEOs interact with their board members
frequently and obtain important input and advice.
Lend Legitimacy
q y p p
Another important function of a board of directors is
to lend legitimacy to a firm Well?known and to lend legitimacy to a firm. Well known and
respected board members bring instant credibility to a
firm.
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A primer in Entrepreneurship
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I. Creating a New Venture Team
5 F f M ti d C ti
C. The Role of the Board of Directors
5. Frequency of Meetings and Compensation
Most boards of directors meet three to four times a year.
New ventures are more likely to pay their boards in company stock or
ask them to serve on a voluntary basis rather than pay a cash
honorarium.
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Ulrich Kaiser
A primer in Entrepreneurship
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Chapter 9: Building a New Venture Team
Table of Contents
I. Creating a New Venture Team
A. The Founder or Founders
B R iti d S l ti K E l B. Recruiting and Selecting Key Employees
C. The Role of the Board of Directors
II. Rounding Out the Team – The Role of Professional Advisors
A. Board of Advisors
B. Lenders and Investors
C. Other Professionals
University of Zurich
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Ulrich Kaiser
A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of g
Professional Advisors
Board of Advisers oa d o d se s
Lenders and Investors Other Professionals
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Ulrich Kaiser
A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of g
Professional Advisors
1. A growing number of start?ups are forming advisory boards to provide
A. Board of Advisors
g o g u be o s a ups a e o g ad so y boa ds o p o de
them with direction and advice.
2 An advisory board is a panel of experts who are asked by a firm’s 2. An advisory board is a panel of experts who are asked by a firms
managers to provide counsel and advice on an ongoing basis.
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of g
Professional Advisors
A Board of Advisors
3. Unlike a board of directors, an advisory board possesses no legal
responsibility for the firm and gives nonbinding advice
A. Board of Advisors
responsibility for the firm and gives nonbinding advice.
4. An advisory board can be established for general purposes or can be set
dd f d l f h up to address a specific issue or need. For example, some firms have
customer advisory boards that help the firm identify new product and
service ideas.
5. Most boards of advisors have between five and 15 members.
Companies typically pay the members of their board of advisors a small p yp y p y
honorarium for their service, either annually or on a per?meeting basis.
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of g
Professional Advisors
A Board of Advisors
Guidelines to Organizing a Board of Advisers
1 Advisers will become disillusioned if they don’t play a meaningful role
A. Board of Advisors
1. Advisers will become disillusioned if they don’t play a meaningful role
in the firm’s development and growth.
2. A firm should look for board members who are compatible and
l h f d complement one another in terms of experience and expertise.
3. When inviting people to serve on its board of advisors, a company
should carefully spell out to the individuals involved the rules in terms
of access to confidential information.
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of g
Professional Advisors
Board of Advisers of Ugobe (http://www.ugobe.com/)
((http://www.ubs.com/1/g/media_overview/media_switz
erland/images/boardofdirectors.h
Name Profession Role on Advisory Board
Steven Mayer Adviser to corporations such Adds legitimacy and provides the
Curtis Sasaki
as Intel and Nintendo
Vice President, Sun
Microsystems
firm advice on management issues
Adds legitimacy and provides the
firm advice product/market issues
Phil Schlein
c osyste s
Partner, U.S. Venture Partners
ad ce p oduct/ a et ssues
Adds legitimacy and provides the firm
advice on financial?related issues
Abraham Wei Senior Managing Director,
Chinavest Merchant Bank
Adds legitimacy and provides the firm
advice on financial?related issues
Bill Hillard Managing Partner, Hillard
Equities/Sonn?Hill
Consulting
Adds legitimacy and provides the firm
advice on financial? and management?
related issues
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of
B Lenders and Investors
Professional Advisors
1. As emphasized throughout this book, lenders and investors have a
vested interest in the companies they finance, often causing them to
B. Lenders and Investors
p y , g
become very involved in helping the firms they fund.
2. As with the other non?employee members of a firm’s new venture 2. As with the other non employee members of a firms new venture
team, lenders and investors help new firms by providing guidance and
lending legitimacy, and assume the natural role of providing financial
oversight oversight.
3. In some instances, lenders and investors also work hard to help new
fi fill t th i t t firms fill out their management teams.
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of
B Lenders and Investors
Professional Advisors
B. Lenders and Investors
Beyond Financing and Funding: Ways Lenders and Investors Add Value to an
Entrepreneurial Venture
Help identify and recruit key
management personnel
Provide insight into the industry and
markets in which the venture intends
to participate
Help the venture fine?tune its business
d l
Serve as a sounding board for new
id model ideas
Provide introductions to additional
sources of capital
Serve on the new venture’s board of
directors or board of advisors
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A primer in Entrepreneurship
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II. Rounding Out the Team – The Role of
C. Other Professionals
g
Professional Advisors
At times, other professionals assume important roles in a new venture’s
success. Attorneys, accountants, and business consultants are often
d f l d d i good sources of counsel and advice.
a. A consultant is an individual who gives professional or expert
advice. New ventures vary in how much they rely on business
consultants for direction.
b. Consultants fall into two categories: paid consultants and g p
consultants who are made available for free or at a reduced rate
through a nonprofit or government agency.
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A primer in Entrepreneurship
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A primer in Entrepreneurship
Prof. Dr. Ulrich Kaiser
Institute for Strategy and Business Economics Institute for Strategy and Business Economics
University of Zurich
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
26
Spring semester 2008
Chapter 10: Getting Funding or Financing
Table of Contents
I. The Importance of Getting Financing or Funding
II. Sources of Equity Funding
III. Sources of Debt Financingg
IV. Creative Sources of Financing and Funding
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A primer in Entrepreneurship
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I. The Importance of Getting Financing or
Funding
A Why Most New Ventures Need Funding
The Nature of the Funding and Financing Process
Few people deal with the process of raising investment capital until they
A. Why Most New Ventures Need Funding
Few people deal with the process of raising investment capital until they
need to raise capital for their own firm.
As a result, many entrepreneurs go about the task of raising capital
haphazardly because they lack experience in this area haphazardly because they lack experience in this area.
Why Most New Ventures Need Funding… next slide
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I. The Importance of Getting Financing or
Funding
A Why Most New Ventures Need Funding A. Why Most New Ventures Need Funding
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I. The Importance of Getting Financing or
B. Source of Personal Financing
Funding
Personal Funds Equity Capital
Alternatives for Raising Money for a Start?Up Firm
Personal Funds Equity Capital
Debt Financing Other (Creative) Sources
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I. The Importance of Getting Financing or
B. Source of Personal Financing
Funding
1. Typically, the seed money that gets a company off the ground comes
from the founders themselves—from their personal savings, mortgages,
and credit cards and by tapping into the cash value of life insurance and credit cards, and by tapping into the cash value of life insurance.
2. Friends and family are the second source of funds for many new
ventures This form of contribution often comes as loans or investments ventures. This form of contribution often comes as loans or investments,
but can also involve outright gifts, forgone or delayed compensation, or
reduced fees or rent.
3. Another source of seed money for new ventures is referred to as
“bootstrapping”. Bootstrapping is the use of creativity, ingenuity, and
any means possible to obtain resources other than borrowing money or
raising capital from traditional sources.
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I. The Importance of Getting Financing or
Bootstrapping
Funding
Buying used instead of
new equipment
Coordinating purchases
with other businesses
Leasing equipment
instead of buying
Obtaining payments in
advance from customers instead of buying
Minimizing personal
advance from customers
Avoiding unnecessary Minimizing personal
expenses
Avoiding unnecessary
expenses
Sharing office space
with other businesses
Applying for and
obtaining grants
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
1. Step 1: Determine precisely how much money is needed.
2 St 2 D t i th t i t t f fi i f di 2. Step 2: Determine the most appropriate type of financing or funding.
a. Equity financing means exchanging partial ownership in a firm,
usually in the form of stock, for funding.
b. Debt financing is getting a loan.
3. Step 3: Develop a strategy for engaging potential investors or bankers.
An elevator speech is a brief, carefully?constructed statement that
outlines the merits of a business opportunity.
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
Preparation for Debt or Equity Financing
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
l f Two most common alternatives for raising money
Alternative Explanation
Equity funding
Equity funding means exchanging partial ownership in a firm, usually
in the form of stock, for funding. Angel investors, private placement,
venture capital, and initial public offerings are the most common
sources of equity funding Equity funding is not a loan the money sources of equity funding. Equity funding is not a loan—the money
that is received is not paid back. Instead, equity investors become
partial owners of a firm.
Debt financing
Debt financing is getting a loan. The most common sources of
debt financing are commercial banks and the Small Business
Administration (through its guaranteed loan program) Administration (through its guaranteed loan program).
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
Matching a New Venture’s Characteristics with the Appropriate Form of Financing Matching a New Venture s Characteristics with the Appropriate Form of Financing
or Funding
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
El t S h Elevator Speech
An elevator speech is a brief, carefully constructed statement that outlines
the merits of a business opportunity. pp y
Why is it called an elevator speech?
If an entrepreneur stepped into an elevator on the 25
th
floor of a building p pp g
and found that by a stroke of luck a potential investor was in the same
elevator, the entrepreneur would have the time it takes to get from the
25
th
floor to the ground floor to try to get the investor interested in his or
her opportunity. This type of chance encounter with an investor calls for
a quick pitch of one’s business idea. This quick pitch has taken on the
name “elevator speech.”
Most elevator speeches are 45 seconds to two minutes long.
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
G id li f P i El t S h Guidelines for Preparing an Elevator Speech
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II. Sources of Equity Funding q y g
V C i l B i A l Venture Capital Business Angels
Initial Public Initial Public
Offerings
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II. Sources of Equity Funding q y g
Venture capital: broad subcategory of private equity; refers to equity
investments made for the launch, early development, or expansion of a
business.
Private equity: asset class consisting of equity securities in operating companies
that are not publicly traded on a stock exchange (keyword: leveraged buyout). that are not publicly traded on a stock exchange (keyword: leveraged buyout).
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II. Sources of Equity Funding q y g
A. Business Angels (http://www.businessangels.ch/;
http // asban ch/)
1. Business angels are individuals who invest their personal capital directly
in start?ups.http://www.asban.ch/)
a. The prototypical business angel is about 50 years old, has high
income and wealth, is well?educated, has succeeded as an
entrepreneur, and is interested in the start?up process.
b. The number of angel investors in the U.S. has increased dramatically
over the past decade, partly because of the high returns some
report. p
c. Business angels are valuable because of their willingness to make
relatively small investments. This gives access to equity funding to a
start?up that needs just $50 000 rather than the $1 million minimum start up that needs just $50,000 rather than the $1 million minimum
investment that most venture capitalists require.
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II. Sources of Equity Funding
B. Venture Capital
q y g
1. Venture capital is money that is invested by venture capital firms in
start?ups and small businesses with exceptional growth potential.
2. Venture capital firms are limited partnerships of money managers who
raise money in “funds” to invest in start?ups and growing firms. The
funds or pools of money are raised from wealthy individuals pension funds, or pools of money, are raised from wealthy individuals, pension
plans, university endowments, foreign investors, and similar sources.
di d h h dl j d 3. Many entrepreneurs get discouraged when they are repeatedly rejected
for venture capital funding, even though they may have an excellent
business plan. Venture capitalists are looking for the “home run,” and
so reject the majority of the proposals they consider.
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II. Sources of Equity Funding
1. An IPO is the first sale of stock by a firm to the public. When a company
C. Initial Public Offering
q y g
goes public, its stock is typically traded on one of the major stock
exchanges.
2. Although there are many advantages to going public, it is a complicated g y g g g p , p
and expensive process. The first step is to hire an investment bank. An
investment bank is an institution, such as Credit Suisse First Boston, that
acts as an underwriter or agent for a firm issuing securities The acts as an underwriter or agent for a firm issuing securities. The
investment bank acts as the firm’s advocate and advisor, and walks it
through the process of going public.
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II. Sources of Equity Funding
C. Initial Public Offering
q y g
Four reasons that motivate firms to go public Four reasons that motivate firms to go public
Reason 1 Reason 4 Reason 3 Reason 2
Is a way to raise
An IPO raises a
firm’s public
An IPO is a liquidity
event that provides a
By going public a Is a way to raise
equity capital to
fund current and
future operations.
firm s public
profile, making it
easier to attract
high?quality
event that provides a
means for a
company
shareholders
(
By going public, a
firm creates
another form of
currency that can
customers,
alliance partners,
and employees.
(including its
investors) to cash
out their
investments.
be used to grow
the company.
investments. http://www.x?cite.de/Roadshows?IPO?Postbank?2_89_53.html
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III. Sources of Debt Financingg
A. Commercial Banks
Commercial
Banks
SBA Guaranteed
Loans Banks Loans
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III. Sources of Debt Financingg
1 Historically commercial banks have not been viewed as practical sources
A. Commercial Banks
1. Historically, commercial banks have not been viewed as practical sources
of financing for start?up firms. This sentiment is not a knock against
banks; it is just that banks are risk adverse, and financing start?ups is risky
b i business.
2. There are two reasons that banks have historically been reluctant to lend
money to start?ups:
a. First, as mentioned previously, banks are risk?adverse. In addition,
banks frequently have internal controls and regulatory restrictions
prohibiting them from making high?risk loans.
b. Second, lending to small firms is not as profitable as lending to large
firms. In many instances, it is simply not worth a banker’s time to do y , p y
the due diligence necessary to determine the entrepreneur’s risk
profile.
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III. Sources of Debt Financing
1. Approximately 50 percent of the 9,000 banks in the United States
B. SBA Guaranteed Loans
g
pp o a e y 50 pe ce o e 9,000 ba s e U ed S a es
participate in the SBA Guaranteed Loan Program. While these loans
typically aren’t available to start?ups, they are an important source of
funding for small businesses in general funding for small businesses in general.
2. The most notable SBA program available to small businesses is the 7(A)
Loan Guarantee Program This program accounts for 90 percent of the Loan Guarantee Program. This program accounts for 90 percent of the
SBA’s loan activity. Almost all small businesses are eligible to apply for
an SBA guaranteed loan.
3. The SBA can guarantee as much as 85 percent (debt to equity) on loans
up to $150,000, and 75 percent on loans of more than $150,000.
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III. Creative Sources of Financing and
Funding
i i Leasing Strategic Partners
S ll B i Small Business
Innovation
Research Grants Research Grants
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III. Creative Sources of Financing and
Funding
A. Leasing
1. A lease is a written agreement in which the owner of a piece of property
allows an individual or business to use the property for a specified period
of time in exchange for payments.
2. The major advantage of leasing is that it enables a company to acquire
the use of assets with very little, or no, down payment.
3. The two most common types of leases that new ventures enter into are yp
leases for facilities and leases for equipment.
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III. Creative Sources of Financing and
B. Government Grants
Funding
1. The Small Business Innovation Research (SBIR) and the Small Business
Technology Transfer (STTR) programs are two important sources of
early?stage funding for technology firms These programs provide cash early stage funding for technology firms. These programs provide cash
grants to entrepreneurs who are working on projects in specific areas.
2 The SBIR Program is a competitive grant program that provides more 2. The SBIR Program is a competitive grant program that provides more
than $1 billion per year to small businesses for early?stage and
development projects. Each year, 10 federal departments and agencies
i d b h SBIR i f h i h d are required by the SBIR to reserve a portion of their research and
development funds for awards to small businesses.http://www.bbt.admin.ch/kti/
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III. Creative Sources of Financing and
Funding
B. Government Grants
a. The SBIR is a three?phase program, meaning that firms that qualify
have the potential to receive more than one grant to fund a
particular proposal. p p p
b. Historically, less than 15 percent of all phase I proposals are funded,
and about 30 percent of all phase II proposals are funded. The and about 30 percent of all phase II proposals are funded. The
payoff for successful proposals, however, is high. The money is
essentially free. It is a grant, meaning that it doesn’t have to be
paid back and no equity is the firm is at stake paid back, and no equity is the firm is at stake.
3 Th STTR P i i ti f th SBIR f ll b ti h 3. The STTR Program is a variation of the SBIR for collaborative research
projects that involves small businesses and research organizations, such
as universities and federal laboratories.
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III. Creative Sources of Financing and
Funding
B. Government Grants
Small Business Innovation Research (SBIR): Three?Phase Grant Program
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III. Creative Sources of Financing and
C. Strategic Partners
Funding
1. Strategic partners are another source of capital for new ventures.
Indeed, strategic partners often play a critical role in helping young
firms fund their operations and round out their business models. p
2. Biotechnology, for example, relies heavily on partners for financial
support. Biotech firms, which are typically fairly small, often partner support. Biotech firms, which are typically fairly small, often partner
with larger drug companies to conduct clinical trials and bring products
to market.
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doc_915534541.pdf
In this such a information about university of zurich a primer in entrepreneurship prof. dr. ulrich kaiser.
A primer in Entrepreneurship
Prof. Dr. Ulrich Kaiser
Institute for Strategy and Business Economics Institute for Strategy and Business Economics
University of Zurich
Spring semester 2008
Chapter 9: Building a New Venture Team
Table of Contents
I. Creating a New Venture Team
A. The Founder or Founders
B R iti d S l ti K E l B. Recruiting and Selecting Key Employees
C. The Role of the Board of Directors
II. Rounding Out the Team – The Role of Professional Advisors
A. Board of Advisors
B. Lenders and Investors
C. Other Professionals
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I. Creating a New Venture Team
1. A new venture team is the group of founders, key employees, and advisers
that move a new venture from an idea to a fully?functioning firm.
2. Usually the team doesn’t come together all at once. Instead, it is built as
the new firm can afford to hire additional personnel.
3. The team also involves more than paid employees. Many firms have
boards of directors, boards of advisers, and professionals on whom they , , p y
rely for direction and advice.
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I. Creating a New Venture Team
Liabilities of Newness
1. New ventures have a high propensity to fail.
2. The high failure rate is due in part to what researchers call the liability of
newness, which refers to the fact that companies often falter because
the people who start the firms can’t adjust quickly enough to their new
roles and because the firm lacks a “track record” with outside buyers and
sellers.
3. Assembling a talented and experienced new venture team is one path g p p
that firms can take to overcome these limitations.
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I. Creating a New Venture Team
Elements of a New Venture Team
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I. Creating a New Venture Team
1 Si f F di T
A. The Founder or Founders
1. Size of Founding Team
a. The first decision that most founders face is whether to start a firm on their
own or whether to build an initial founding team. Studies show that teams
or partners start 50 to 70 percent of all new firms (CH: 47 percent).
b. It is generally believed that new ventures started by a team have an
advantage over those started by an individual, because a team brings more
talent, resources, ideas, and professional contacts to a new venture than talent, resources, ideas, and professional contacts to a new venture than
does a sole entrepreneur.
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I. Creating a New Venture Team
S l f t ff t th l f t th t i t ti fi
A. The Founder or Founders
c. Several factors affect the value of a team that is starting a new firm.
i. First, teams that have worked together before, as opposed to
teams that are working together for the first time, have an
edge.
ii. Second, if the members of the team are heterogeneous,
meaning that they are diverse in terms of their abilities and
experiences, rather than homogeneous, meaning that their experiences, rather than homogeneous, meaning that their
areas of expertise are very similar to one another, they are
likely to have different points of view about important issues.
These different points of view are likely to generate debate and These different points of view are likely to generate debate and
constructive conflict.
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
a. One reason the founders are so important is that in the early
d f th fi th i k l d kill d i days of the firm, their knowledge, skills, and experiences are
the most valuable resource the firm has.
b. Several features are thought to be significant to a founder’s
success. These factors include:
The level of the founder’s education
Prior entrepreneurial experience
Relevant industry experience y p
Networking (the depth of the founder’s professional network)
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
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I. Creating a New Venture Team
2 Qualities of the Founders
A. The Founder or Founders
2. Qualities of the Founders
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I. Creating a New Venture Team
1 Founders differ in terms of how they approach the task of recruiting and
B. Recruiting and Selecting Key Employees
1. Founders differ in terms of how they approach the task of recruiting and
selecting key employees. Some founders draw on their network of
contacts to identify candidates for key positions, while others use
ti h fi executive search firms.
2. An executive search firm is a company that specializes in helping other
companies recruit and select key personnel.
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I. Creating a New Venture Team
3 Many founders worry about hiring the wrong person for a key role
B. Recruiting and Selecting Key Employees
3. Many founders worry about hiring the wrong person for a key role.
Because most new firms are strapped for cash, every team member
must make a valuable contribution, so it’s not good enough to hire
h i ll i t d d b t h d ’t i l fit th j b someone who is well?intended but who doesn’t precisely fit the job.
4. Some founders approach the task of hiring by creating a formal hiring
plan. Others approach the task more informally, and hire personnel as
funds become available and opportunities emerge.
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I. Creating a New Venture Team
1 If a ne ent re organi es as a corporation it is legall req ired to ha e a board of
C. The Role of the Board of Directors
1. If a new venture organizes as a corporation, it is legally required to have a board of
directors – a panel of individuals who are elected by a corporation’s shareholders
to oversee the management of the firm.
2. A board is typically made up of both inside and outside directors. An inside
director is a person who is also an officer of the firm. An outside director is
someone who is not employed by the firm.
3. A board of directors has three formal responsibilities: appoint the officers of the p pp
firm, declare dividends, and oversee the affairs of the corporation. http://wwwubs com/1/g/media overview/media switzerland/images/boardofdirectohttp://www.ubs.com/1/g/media_overview/media_switzerland/images/boardofdirecto
rs.html
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I. Creating a New Venture Team
4 If h dl d l ’ b d f di t b i t t
C. The Role of the Board of Directors
4. If handled properly, a company’s board of directors can be an important
part of its new venture team. Two ways a board of directors can help a
new firm get off to a good start and develop what, it is hoped, will
become a sustainable competitive advantage are by providing guidance
and lending legitimacy.
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I. Creating a New Venture Team
C. The Role of the Board of Directors
Ways a Board of Directors Can Help a New Venture Get Off to a
Function Importance of Function
Good Start
Function Importance of Function
Provide
Although a board of directors has formal governance
responsibilities, its most useful role is to provide
Provide
Guidance
responsibilities, its most useful role is to provide
guidance and support to the firm’s managers. Many
founders and CEOs interact with their board members
frequently and obtain important input and advice.
Lend Legitimacy
q y p p
Another important function of a board of directors is
to lend legitimacy to a firm Well?known and to lend legitimacy to a firm. Well known and
respected board members bring instant credibility to a
firm.
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I. Creating a New Venture Team
5 F f M ti d C ti
C. The Role of the Board of Directors
5. Frequency of Meetings and Compensation
Most boards of directors meet three to four times a year.
New ventures are more likely to pay their boards in company stock or
ask them to serve on a voluntary basis rather than pay a cash
honorarium.
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Chapter 9: Building a New Venture Team
Table of Contents
I. Creating a New Venture Team
A. The Founder or Founders
B R iti d S l ti K E l B. Recruiting and Selecting Key Employees
C. The Role of the Board of Directors
II. Rounding Out the Team – The Role of Professional Advisors
A. Board of Advisors
B. Lenders and Investors
C. Other Professionals
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II. Rounding Out the Team – The Role of g
Professional Advisors
Board of Advisers oa d o d se s
Lenders and Investors Other Professionals
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II. Rounding Out the Team – The Role of g
Professional Advisors
1. A growing number of start?ups are forming advisory boards to provide
A. Board of Advisors
g o g u be o s a ups a e o g ad so y boa ds o p o de
them with direction and advice.
2 An advisory board is a panel of experts who are asked by a firm’s 2. An advisory board is a panel of experts who are asked by a firms
managers to provide counsel and advice on an ongoing basis.
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II. Rounding Out the Team – The Role of g
Professional Advisors
A Board of Advisors
3. Unlike a board of directors, an advisory board possesses no legal
responsibility for the firm and gives nonbinding advice
A. Board of Advisors
responsibility for the firm and gives nonbinding advice.
4. An advisory board can be established for general purposes or can be set
dd f d l f h up to address a specific issue or need. For example, some firms have
customer advisory boards that help the firm identify new product and
service ideas.
5. Most boards of advisors have between five and 15 members.
Companies typically pay the members of their board of advisors a small p yp y p y
honorarium for their service, either annually or on a per?meeting basis.
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II. Rounding Out the Team – The Role of g
Professional Advisors
A Board of Advisors
Guidelines to Organizing a Board of Advisers
1 Advisers will become disillusioned if they don’t play a meaningful role
A. Board of Advisors
1. Advisers will become disillusioned if they don’t play a meaningful role
in the firm’s development and growth.
2. A firm should look for board members who are compatible and
l h f d complement one another in terms of experience and expertise.
3. When inviting people to serve on its board of advisors, a company
should carefully spell out to the individuals involved the rules in terms
of access to confidential information.
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II. Rounding Out the Team – The Role of g
Professional Advisors
Board of Advisers of Ugobe (http://www.ugobe.com/)
((http://www.ubs.com/1/g/media_overview/media_switz
erland/images/boardofdirectors.h
Name Profession Role on Advisory Board
Steven Mayer Adviser to corporations such Adds legitimacy and provides the
Curtis Sasaki
as Intel and Nintendo
Vice President, Sun
Microsystems
firm advice on management issues
Adds legitimacy and provides the
firm advice product/market issues
Phil Schlein
c osyste s
Partner, U.S. Venture Partners
ad ce p oduct/ a et ssues
Adds legitimacy and provides the firm
advice on financial?related issues
Abraham Wei Senior Managing Director,
Chinavest Merchant Bank
Adds legitimacy and provides the firm
advice on financial?related issues
Bill Hillard Managing Partner, Hillard
Equities/Sonn?Hill
Consulting
Adds legitimacy and provides the firm
advice on financial? and management?
related issues
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II. Rounding Out the Team – The Role of
B Lenders and Investors
Professional Advisors
1. As emphasized throughout this book, lenders and investors have a
vested interest in the companies they finance, often causing them to
B. Lenders and Investors
p y , g
become very involved in helping the firms they fund.
2. As with the other non?employee members of a firm’s new venture 2. As with the other non employee members of a firms new venture
team, lenders and investors help new firms by providing guidance and
lending legitimacy, and assume the natural role of providing financial
oversight oversight.
3. In some instances, lenders and investors also work hard to help new
fi fill t th i t t firms fill out their management teams.
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II. Rounding Out the Team – The Role of
B Lenders and Investors
Professional Advisors
B. Lenders and Investors
Beyond Financing and Funding: Ways Lenders and Investors Add Value to an
Entrepreneurial Venture
Help identify and recruit key
management personnel
Provide insight into the industry and
markets in which the venture intends
to participate
Help the venture fine?tune its business
d l
Serve as a sounding board for new
id model ideas
Provide introductions to additional
sources of capital
Serve on the new venture’s board of
directors or board of advisors
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II. Rounding Out the Team – The Role of
C. Other Professionals
g
Professional Advisors
At times, other professionals assume important roles in a new venture’s
success. Attorneys, accountants, and business consultants are often
d f l d d i good sources of counsel and advice.
a. A consultant is an individual who gives professional or expert
advice. New ventures vary in how much they rely on business
consultants for direction.
b. Consultants fall into two categories: paid consultants and g p
consultants who are made available for free or at a reduced rate
through a nonprofit or government agency.
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A primer in Entrepreneurship
Prof. Dr. Ulrich Kaiser
Institute for Strategy and Business Economics Institute for Strategy and Business Economics
University of Zurich
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Spring semester 2008
Chapter 10: Getting Funding or Financing
Table of Contents
I. The Importance of Getting Financing or Funding
II. Sources of Equity Funding
III. Sources of Debt Financingg
IV. Creative Sources of Financing and Funding
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I. The Importance of Getting Financing or
Funding
A Why Most New Ventures Need Funding
The Nature of the Funding and Financing Process
Few people deal with the process of raising investment capital until they
A. Why Most New Ventures Need Funding
Few people deal with the process of raising investment capital until they
need to raise capital for their own firm.
As a result, many entrepreneurs go about the task of raising capital
haphazardly because they lack experience in this area haphazardly because they lack experience in this area.
Why Most New Ventures Need Funding… next slide
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I. The Importance of Getting Financing or
Funding
A Why Most New Ventures Need Funding A. Why Most New Ventures Need Funding
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I. The Importance of Getting Financing or
B. Source of Personal Financing
Funding
Personal Funds Equity Capital
Alternatives for Raising Money for a Start?Up Firm
Personal Funds Equity Capital
Debt Financing Other (Creative) Sources
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I. The Importance of Getting Financing or
B. Source of Personal Financing
Funding
1. Typically, the seed money that gets a company off the ground comes
from the founders themselves—from their personal savings, mortgages,
and credit cards and by tapping into the cash value of life insurance and credit cards, and by tapping into the cash value of life insurance.
2. Friends and family are the second source of funds for many new
ventures This form of contribution often comes as loans or investments ventures. This form of contribution often comes as loans or investments,
but can also involve outright gifts, forgone or delayed compensation, or
reduced fees or rent.
3. Another source of seed money for new ventures is referred to as
“bootstrapping”. Bootstrapping is the use of creativity, ingenuity, and
any means possible to obtain resources other than borrowing money or
raising capital from traditional sources.
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I. The Importance of Getting Financing or
Bootstrapping
Funding
Buying used instead of
new equipment
Coordinating purchases
with other businesses
Leasing equipment
instead of buying
Obtaining payments in
advance from customers instead of buying
Minimizing personal
advance from customers
Avoiding unnecessary Minimizing personal
expenses
Avoiding unnecessary
expenses
Sharing office space
with other businesses
Applying for and
obtaining grants
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
1. Step 1: Determine precisely how much money is needed.
2 St 2 D t i th t i t t f fi i f di 2. Step 2: Determine the most appropriate type of financing or funding.
a. Equity financing means exchanging partial ownership in a firm,
usually in the form of stock, for funding.
b. Debt financing is getting a loan.
3. Step 3: Develop a strategy for engaging potential investors or bankers.
An elevator speech is a brief, carefully?constructed statement that
outlines the merits of a business opportunity.
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
Preparation for Debt or Equity Financing
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
l f Two most common alternatives for raising money
Alternative Explanation
Equity funding
Equity funding means exchanging partial ownership in a firm, usually
in the form of stock, for funding. Angel investors, private placement,
venture capital, and initial public offerings are the most common
sources of equity funding Equity funding is not a loan the money sources of equity funding. Equity funding is not a loan—the money
that is received is not paid back. Instead, equity investors become
partial owners of a firm.
Debt financing
Debt financing is getting a loan. The most common sources of
debt financing are commercial banks and the Small Business
Administration (through its guaranteed loan program) Administration (through its guaranteed loan program).
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
Matching a New Venture’s Characteristics with the Appropriate Form of Financing Matching a New Venture s Characteristics with the Appropriate Form of Financing
or Funding
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
El t S h Elevator Speech
An elevator speech is a brief, carefully constructed statement that outlines
the merits of a business opportunity. pp y
Why is it called an elevator speech?
If an entrepreneur stepped into an elevator on the 25
th
floor of a building p pp g
and found that by a stroke of luck a potential investor was in the same
elevator, the entrepreneur would have the time it takes to get from the
25
th
floor to the ground floor to try to get the investor interested in his or
her opportunity. This type of chance encounter with an investor calls for
a quick pitch of one’s business idea. This quick pitch has taken on the
name “elevator speech.”
Most elevator speeches are 45 seconds to two minutes long.
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I. The Importance of Getting Financing or
C. Preparing to Raise Debt or Equity Financing
Funding
G id li f P i El t S h Guidelines for Preparing an Elevator Speech
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II. Sources of Equity Funding q y g
V C i l B i A l Venture Capital Business Angels
Initial Public Initial Public
Offerings
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II. Sources of Equity Funding q y g
Venture capital: broad subcategory of private equity; refers to equity
investments made for the launch, early development, or expansion of a
business.
Private equity: asset class consisting of equity securities in operating companies
that are not publicly traded on a stock exchange (keyword: leveraged buyout). that are not publicly traded on a stock exchange (keyword: leveraged buyout).
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II. Sources of Equity Funding q y g
A. Business Angels (http://www.businessangels.ch/;
http // asban ch/)
1. Business angels are individuals who invest their personal capital directly
in start?ups.http://www.asban.ch/)
a. The prototypical business angel is about 50 years old, has high
income and wealth, is well?educated, has succeeded as an
entrepreneur, and is interested in the start?up process.
b. The number of angel investors in the U.S. has increased dramatically
over the past decade, partly because of the high returns some
report. p
c. Business angels are valuable because of their willingness to make
relatively small investments. This gives access to equity funding to a
start?up that needs just $50 000 rather than the $1 million minimum start up that needs just $50,000 rather than the $1 million minimum
investment that most venture capitalists require.
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II. Sources of Equity Funding
B. Venture Capital
q y g
1. Venture capital is money that is invested by venture capital firms in
start?ups and small businesses with exceptional growth potential.
2. Venture capital firms are limited partnerships of money managers who
raise money in “funds” to invest in start?ups and growing firms. The
funds or pools of money are raised from wealthy individuals pension funds, or pools of money, are raised from wealthy individuals, pension
plans, university endowments, foreign investors, and similar sources.
di d h h dl j d 3. Many entrepreneurs get discouraged when they are repeatedly rejected
for venture capital funding, even though they may have an excellent
business plan. Venture capitalists are looking for the “home run,” and
so reject the majority of the proposals they consider.
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II. Sources of Equity Funding
1. An IPO is the first sale of stock by a firm to the public. When a company
C. Initial Public Offering
q y g
goes public, its stock is typically traded on one of the major stock
exchanges.
2. Although there are many advantages to going public, it is a complicated g y g g g p , p
and expensive process. The first step is to hire an investment bank. An
investment bank is an institution, such as Credit Suisse First Boston, that
acts as an underwriter or agent for a firm issuing securities The acts as an underwriter or agent for a firm issuing securities. The
investment bank acts as the firm’s advocate and advisor, and walks it
through the process of going public.
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II. Sources of Equity Funding
C. Initial Public Offering
q y g
Four reasons that motivate firms to go public Four reasons that motivate firms to go public
Reason 1 Reason 4 Reason 3 Reason 2
Is a way to raise
An IPO raises a
firm’s public
An IPO is a liquidity
event that provides a
By going public a Is a way to raise
equity capital to
fund current and
future operations.
firm s public
profile, making it
easier to attract
high?quality
event that provides a
means for a
company
shareholders
(
By going public, a
firm creates
another form of
currency that can
customers,
alliance partners,
and employees.
(including its
investors) to cash
out their
investments.
be used to grow
the company.
investments. http://www.x?cite.de/Roadshows?IPO?Postbank?2_89_53.html
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A primer in Entrepreneurship
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III. Sources of Debt Financingg
A. Commercial Banks
Commercial
Banks
SBA Guaranteed
Loans Banks Loans
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Sources of Debt Financingg
1 Historically commercial banks have not been viewed as practical sources
A. Commercial Banks
1. Historically, commercial banks have not been viewed as practical sources
of financing for start?up firms. This sentiment is not a knock against
banks; it is just that banks are risk adverse, and financing start?ups is risky
b i business.
2. There are two reasons that banks have historically been reluctant to lend
money to start?ups:
a. First, as mentioned previously, banks are risk?adverse. In addition,
banks frequently have internal controls and regulatory restrictions
prohibiting them from making high?risk loans.
b. Second, lending to small firms is not as profitable as lending to large
firms. In many instances, it is simply not worth a banker’s time to do y , p y
the due diligence necessary to determine the entrepreneur’s risk
profile.
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
46
III. Sources of Debt Financing
1. Approximately 50 percent of the 9,000 banks in the United States
B. SBA Guaranteed Loans
g
pp o a e y 50 pe ce o e 9,000 ba s e U ed S a es
participate in the SBA Guaranteed Loan Program. While these loans
typically aren’t available to start?ups, they are an important source of
funding for small businesses in general funding for small businesses in general.
2. The most notable SBA program available to small businesses is the 7(A)
Loan Guarantee Program This program accounts for 90 percent of the Loan Guarantee Program. This program accounts for 90 percent of the
SBA’s loan activity. Almost all small businesses are eligible to apply for
an SBA guaranteed loan.
3. The SBA can guarantee as much as 85 percent (debt to equity) on loans
up to $150,000, and 75 percent on loans of more than $150,000.
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
47
III. Creative Sources of Financing and
Funding
i i Leasing Strategic Partners
S ll B i Small Business
Innovation
Research Grants Research Grants
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Creative Sources of Financing and
Funding
A. Leasing
1. A lease is a written agreement in which the owner of a piece of property
allows an individual or business to use the property for a specified period
of time in exchange for payments.
2. The major advantage of leasing is that it enables a company to acquire
the use of assets with very little, or no, down payment.
3. The two most common types of leases that new ventures enter into are yp
leases for facilities and leases for equipment.
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Creative Sources of Financing and
B. Government Grants
Funding
1. The Small Business Innovation Research (SBIR) and the Small Business
Technology Transfer (STTR) programs are two important sources of
early?stage funding for technology firms These programs provide cash early stage funding for technology firms. These programs provide cash
grants to entrepreneurs who are working on projects in specific areas.
2 The SBIR Program is a competitive grant program that provides more 2. The SBIR Program is a competitive grant program that provides more
than $1 billion per year to small businesses for early?stage and
development projects. Each year, 10 federal departments and agencies
i d b h SBIR i f h i h d are required by the SBIR to reserve a portion of their research and
development funds for awards to small businesses.http://www.bbt.admin.ch/kti/
University of Zurich
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Creative Sources of Financing and
Funding
B. Government Grants
a. The SBIR is a three?phase program, meaning that firms that qualify
have the potential to receive more than one grant to fund a
particular proposal. p p p
b. Historically, less than 15 percent of all phase I proposals are funded,
and about 30 percent of all phase II proposals are funded. The and about 30 percent of all phase II proposals are funded. The
payoff for successful proposals, however, is high. The money is
essentially free. It is a grant, meaning that it doesn’t have to be
paid back and no equity is the firm is at stake paid back, and no equity is the firm is at stake.
3 Th STTR P i i ti f th SBIR f ll b ti h 3. The STTR Program is a variation of the SBIR for collaborative research
projects that involves small businesses and research organizations, such
as universities and federal laboratories.
University of Zurich
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Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Creative Sources of Financing and
Funding
B. Government Grants
Small Business Innovation Research (SBIR): Three?Phase Grant Program
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
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III. Creative Sources of Financing and
C. Strategic Partners
Funding
1. Strategic partners are another source of capital for new ventures.
Indeed, strategic partners often play a critical role in helping young
firms fund their operations and round out their business models. p
2. Biotechnology, for example, relies heavily on partners for financial
support. Biotech firms, which are typically fairly small, often partner support. Biotech firms, which are typically fairly small, often partner
with larger drug companies to conduct clinical trials and bring products
to market.
University of Zurich
ISU – Institute for Strategy and Business Economics
Ulrich Kaiser
A primer in Entrepreneurship
Spring semester 2008
53
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