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National Formosa University Pre-competition

National Formosa University Pre-competition. Financing and Capital Sourcing Options. By Dr. Bill Todorovic Richard T. Doermer School of Business and Management Neff Hall 340L, Tel. (260) 481 6940 http://users.ipfw.edu/todorovz /. The Nature of a Firm and Its Financing Sources.

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National Formosa University Pre-competition

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  1. National Formosa UniversityPre-competition Financing and Capital Sourcing Options By Dr. Bill Todorovic Richard T. Doermer School of Business and Management Neff Hall 340L, Tel. (260) 481 6940 http://users.ipfw.edu/todorovz/

  2. The Nature of a Firm andIts Financing Sources • Factors That Determine Financing • Firm’s economic potential • Maturity of the company • Nature of its assets • Owners’ preferences for debt or equity

  3. Beginning of Production ? Going Concern Start-up Sources Of Funds Company Size Personal IPO Friends and Family Banks Angels Government Venture Capitalist Customers/Suppliers Amount

  4. Sources of Financing Other Venture Capital Mortgaged Property Private Investors Bank Loans Friends Personal Charge Cards Partners Family Members Personal Savings 0 10 20 30 40 50 60 70 80 Percentage of EntrepreneursUsing Source of Financing Sources of Financing

  5. Critical Financing Factors • Accomplishments and performance to date. • Investor’s perceived risk. • Industry and technology. • Venture upside potential and anticipated exit timing. • Venture anticipated growth rate • Venture age and stage of development.

  6. Debt or Equity? • Entrepreneurs typically prefer debt • Allows them to appropriate as much as of the benefit as possible + retain sole control • Can default • Debt is unattractive to investors in emerging technology • Usually little collateral or predictable cash flow • Information asymmetry is lessened by ownership position – shared ownership gives some control • High interest rate to offset risk will stifle growth or cause default

  7. No debt $28,000 14% return 14% return income on on $200,000 equals on assets total assets ($28,000 ÷ $200,000) ($28,000 ÷ $200,000) of $200,000 $200,000 equity Debt Versus Equity With no debt and all equity: Equity: Owners get to keep all of the profits in return for accepting the risk of lower returns

  8. With $100,000 debt and $100,000 equity: $100,000 debt (10% cost) $28,000 18% return 14% return income on on $100,000 equals on assets total assets ($18,000 ÷ $100,000) ($28,000 ÷ $200,000) of $200,000 $100,000 equity Debt Versus Equity (Cont’d) Debt is Risky: Lenders have first claim on profits and must be paid even if there are no profits.

  9. The Banker’s Perspective • Bankers’ Concerns! • The Five C’s of Credit • Character of the borrower • Capacity of the borrower to repay the loan • Capital invested in the venture by the borrower • Conditions of the industry and economy • Collateral available to secure the loan

  10. Financial Information Requiredfor a Bank Loan • Three years of the firm’s historical statements • The firm’s pro forma financial statements • Personal financial statements

  11. Getting to know your friendly neighborhood Venture Capitalist…

  12. The myth… and the reality • The myth: VCs support good people and good ideas • The reality: VCs invest in industries with double digit growth in the middle of the S-curve • Appropriate management team • Specialty funds (earlier and later stages on the S-curve) • Limits the risk to management risk • Produces attractive exit opportunities

  13. Present Day Situation Myth: There is less available capital Fact: The industry has plenty of money, but limited appetite for new investment Fact: Investor attitudes toward risk have changed

  14. VC fills a void • Gap between innovation and traditional sources of debt • Risk inherent in startups typically justify interest rates higher than allowed by law • VCs must balance high returns for their investors against sufficient upside potential for entrepreneurs to keep them motivated

  15. What VCs get out of it • 10X return on capital over 5 years • VCs management fees and high growth funds • Fund structured with limited and general partners and a life of 7-10 years

  16. What VCs Do?

  17. Angels • Well to do private individuals • Geography and industry specific • Invest lower amount than VC • Often a good source of industry experience

  18. Finding Angels • Private Individuals • Professionals (lawyers, accountants, bankers) • Local small business development centers • Internet associations (e.g., Technology Capital Network at MIT)

  19. Other Sources of Financing • Community-based financial institutions • Large corporations • Stock Sales • Private placement • Initial public offering (IPO)

  20. Why Companies Invest? • Preemption of new rivals • Replace core earnings lost because of an emerging technology • Apply existing competitive advantage in a rapidly growing market • And some degree of autonomy: • JVs, alliances, flexible internal management structures

  21. Government-Sponsored Programsand Agencies • Small Business Administration (SBA) loans • Guaranty loan • Direct loan • Small business investment centers (SBICs) • Small Business Innovative Research (SBIR) • State and Local Government Assistance

  22. Building to Grow

  23. Low Level Investment Lower Long-term Income Potential (Lower Capacity) Complements of: Timmons/Spinelli New Venture Creation, sixth edition

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