Mgt C38 - Entrepreneurship
Financing The Small
Entrepreneurial Business
Chris Bovaird
15 September, 2008
Key Points/Topics:
1. Start-up involves most risk
2. Banks do not provide start-up finance.
3. Personal Equity - Main Source
4. “Love” Money
5. Business Angels
6. Venture Capital
1. Start-up involves most risk
Starting a business is cash absorbing activity
Cash needed for:
equipment
rent
salaries
product development
market research
marketing
etc., etc.
Starting production absorbs even more cash
Suppliers unwilling to provide trade credit
Customers unwilling to pay/slow collections
2. Banks will not provide start-up finance
Banks require:
Track record - audited financial statements
Collaterial security - raw materials, WIP, receivables
Cash flow - to service debt
Start-ups have none of these
Therefore: Debt not an option!
Equity is Only Form of Start-Up Finance
3. Personal Equity - Main Source
It's your business - you want to retain ownership
If you're not committed - who is?
Personal guarantees (mortgage the house)
This source is limited
4. “Love” Money
Your parents
Your in-laws
Your friends
If you can't convince the people who like and trust you the most, who can you convince?
5. "Business Angels"
Who:
Retired business execs
Wealthy dabblers (doctors, lawyers, dentists)
Company Directors
Business Angels - What They Want
Professional investors - looking to make good returns.
Wealthy dabblers - looking for tax write-offs
Company Directors - enjoy the process, mentoring
Business Angels - How to Find
You can't - by definition "private"
Through lawyers, accountants, networks
6. Venture Capital
Great in theory, unlikely in practise
Canadian Venture Capital Association home page
Most won't invest less than $3-$5 million
Most won't invest in start-ups
Money supplied by “institutions”: banks, pension funds, insurance cos.
Small % of their portfolio, to increase overall return
Venture Capital - "hands on" Investment
New ventures are high risk - they need managing
Entrepreneurial teams may lack skills - marketing, strategy, finance
V.C. investors will nominate Directors
Venture Capital - Seeks Very High Return
3X investment in 3 years
5X investment in 5 years
= 40% return on investment - minimum
Getting Venture Capital is Difficult
100 plans
50 “binned” within first hour
50 proceed to get second or third read
25 proceed to meetings, discussions
10 - 15 proceed to “due diligence” (detailed investigation)
5 - 10 proceed to outline offer
5 proceed to serious negotiation of terms
2 - 3 receive investment
Rule of 2:6:2
V.C.s do their best to pick winners, don’t always succeed
20% “dogs” - go bust in year 1
60% “problem children” - inadequate/labour intensive returns
20% “stars” - meet or surpass forecasts
result: overall portfolio return circa 20%
Financing Small Business - Conclusions
The banks won't lend to you
You can't find business angels
You're too small for venture capital
Therefore, it's up to.....
your mom and dad