© 2006 G. Yelle. All rights reserved.

Why Do Ventures Need Financing

© 2006 G. Yelle. All rights reserved.

Financing – Debt or Equity

• DEBT – Funds obtained from a LOAN. Loans require repayment with Interest

• EQUITY - Funds obtained from the sale of Ownership in the company, or

the addition of value of the business.

© 2006 G. Yelle. All rights reserved.

Financing Alternatives

Personal Funds Equity Capital

Debt Financing Other (Creative) Sources

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What Financing is Most Applicable?

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Creative Financing

Bootstrapping

Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.

Examples: Buying Used Equipment, Sharing Office Space, Leasing instead of Buying, Cost Reduction,Customer Deposits, etc.

© 2006 G. Yelle. All rights reserved.

Sources of Financing

DEBT EQUITY

• Banks (Loans)• SBA (Loan Guarantees)• People (Loans)• Government Agencies (Loans)• Franchisor (Loans)• Suppliers (Loans)• Venture Capital (Loans)

• Cash - (Self)• Corp. Shares – (Corporation)• Corp. Shares - (Venture Capital)• Corp. Shares – (Private Placement)

• Corp. Shares – (IPO)• Cash or Stock – (Angel Investor)• LP Shares – (Limited Partnership)• Cash (Grants)

© 2006 G. Yelle. All rights reserved.

Banks as a Financing Source

• Amount Required

• Use of Financing

• Loan Terms

• Collateral

• Borrower Credit History

• Business Plan

© 2006 G. Yelle. All rights reserved.

SBA Loan Guarantees

• U.S. Small Business Administration provides a Loan Guarantee through the U.S. Government Small Business Administration.

• Banks obtain Loan Guarantees of up to 85%

• SBA Loan Guarantees make possible loans that might otherwise not be approved by a bank.

© 2006 G. Yelle. All rights reserved.

Bank Financing – Approval Issues(4 c’s of Credit)

Character - Attributes of the borrower (including Credit History).

Cash Flow - Positive cash flow that covers the debt.

Collateral - Assets pledged to secure the loan.

Contribution - The borrower’s financial contribution.

© 2006 G. Yelle. All rights reserved.

Credit Bureaus & Credit Reports

Three Major Credit Reporting Agencies• Equifax• Trans Union• Experian (TRW)

Credit ScoringExperian - Fair Isaac Score: 365-870

© 2006 G. Yelle. All rights reserved.

© 2006 G. Yelle. All rights reserved.

Government Agencies as Lenders

• Economic Development Loans are available through Economic Development Agencies, or Community Loan Funds.

• Usually tied to Job Creation.

• May have specific loan use restrictions.

© 2006 G. Yelle. All rights reserved.

Venture Capital

• Companies

• Often Based on Attractiveness of the Deal

• Skilled Management ot Management Team

• High Potential Return On Investment (ROI)

• Ownership & Possibly Board Seats

• Short Exit Horizon for the VC Firm

• Equity – Stock Shares (Usually Preferred Shares)

• Debt – Convertible Debt (Secured by Company Assets)

© 2006 G. Yelle. All rights reserved.

Angel Investors

• High Net Worth Individuals

• More Likely to Fund Early-Stage of a Business

• Possible Ownership Stake/Board Seat

• More Likely to be in <$1 Million Range

• Seek High ROI

IPO & Private Placement

Initial Public Offering (IPO)• For General Public.

• Strict SEC Regulations.

• Will become Publicly Traded Stock.

Private Placement• For More Sophisticated

Investors.

• Governed by Regulation D.

• Rule 505 permits $5 Million unregistered securities to be sold in 12 month period, and can be sold to “any” 35 Investors & UNLIMITED Accredited Investors.

• Remains Privately-Held Stock.

© 2006 G. Yelle. All rights reserved.

Grants Overview

• Small Business Innovation Research (SBIR) Grants (Federal)

• HUD Grants (Federal)• Empire State Development Grants (NY State)• Government Set asides - 8A Program (Federal)• Specialized - Examples:

-VESID (NY State)-NYSERDA (NY State)-DEPT OF AGRICULTURE (Federal)

© 2006 G. Yelle. All rights reserved.

SBIR & STTR PROGRAMS

Small Business Innovation Research (SBIR) Grants

Small Business Technology Transfer (STTR) Grants

• Available through 10 Federal Agencies

• Available through 5 Federal Agencies

• Requires partnering with a U.S. Research Institution.

Objective: To move a project from R&D to commercialization. (See Table 11.3)

© 2006 G. Yelle. All rights reserved.

Grants

© 2006 G. Yelle. All rights reserved.

Grants

INTRO

GROWTH

MATURITY & DECLINE

2ND STAGE FINANCING (SERIES B)

Cash X X X XBanks X X XStock X X XVC X XAngel X X X X

PREMARKET

1ST Stage Seed Capital

3RD & 4TH STAGE(Bridge Loans or Mezzanine Financing*

TYPE

Initial Start-up, Prototypes,etc.

Type of Financing by Stage of Business

Temporary Funding– for expansion or - IPO * Backed by Stock

LATE STAGE FINANCING

Acquisition & Buyout

Sales Profits

Asset Purchases,Inventory,Working Capital