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Sources of Capital
for Entrepreneurial Venture
Lecturer: Ph.D Li, Fangxi
Econometrics & Business Accounting
Institute of International Education, Liaoning University
Objectives
1.To be able to distinguish the five forms of entrepreneurial
capital
2.To understand sources of capital
3.To differentiate between debt and equity as methods of
financing
4.To discuss several types of equity capital
New Ventures Need Money
1. what do you plan to do with the money?
2. How much do you need?
3. when do your need it?
4. How long will you need it?
– Choose the right source
–Know the right people to get money
–Plan money into your timeframe
–Be creative where it counts
–Know what you’re getting into
Capitalwhat is Capital?
• Capital is any resource (human-made or natural ) that is used to create other goods or services. We also call them all factors of production.
• E.g. Financial capital, human capital, etc.
Why do we need to know these?
• What types of capital to use and when
• Attempt to find appropriate start-up capital
• Exanimate the sources of capital available to entrepreneurs.
Five Forms of Entrepreneurial Capital
Financial capital:
Financial assets, such as
currency, bank accounts,
bonds and stock :
Manufacturing capital
physical goods, such as
machinery,roads, boats,
factories
Human capital:
peoples’ health, knowledge, skills
that people bring to their jobs.
Social capital
the value of a person’s network.
Natural capital
stock of natural ecosystems
land, water, and minerals.
Debt Versus Equity
• Equity Financing
It involves the sale of some of
the ownership in the venture
–The personal investment of an
owner in a business
–Entrepreneur gives control to
other owners
• Debt Financing
The use of debt to finance a new
venture involves a payback of
the funds plus interest for using
the money.
–Financing that is borrowed and
must be repaid
– Includes an interest component
Debt Versus Equity
• Equity Financing
Advantages:
1. A large injection of capital
2. No interest payments
3. No obligation to repay capital
Disadvantages:
1. degree of control reduced
2. Selling a part of your business
3. High return is expected
4. Buy your share at a future point
• Debt Financing
Advantages:
1. Amount borrowed can vary
according to your needs
2. not affect your ownership of the
company
Disadvantages:
1. Debt obligation
2. Interest will be charged
3. Collateral is usually required
Debt Financing
• Commercial Banks - loanAgain, you do have to repay loans, with interest.
• Other Debt-Financing–Trade Credit
–Accounts Receivable Financing
–Finance Companies
Commercial Bank – Loan
Traditional financing tunnel
most common source
May turn you down because you have no collateral, no cash flow
plan, or you haven’t provided them with convincing information.
Risk Management System: risk test and credit test
Big companies (AAA credit level ): lower interest rate
Big companies (below AA- credit level )-Third party guarantee or
Asset mortgage
Small or initial business -Personal Assets as mortgage
Other Debt-Financing Sources
Trade Credit
Given by supplier who sell goods on account
Account receivable financing
Account receivables as collateral for a loan
Finance companies
Asset-based lenders that lend money against assets. E.g.
receivables, inventory and equipment
Equity Financing for entrepreneurs
Leve
l of
Inve
stm
ent
Ris
kA
ssu
med
by
Inve
sto
r
High
Low
Seed Start-Up EarlyGrowth
Established
Founder, friends,and family
Business Angels
Venture Capitalists
Private placement
Crowd funding
public offering
Stage of Development of the Entrepreneurial Firm
1. Informal Inventor
The source of financing for most start-ups; includes investments from (4Fs)
founders, their family, friends and foolhardy investors
rarest source of capital for start-up entrepreneurs is classic venture capital
India has an astounding rate of informal investing. China and New Zealand
also have a lot of informal investors.
How to get money from 4Fs
• Know your investor’s intentions
• Debt is better than equity for relatives and friends
• Have a realistic repayment or cash-out plan
• Prepare some documentation so that there is no misunderstanding..
2. “Angel” Financing• “business angels” (or informal risk capitalists). Many wealthy people in
the United States are looking for investment opportunities.
• One newly source is the Angel Capital Electronic Network (ACE-Net).
This Internet-based service provides information to institutional and
individual accredited investors
• Typical deal size: $250,000 to $5 million
• Typical recipient: Start-up firms
• Cash-out time frame: 5 to 7 years
• Expected return: 35 to 50%
Main Differences
• Personal
• Firms funded
• Due diligence done
• Location of investment
• Contract used
• Monitoring after investment
• Exiting the firm
• Rate of return
Business Angels
• Entrepreneurs
• Small, early-stage
• Minimal
• Of concern
• Simple
• Active, Hands-on
• Of lesser concern
• Of lesser concern
Venture Capitalists
• investors
• Large, mature
• Extensive
• Not important
• Comprehensive
• Strategic
• Highly important
• Highly important
Business Angels vs. Venture Capitalists
The Pros and Cons of Business Angel
Angels’ Characteristics
Value-addingGeographically dispersed
More permissive investors
Investment Characteristics
Seek Smaller DealsPrefer start-up & early stageInvest in all industry sectors
Like high-tech firms
Added Bonuses
Leveraging effectGive loan guarantees
No high fees
Advantages
Business Angels
Disadvantages
Littlefollow-on
money
Want a sayin firm
Could turnout to be“devils”
No nationalreputationto leverage
Types of Angel Investors
• Corporate Angels
• Entrepreneurial Angels
• Enthusiast Angles
• Micromanagement Angels
• Professional Angels
3. Venture capital
Venture capital (VC) is a form of financing that is
provided by firms or funds to small emerging
firms with high growth potential, or which have
demonstrated high growth.
They invest money, you give them shares.
they need participate in the board
Venture capitalists’ objectives : Be interested in
making a large return on investment (ROI). VC want to
work with a team with good credentials and experience
New-Venture Proposals
• critical factors for new-venture
proposals
(1) timing of entry,
(2) key success factor stability,
(3) competitive rivalry
(4)education capability,
(5) scope
(6) familiar with the market
(7) ROI
• Venture capitalists reached a go/no go
decision in an average of six minutes
• proposal should be complete, clear and
well presented. Venture capitalists will
generally analyse five major aspects
of the plan:
(1) the proposal size,
(2) financial projections,
(3) investment recovery,
(4) competitive advantage,
(5) company management.
Different Stages of Venture Capitalists
Stage of BusinessExpected Annual
Return on InvestmentExpected Increase on
Initial Investment
Seed financing(start-up stage)
60% 10-15 x investment
early-stage financing(new business)
40%-60%
early-stage financing(development stage)
30%-50%
Expansion financing(expansion stage)
25%-40%
Late- stage funding 50%
6-12 x investment
4-8 x investment
3-6 x investment
8-15 x investment
Venture capital internet resources
• Australian Venture Capital Association
• Global Entrepreneurship Monitor Financial
Reports
• Hong Kong Venture Capital Association
Ltd
• Singapore Venture Capital and Private
Equity Association
• http://www.avcal.com.au
• http://www.gemconsortium.
org
• http://www.hkvca.com.hk
• http://www.svca.org.sg
4. Crowd Funding
• Crowd funding is the practice of
funding a project by raising monetary
contributions from a large number of
people. New financial instrument.
• Successful case: Cartoon Movie
《Monkey King:Hero is back》
In 2015, 89 investors, contribute
¥7.8million to make the movie. they
earn 4 times of their initial investment.
Incentives Disincentives
Lower cost of capital Entrepreneur typically must disclose hispropritary idea to a larger public
There is a better match between entrepreneursand investors
Has engative repercussions on patentability
The entrepreneur has access to global funders Gives competitors inside information
The funder gains early access to the product andrecognition for helping innovation
Entrepreneur must(prematurely)disclose staffnames
More and better information increases thefunders' willingness
The crowd often has no special industryknowledge compared to professional funders
Crowdfunding is a good type of market research The crowd is atomised individuals not networks
Gives entrepreneurs valuable feedback on theirproject
Because there are more investor, there are moreinvestor management issues
Engages potential users in the product design Entrepreneur must deal with strongpersonalities
Crowd funding incentives and disincentives
Private Placements
• Private placement is money invested in a company usually from
private investors in the form of shares or sometimes bonds.
• In most cases, a placement agent (usually a share-broking firm
or investment bank) will manage the process for a fee.
• It looks for growth or expansion funding.
• Institutional investors such as banks, insurance companies,
venture capital firms.
Private Placements
Advantages
• a Company has considerable
control over terms of the
placement
• b Investors unlikely to want day-to-
day control
Disadvantages
• a Time consuming to prepare
detailed information for potential
investors
• b Cost of the placement to cover
fees of placement agent,
accountants, and lawyers
• c Level of disclosure required
Public Offerings
• many new ventures have sought capital through the
public markets.
• Initial public offering (IPO) is used to represent the
registered public offering of a company's securities for
the first time.
Public Offerings
Advantages of going public:
• Size of capital amount
• Liquidity
• Value
• Image
Disadvantages of going public:
• Costs
• Disclosure
• Requirements
• Shareholder pressure