Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Bootstrapping and Financing the
Closely-held Company
Patterns of Entrepreneurship Management4th Edition, Chapter 9
Funding the Venture -1
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Focused on early stage funding
Personal, friends and family
Angel financing and early private equity
Factoring and supplier finance
Presentation Outline
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
73%31%18%16%
10%4%2%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Personal Savings
Bank Loans
Family
Mortgaged Property
Friends
State/Federal Guaranteed Loans
Venture Capital
SOURCES OF START-UP FUNDS
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Note: does not add to 100% as there are overlapping sources.
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Ultrafast Milestones and Value Creation
Funding Stages Should Match Milestones
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
More Suitable for the Early Stages
(Covered in
This Chapter)
More Suitable for Later Stages
(Covered in Chapter 10)
Self-Funding Super-angels
Moonlighting and Consulting Institutional Venture Capital
Bootstrapping Private Placements
Family and Friends/Angels Corporate Debt
Micro-equity, Micro-loans Strategic Partnerships
Personally Secured Bank Loans Mezzanine Finance
Factoring and Supplier Financing Initial Public Offerings
Government Programs
Comparison of Early Stage and Later Stage Sources of Finance
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
The Virtual Company
• The internet enables a new venture to develop without significant overhead costs
− Internet video conferencing for meetings
− Project management software such as Basecamp
− Outsourced HR software
− Locating experts who can work as “pay-as-you-go” consultants
− No need for offices, etc. etc.• Such ventures can be much more efficient in the use of funds and
therefore reducing the need for capital• If a sale to an existing company is planned then only the
ESSENTIAL assets need be created.
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Personal Funding
Investing your own money – “sweat” equity for stock
– Offers greatest return, if successful
– Investors and venture capital sources usually require it
– Your personal funds can be treated as equity or debt
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Moonlighting
• Founder still working a regular job
• Income used to support the entrepreneur during needed cash flow
• When the venture begins paying as well or better - entrepreneur leaves job
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Bootstrapping
• A general term that refers to building value in a company without taking on outside investors or bank loans
• Usually overlooked as a source of resources by entrepreneurs
• Effective bootstrapping allows founders to retain more of their ownership
• Often the ONLY way to grow a company• The entrepreneur becomes more efficient and
cost conscious which is attractive to investors
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Protect your Investment – Document EVERY source of money and the terms.
Specify in writing if it is a loan to the company, how the loan is payable, conversion rights or equity.
Specify if the loan is payable in full upon the company receiving venture funding.Get into the habit of documenting all financial transactions from the start to avoid later problems.
Personal FundingChapter
9Personal Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Second mortgage, credit cards, or sell your car
OR
Get an investor to use a bank deposit or stock holdings as collateral for a loan
Use of Personal Assets
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Friends And Family
• The most popular source of funds for startup capital
• Friends and family are not as worried about quick profits as professional investors
• Usually they do not investigate the business and are not familiar with all the risks
• The best advice is to provide the same full disclosure to a friend as you would a professional investor
• Document the transaction
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Well-off individuals with money to invest
Good prospects get funded
Need good contacts found via networking
Seek local Angel Networks. Fees range from $150-$300
Seek Angel Support Networks such a Ycombinator, DreamIt Ventures
List on Angelsoft.com
Angels
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Accredited Investors
• An accredited investor is defined as having income in excess of $200,000 in each of the two most recent years or joint income of $300,000
OR• Individual net worth or joint worth exceeding
$1,000,000
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Common Stock - Purest form of equity
– No fixed or guaranteed return– Greatest risk and greatest return– Voting stock versus non-voting stock
Preferred Stock– Guaranteed dividends– Rights are prior to common stock
rights especially on sale or dissolution
Equity Investments
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Micro-equity and Micro-loans
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Early stage funding and networking are offered by Micro-EquityGroups such as and
These groups provide some financing, incubator support and mentoring to prepare entrepreneurs for later funding. They take a small equity position for this work.
Micro-loans, which are well established for developing economies, are just gaining acceptance in the US. A number of lending networks can be found on the internet.
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Factoring and Supplier Financing
FACTORS provide credit to companies that are unable to access a conventional bank loan. Factors secure the loan against purchase orders received by the company. Customers pay the factor directly, who deducts high interest and fees sending the remaining amount to the company.
SUPPLIERS may delay invoicing or receiving payment from a small company in order to retain the business and help through the early stages.
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Programs of the Small Business Administration
(SBA) The Federal Government has a number of
loan support programs The rules change often so check the SBA
web-site Most of the SBA loans are made by
lenders( commercial Banks, savings and loans, Insurance companies)
Guaranteed by the SBA Average loan is $100,000 plus-with a
maturity of 10 years
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
The program allocates in excess of 1 billion annually for scientific innovation
Phase 1-awards up to $150,000 for the purpose of investigating the feasibility of an innovation
Phase 11 –The report is reviewed and if feasible, an award up to $1,000,000
Phase 111- Funding for commercialization must come from private sources
Check the SBIR web-site for proposal requests
SBIR Program
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
Licensed by the SBA - Invest locally and have industry preferences
Limited to companies under $2 million in earnings and less than $6 million in net worth
Have both debt and equity investments
Do not take a majority position in the company
There are also many other federally funded programs authorized by congress from time to time, entrepreneurs should check on these regularly.
Small Business Investment Companies etc.
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Micro-Finance
Factoring/Supplier Finance
Copyright 2013 Jack M. Kaplan & Anthony C. Warren
State programs
– Many states target funds for economic development:
PA. Ben Franklin Technology Centers make grants up to $450,000 in three installments
N.J. New Jersey Economic Development Agency, loans and royalty agreements
– Advantages:
No repayment unless the project succeeds and
minimal equity conversion rights
Relatively simple process
May be one of only a few sources for early stage
– Disadvantages:
Pay royalties on sales
State Development Programs
Chapter 9Personal
Financing
Angels
Friends & Family
Private Equity
Government
Programs
Banks
Micro-Finance
Factoring/Supplier Finance