THE SEARCH FOR ENTREPRENEURIAL CAPITAL

I. The Entrepreneur’s Search for Capital

Every entrepreneur faces the challenge of finding start-up capital. There are numerous possibilities and
combinations of financial packages that may be appropriate for a business.
II. Debt versus Equity
The use of debt to finance a new venture requires a payback of funds plus a fee, whereas equity financing
involves the sale of some of the ownership in the venture.
A. Debt financing
Debt financing is popular for short term borrowing (one year or less) for working capital and for long
term borrowing (one to five years or more) for the purchase of property or equipment.
1. Commercial banks
To secure a bank loan, an entrepreneur typically will have to answer a number of questions. Five
of the most common questions are:
 What do you plan to do with the money?
 How much do you need?
 When do you need it?
 How long will you need it?
 How will you repay the loan?
a. Advantages
1. No relinquishment of ownership
2. More borrowing allows for potentially greater return on
investment.
3. During periods of low interest rates opportunity cost is
justified.
b. Disadvantages
1. Regular interest payments
2. Intensified continual cash flow problems
 3. Heavy use of debt can inhibit growth and development.
2. Other debt-financing sources
a. Trade credit
1. Given by suppliers who sell goods on account.
2. Must be paid in 30 to 90 days
b. Accounts receivable financing
1. Short-term financing that involves
2. Requires collateral (receivables)
c. Factoring
1. Sale of accounts receivable
d. Finance companies
1. Asset-based lenders
2. Interest is from 2 to 6 percent
B. Equity financing
Requires sharing ownership and profit with the funding source.
1. Public offerings
a. Advantages
1. Size of capital amount. Selling securities is one of the fastest ways to raise large sums of
capital in a short period of time.
2. Liquidity. The public market provides liquidity for owners since they can readily sell
their stock.
3. Value.
4. Image.
b. Disadvantages

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 1. Cost
2. Disclosure
3. Requirements
4. Shareholder pressure
2. Private placements
a. Regulation D
1. Eased reports required for selling stock
a. Rule 504a-placements of less than $500,000
b. Rule 504-placements up to $1 million
c. Rule 505-placements of up to $5 million
d. Rule 506-placements in excess of $5 million
III. The Venture Capital Market
These experienced professionals provide the following services:
1. Capital for start-up
2. Market research for marketing department
3. Management consulting
4. Contact with prospective people
5. Assistance in negotiating
6. Counseling and guidance
A. Recent developments in venture capital
2001-2004 was a downward trend in venture capital activity; however VCs
have raised their investments in later stage companies and not start-ups or
early-stage venture. So VCs are more inclined to finance companies in more
mature stages.
B. Dispelling venture capital myths
1. Myth 1: Venture capital firms want to own control of your company and
tell you how to run the business
a. They want the entrepreneur and management team to run it
profitably.
2. Myth 2: Venture capitalists are satisfied with a reasonable return on
 investments
a If there is a high degree of risk, there must be a high return on
investment.
3. Myth 3: Venture capitalists are quick to invest
a. t takes a long time to raise a venture capital.
4. Myth 4: Venture capitalists are interested in backing new ideas or high-
technology inventions—Management is a secondary consideration
a. Venture capitalists back only good management.
5. Myth 5: Venture capitalists need only basic summary information before
they make an investment
a. A detailed organized business plan is a must.
C. Venture capitalists’ objectives
1. Concerned with return on investment
2. Measure the product, service, and management of a business
D. Criteria for evaluating new-venture proposals
1. Stage 1: Initial screening
2. Stage 2: Evaluation of the business plan
3. Stage 3: Oral presentation
4. Stage 4: Final evaluation
E. Evaluating the venture capitalist
1. Does the venture capitalist understand the proposal?
2. Is the individual familiar with the business?
3. Is the person someone with whom the entrepreneur can work?
IV. Informal Risk Capital—“Angel” Financing
Many wealthy people are looking for investment opportunities. They are referred to
as business angels or informal risk capitalists.
A. Types of angel investors
1. Corporate angels
2. Entrepreneurial angels
3. Enthusiast angels
4. Micromanagement angels
5. Professional angels