Sources of Capital Flashcards
(59 cards)
1
Q
Sources of Capital
- Involves a payback of funds plus a fee for the use of money.
- Debt places a burden on the entrepreneur of loan repayment with interest.
A
Debt Financing
2
Q
Sources of Capital
- Involves the sale of some of the ownership in the venture.
- Forces the entrepreneur to relinquish some degree of control in the venture
A
Equity Financing
3
Q
Sources of Capital
- Raising capital for a venture by getting a loan.
- Many new ventures find this a necessity, more than a choice.
A
Debt Financing
4
Q
Sources of Capital
2 types of burrowing under Debt Financing
A
- Short term burrowing
- Long term burrowing
5
Q
2 types of burrowing under Debt Financing
One year or less
A
Short-term burrowing
6
Q
2 types of burrowing under Debt Financing
One to five years, or more
A
Long-term burrowing
7
Q
Sources of Capital
3 types of debt financing
A
- Commercial Banks
- Peer to Peer lending
- Other sources
8
Q
Sources of Capital
- 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
Commercial Banks
9
Q
Sources of Capital
The practice of lending money to unrelated individuals (i.e. peers), without going through a traditional financial institution.
A
Peer-to-Peer Lending
10
Q
Sources of Capital
Also known as Debt-Based Crowdfunding; also, Social Loans
A
Peer-to-Peer Lending
11
Q
Sources of Capital
A 21st century phenomenon: takes place on internet sites that pool money from investors willing to lend money at agreed-upon rates. (e.g.,kiva.org)
A
Peer-to-Peer lending
12
Q
Sources of Capital
____________ lenders charge fees for brokering and servicing loans and collect penalties for late payments as well.
A
Peer-to-Peer Lending
13
Q
Sources of Capital
First appeared in 2005
A
Peer-to-Peer Lending
14
Q
Sources of Capital
Amounts lent: $17,000 - $250,000
A
P2P
15
Q
Sources of Capital
Interest rates of P2P?
A
5.6% to 35.8%
16
Q
Sources of Capital
Default rates of P2P
A
1.5% to 10%
17
Q
Sources of Capital
- Disadvantages:
- Funding success rate. Most loans are difficult to complete.
- Business plan disclosure. The entrepreneur’s business plan is published publicly.
- No ongoing counseling relationship.
- Potential tax liability.
- Uncertain regulatory environment. The SEC is still reviewing these sites
A
P2P
18
Q
Sources of Capital
In terms of debt financing, what are the 4 other sources of finance?
A
- Trade credit
- Accounts receivable
- Factoring
- Finance Companies
19
Q
Sources of Capital
Money invested in the venture with no legal obligation for entrepreneurs to repay the principal or pay interest on it. However, it requires sharing the ownership and profits with the funding source
A
Equity Financing
20
Q
Sources of Capital
4 types of equity financing
A
- public offerings
- private placements
- venture capital markets
- angel investors
21
Q
Sources of Capital
Common Financial/Equity Instruments
A
- Loan with Warrants
- Convertible debentures
- Preferred and common stocks
22
Q
Common Financial/Equity Instruments
Provides the investor with the right to buy stock at a fixed price at some future date
A
Loans with Warrants
23
Q
Common Financial/Equity Instruments
Usual terms: >100% of original offering, 5 years after offering.
A
Loans with Warrants
24
Q
Common Financial/Equity Instruments
Unsecured loans that
can be converted into
stock.
A
Convertible Debentures
25
# Common Financial/Equity Instruments
Conversion price, interest rate, other provisions are negotiable.
Convertible Debentures
26
# Common Financial/Equity Instruments: Preferred Stock or Common Stock?
Fixed, certain, lower return
Preferred Stock
27
# Common Financial/Equity Instruments: Preferred Stock or Common Stock?
Variable, uncertain, higher return
Common stock
28
# Sources of Capital
Advantages:
* Size of Capital
* Liquidity
* Value
* Image
Public Offerings (IPO) [Going public]
29
# Sources of Capital
Disadvantages:
* Costs
* Disclosure
* Requirements
* Shareholder Pressure
Public Offerings (IPO) [Going Public]
30
# Sources of Capital
Raising capital through the private placement of securities
Private placements
31
# Sources of Capital
3 types of Private Placements
* Direct Public Offerings
* Sophisticated Investors
* Crowdfunding
32
# Sources of Capital: Issues surrounding what?
* Reputation
* Intellectual Property
* Donor Dilution
* Public Fear
Crowdfunding
33
# Sources of Capital
Professional investors who provide capital for start-up, early stage, or expansion of different business ventures
Venture Capitalist
34
# Sources of Capital
These professionals provide a full range of financial services for new or growing ventures.
Venture Capitalist
35
# Sources of Capital
As partial owners of the companies they invest in, they are most concerned with return on investment. And they expect high returns!
Venture Capitalist
36
# Sources of Capital
They carefully weigh the risk of the venture against the potential return
Venture capitalist
37
# Sources of Capital
They carefully measure both the product or service offered by and the management of the venture.
Venture Capitalist
38
# Sources of Capital: What is this?
* Capital for start-ups and expansion
* Market research and strategy for businesses that do not have their own marketing departments
* Management-consulting functions and management audit and evaluation
* Contacts with prospective customers, suppliers, and other important business people
* Assistance in negotiating technical agreements
Financial Services provided by Venture Capitalist
39
# Sources of Capital: What is this?
* Help in establishing management and accounting controls
* Help in employee recruitment and development of employee agreements
* Help in risk management and the establishment of an effective insurance program
* Counseling and guidance in complying with a myriad of government regulations
Financial Services provided by Venture Capitalist
40
# Venture Capitalist: Myth or Fact
Venture capital firms want to own control of your company and tell you how to run your business
Myth
41
# Venture Capitalist: Myth or Fact
Venture capitalists are not satisfied with a reasonable return on investments
Fact
42
# Venture Capitalist: Myth or Fact
Venture capitalists are quick to invest
Myth
43
# Venture Capitalist: Myth or Fact
Venture capitalists are interested in backing new ideas or high-tech inventions — management is a
secondary consideration
Myth
44
# Venture Capitalist: Myth or Fact
Venture capitalists need only basic
summary information before they make an investment
Myth
45
# Venture Capitalist: What is this?
1. Firm requirement
2. Nature of the proposed business
3. Economic environment of proposed industry
4. Proposed busines strategy
5. Financial information of the proposed business
6. Proposal characteristics
7. Entrepreneur & team characteristics
Screening criteria used by Venture Capitalists
46
# Sources of Capital
A.k.a. business angels or informal risk capitalists
Angel investors
47
# Sources of Capital
They are typically entrepreneurs, retired corporate executives, or professionals who have a net-worth of more than $1M and an income of more than $100,000 a year
angel investors
48
# Sources of Capital
They are self-starters and they are trying to perpetuate the system that made them successful
angel investors
49
# Sources of Capital
They seek other non-financial returns such as:
* creation of jobs in areas of high unemployment,
* development of technology for social needs (e.g., medical or energy),
* urban revitalization,
* minority or disadvantaged assistance,
* and personal satisfaction from assisting
entrepreneurs.
Angel investors
50
# Sources of Capital
Research studies indicate they use a network of friends to find worthwhile ventures to invest on.
Angel investors
51
# Angel investors
5 types of angel investors
* corporate
* entrepreneurial
* enthusiast
* micromanagement
* professional
52
# Type of Angel investors
* Typically, are senior managers at Fortune 1000 corporations who have been laid off with generous severances or have taken early retirement.
* Aside from receiving cash, some entrepreneurs persuade them to occupy a senior management position.
corporate
53
# Type of Angel investors
* Most of these investors own and operate highly successful businesses.
* These angels will seldom look at ventures outside their expertise and will only participate in a handful of investments.
entrepreneurial
54
# Type of Angel investors
* These investors normally take a seat in the board of directors but rarely assume management duties.
* Typical investments: $200,000 to $500,000, and more as the venture progresses.
Entrepreneurial
55
# Type of Angel investors
* Most of these investors are 65 or older, less calculating than entrepreneur angels, simply like to be involved in deals.
* For them investing is a hobby. They typically play no role in management or a place in the board.
* The size of investments are relatively smaller since these investors spread themselves across numerous companies.
Enthusiast
56
# Type of Angel investors
* They are very serious investors.
* Because most have successfully built a company, they attempt to impose the tactics that worked for them on their portfolio companies.
* They do not seek a management role, but usually demand a seat on the board of directors.
* If business is not doing well, they will try to bring in new managers.
micromanagement
57
# Type of Angel investors
* pertains to the occupation of the investors, such as, doctors, lawyers, or in few cases, accountants.
* They can be unpleasant to deal with when the going gets rough.
* They rarely seek a board seat and invest in several companies at one time.
professional
58
# Angel Investors: What is this?
* Angels engage in smaller financial deals.
* Angels prefer seed stage or start up stage.
* Angels invest in various industry sectors.
* Angels are located in local geographic areas.
* Angels are genuinely interested in the entrepreneur.
Pros
59
# Angel Investors: What is this?
* Angels offer no additional investment money.
* Angels cannot offer any national image.
* Angels lack important contacts for future leverage
* Angels may want some decision making with the entrepreneur.
* Angels are getting more sophisticated in their investment choices.
Cons
