Keys to Financing the New Venture
Alec Johnson, Ph.D.
University of St. Thomas
The Problem
“Small business management is cash flow
management.” Dr. Robert Pricer, Weinert Applied Ventures Program, Unviersity of
Wisconsin
“Cash is King.” Dave Stassen, Partner, St. Paul Venture Capital
“You’re not an entrepreneur until you’ve written payroll
checks on Friday and spent the weekend collecting the
cash to cover them.” Keith Streckenbach, founder and CEO of
PharmacyOneSouce.com
Entrepreneurial Finance vs.
Corporate Finance
Differences from Corporate Finance
–
Diversification and Value
–
Involvement of Investors
–
Harvesting
The Problem - Objectives
Minimize Cost Maximize
Return
Maintain
Control
Maximize
Ownership
Minimize
Involvement
Minimize Risk

Most Expensive type of
financing
Sources of Debt Financing
Friends and Family
Banks
Leasing
Factoring
Bank Financing
Commercial banks are the largest source of
external capital for growing firms.
Problems:
–
Lack of collateral
–
Lack of earnings history
Leasing
Often used technique to acquiring assets without
having to purchase them.
Two types of Leases:
–
Operating Lease
–
Capital Lease
Factoring
Factors buy company’s accounts receivables at
a discount.
Recall R&R case.
Gets cash to company quickly, but must have
cost of factor available in profit margin.
Equity

Preference in liquidation
Types of Equity Instruments
Preferred Stock Characteristics:
–
Looks a lot like Debt!
–
Used by Venture Capitalists to gain position in
liquidity event while minimizing risk.
Types of Equity Investors
Angel Investors
Venture Capitalists
Types of Equity Investors: Angels
Typical Angel Investor
–
Private individual (not an institutional fund)
–
Age: 47 –54 years
–
Gender: Male
–
Net Worth: $1,000,000 +
Types of Equity Investors: Angels
Typical Angel Investor
–
Education: Bachelors or greater
–
Average Investment: $59,000
–
Preferred Stage: Start-up (56%) and infant or
young (24%)

Required Rate of Return: 10X in 3-5 years.
–
Typically invest using Preferred Stock
Venture Capital Investments, Q2 2001
2.2% of Venture Capital invested in Midwest!
0
5
10
15
20
25
30
Communications
and Networking
Consumer and
Business
Services
Biopharm Semiconductors Med Sftwr Retailers Consumer &
Bus.
Dollars
Share
Timing – Sources of New Venture
Financing*
Development Start-Up Early
Growth
Rapid Growth Exit
Entrepreneur/
Friends/Family
Angels/Partner
Banks/Lessors