MGT3960 Entrepreneurship Management Fall 2015

1. What are various sources of equity investment?

Public Stock:

Holding shares in publicly traded companies. Usually associated with larger corporations such as Ford Motors, Nike, Citibank. They can trade freely on the New York Exchange and NASDAQ. Smaller companies also trade on these exchanges. The company can sell or buy stocks. It is no longer a private held company.

Private Equity:

• Venture Capital: Capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.

• Leveraged Buyout: The purchase of a controlling share in a company by its management, using outside capital.

• Growth Capital: Usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business

• Special Situations: Usually referred to a company where value can be unlocked as a result of a one-time opportunity (e.g. change in government regulations or market dislocation).

• Mezzanine Capital: Any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares

2. What guidelines should entrepreneurs follow when they are selecting a venture capitalist?

The textbook mentions 6 different guidelines to follow when selecting the appropriate venture capitalist:

1. Scrutinize your business with a critical eye: Work out solid financial projections to prove the results to the venture capitalist.
2. Beef up management: Hire staffers who can make up the deficits.
3. Keep a high profile so the VCs will visit: Make your company look good inside and out to attract potential investors.
4. Target the search: Look for firms that specialize in the industry and the size of investment.
5. Keep a lookout: Look for smaller VC firms that may be more flexible and more receptive to investing in a company.
6. Investigate possible venture partners: Find out what the needs are for the venture capitalist so when a visit is made, the meeting can be more successful. 

7. What are the differences between a single-hit and a home-run business?

A single hit business is one that does not have a sustainable business model or product. A good example of this would be the selfie-stick. A home-run business, on the other hand, would be one like Apple, which is built on a firm foundation and builds off of its products. 

8. What are the four key factors that a banker seeks before providing a corporate loan? 

The four Cs of lending are:

1. Characters: That includes traits such as talent, reliability, and honesty.
2. Cash Flow: To cover debt throughout the term of the obligation.
3. Collateral: To support at least part of the loan if the company is unable to meet its obligations.
4. Contribution: By the entrepreneur towards the funding requirement.

1. What sources of funding are available to entrepreneurs at the early stage of the Company?

1. Family/Friends
2. Small business grants
3. Loans
4. Lines of credit.
5. Angel investors
6. Venture capital
7. Form a partnership
8. Commit to a major customer

2. What are “virtual” companies? What tools help them function? Why are they of interest to an entrepreneur?

A company  that uses Technology to run a business. They usually don’t have official working HQ.

This is interesting because cost is low and these companies are usually the ones that are able to adapt the best to the world that is changing around them.

3. Describe seven techniques for bootstrapping that you could use if you started a company.

Bartering for goods and services-  Good or Service acts as payment

Renting or leasing equipment- Renting to cut cost

Used equipment- Buying used to save money

Access to Expensive Equipment- Accessing equipment through a connection so that you can use expensive tech/equipment.

Cooperative Purchases- Sharing with other companies

Outsourcing- Using other companies to purchase services the company doesn’t need often

Credit Cards- Having a Credit Card

4. Why is bootstrapping important for (a) closely held companies and (b) early-stage, high-grow companies seeking equity investors?

Bootstrapping is when a company is able to do a lot with a little bit of capital. This is important because it is essential that start-ups can manage to function without relying on capital.it also is important because it shows that the entrepreneur’s commitment to show his/her company is succeeding without using money.

This is great for investors to see because it is evidence that the cash that they are investing will in actuality go far. They will feel safe knowing that there money is not being spent carelessly and is actually benefiting the company in the best way possible.

5. What is meant by factoring of purchase orders?

Purchase orders can be used to see how creditable a company is and how interested the market is in purchasing this product or service. To a private investor this is a strong factor that will  determine it they should or should not invest in the business. Many private investors actually believe that this is some sort of safety net because they know that with their loan that the have some sort of a promise that the company will be generating revenue.

What sources of funding are available to entrepreneurs at the early stage of the company?

• Personally Secured Bank Loans: A loan that has to be paid back with interest and may require the entrepreneur to personally guarantee part or all of the money.
• Self-funding: Using personal resources, savings or personal equity.
• Bootstrapping: Using existing personal resources and not relying on investments.
• Moonlighting and Consulting: Using the capital from the owner’s other full time job or using their knowledge to consult to other firms while their business grows and provides a stable income.
• Family and Friends/Angels: Can be a good source for start-up capital because they are not as worried about quick profits as are professional investors. Angels are high-net-worth individuals who have some funds they are willing to risk in start-up companies.
• Micro-Equity, Micro-Loans: An entrepreneur without a business plan can submit an idea on the web sites of micro-equity organizations where they can provide you with cash to live near their offices for a few months and develop plans and work on a prototype. Micro-loan is the opportunity to be lent a small amount of money if you don’t have much or any collateral by anyone.
• Factoring and Supplier Financing: Alternative to conventional bank loans. You can use purchase orders to guarantee the debt instead of providing personal or asset-backed guarantees.
• Government Programs: Federal agencies which help small businesses by aiding them and providing them with loans and venture capital financing.

What are “virtual” companies? What tools help them function? Why are they of interest to an entrepreneur?

• Virtual companies are companies that use the growth of the Internet to conserve cash and maintain flexibility in their plans. They are used to help reduce the level of monthly fixed costs.
• Virtual companies can be supported by the many management tools which can be accessed free of charge in the Internet. They can also use cloud computing which are more sophisticated management tools. Skype can be used for video conferencing, BaseCamp for projects and document management, and ADP for payroll and tax management. They can also find experts on the Internet or through personal recommendations.
• This type of company can be very appealing to entrepreneurs because they have lower operating costs. In my daycare I have to pay rent, electricity, water, etc. but a virtual company has no offices, low number of employees, low legal costs, etc.

Describe seven techniques for bootstrapping that you could use if you started a company?

• No or Low Rent: Do not spend on a separate place for an office or workplace. You can use your residence when starting off. Avoid signing long-term leases in expensive locations. For my daycare I use half of the space of the house for the children and the other half for personal use. This was an important decision in the type of license I chose for the daycare.
• Used Equipment: In the early stages it is possible to find used equipment that can fill short-term needs. You can also find used office furniture. Companies that are in bankruptcy or moving will often give away furniture or sell at low prices. When I was opening my second daycare I was very fortunate to have someone from a center in Harlem call me and ask if I wanted their furniture because they were closing. It is important to have a good network to be able to get unique opportunities.
• Cooperative Purchases: Find ways to work with other small companies to create a buyers club to get access to reduced costs.
• Outsourcing: Contract professional services that are not required full time from outside sources as needed. These services can include legal and accounting. For my daycare I use a legal company that I pay a fee to every month but have access to their services whenever I need them. The small monthly fee provides me with an inexpensive way to have unlimited legal advise and papers written and a large discount if I need legal representation in the future.
• Credit Cards: Credit cards can be used if equity or bank loans are not available. By carrying more than one credit card you can considerably boost the total amount you can use.
• Suppliers’ and Customers’ Help: Suppliers may be willing to help in many ways in the hope that the new company will become a major and loyal customer. When I was starting my daycare I created a good relationship with the managers of an early learning store that called me when they were able to sell furniture and large items that were on display in the store for a great price.
• Access to Expensive Equipment: Some universities and government institutions have labs and programs, which can help small companies by allowing them access to their equipment.

Why is bootstrapping important for (a) closely held companies and (b) early-stage, high-growth companies seeking equity investors?

• Closely held companies: To retain control of the company.
• Early-stage, high-growth companies: Used to defer the stage of equity funding.

In my experience I did not want to lose or share any control over my daycares, which is why I used many of the bootstrapping techniques explained in this chapter. I am very grateful I did that because now that the daycares are making great income I am able to keep all of the profit.

What is meant by: factoring of purchase orders?

If you are unable or unwilling to provide personal guarantee for a loan you can provide them with purchase orders from reputable customers to secure funding. They lend only a percentage of the sales order with high interest rates. The payments go directly from your customers to the lenders.

How can suppliers help in providing working capital?

Suppliers may be able to give you a line of credit, which is very important if you don’t have the cash on hand. You must show that you have reputable customers that will provide you with steady purchase orders.

What sources of funding are available to entrepreneurs at the early stage of the company?

• Personally Secured Bank Loans: A loan that has to be paid back with interest and may require the entrepreneur to personally guarantee part or all of the money.
• Self-funding: Using personal resources, savings or personal equity.
• Bootstrapping: Using existing personal resources and not relying on investments.
• Moonlighting and Consulting: Using the capital from the owner’s other full time job or using their knowledge to consult to other firms while their business grows and provides a stable income.
• Family and Friends/Angels: Can be a good source for start-up capital because they are not as worried about quick profits as are professional investors. Angels are high-net-worth individuals who have some funds they are willing to risk in start-up companies.
• Micro-Equity, Micro-Loans: An entrepreneur without a business plan can submit an idea on the web sites of micro-equity organizations where they can provide you with cash to live near their offices for a few months and develop plans and work on a prototype. Micro-loan is the opportunity to be lent a small amount of money if you don’t have much or any collateral by anyone.
• Factoring and Supplier Financing: Alternative to conventional bank loans. You can use purchase orders to guarantee the debt instead of providing personal or asset-backed guarantees.
• Government Programs: Federal agencies which help small businesses by aiding them and providing them with loans and venture capital financing.

What are “virtual” companies? What tools help them function? Why are they of interest to an entrepreneur?

• Virtual companies are companies that use the growth of the Internet to conserve cash and maintain flexibility in their plans. They are used to help reduce the level of monthly fixed costs.
• Virtual companies can be supported by the many management tools which can be accessed free of charge in the Internet. They can also use cloud computing which are more sophisticated management tools. Skype can be used for video conferencing, BaseCamp for projects and document management, and ADP for payroll and tax management. They can also find experts on the Internet or through personal recommendations.
• This type of company can be very appealing to entrepreneurs because they have lower operating costs. In my daycare I have to pay rent, electricity, water, etc. but a virtual company has no offices, low number of employees, low legal costs, etc.

Describe seven techniques for bootstrapping that you could use if you started a company?

• No or Low Rent: Do not spend on a separate place for an office or workplace. You can use your residence when starting off. Avoid signing long-term leases in expensive locations. For my daycare I use half of the space of the house for the children and the other half for personal use. This was an important decision in the type of license I chose for the daycare.
• Used Equipment: In the early stages it is possible to find used equipment that can fill short-term needs. You can also find used office furniture. Companies that are in bankruptcy or moving will often give away furniture or sell at low prices. When I was opening my second daycare I was very fortunate to have someone from a center in Harlem call me and ask if I wanted their furniture because they were closing. It is important to have a good network to be able to get unique opportunities.
• Cooperative Purchases: Find ways to work with other small companies to create a buyers club to get access to reduced costs.
• Outsourcing: Contract professional services that are not required full time from outside sources as needed. These services can include legal and accounting. For my daycare I use a legal company that I pay a fee to every month but have access to their services whenever I need them. The small monthly fee provides me with an inexpensive way to have unlimited legal advise and papers written and a large discount if I need legal representation in the future.
• Credit Cards: Credit cards can be used if equity or bank loans are not available. By carrying more than one credit card you can considerably boost the total amount you can use.
• Suppliers’ and Customers’ Help: Suppliers may be willing to help in many ways in the hope that the new company will become a major and loyal customer. When I was starting my daycare I created a good relationship with the managers of an early learning store that called me when they were able to sell furniture and large items that were on display in the store for a great price.
• Access to Expensive Equipment: Some universities and government institutions have labs and programs, which can help small companies by allowing them access to their equipment.

Why is bootstrapping important for (a) closely held companies and (b) early-stage, high-growth companies seeking equity investors?

• Closely held companies: To retain control of the company.
• Early-stage, high-growth companies: Used to defer the stage of equity funding.

In my experience I did not want to lose or share any control over my daycares, which is why I used many of the bootstrapping techniques explained in this chapter. I am very grateful I did that because now that the daycares are making great income I am able to keep all of the profit.

What is meant by: factoring of purchase orders?

If you are unable or unwilling to provide personal guarantee for a loan you can provide them with purchase orders from reputable customers to secure funding. They lend only a percentage of the sales order with high interest rates. The payments go directly from your customers to the lenders.

How can suppliers help in providing working capital?

Suppliers may be able to give you a line of credit, which is very important if you don’t have the cash on hand. You must show that you have reputable customers that will provide you with steady purchase orders.