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Case Study: New Venture Financing

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9-802-131 REV: AUGUST 1, 2006 HOWARD H. STEVENSON MICHAEL J. ROBERTS New Venture Financing One of the most common issues which an entrepreneur faces revolves around securing financing for the new venture. The questions of how and when to raise money and from whom are frequent topics of concern. This piece will attempt to describe some common sources of capital, and the conditions under which money is typically lent or invested. Overview As in most transactions, the owners of capital expect to get something in return for providing financing for the venture. In evaluating potential opportunities, the providers of funds will typically use some form of a risk/return model. That is, they will demand a higher return when they …show more content…

Some specialized firms provide “seed capital.” Most venture capital firms require that a business move beyond the idea stage before they will consider financing it. Yet, some businesses require a good deal of work, and money, to get from the concept phase to the point where they can obtain venture capital financing. These seed funds can provide this kind of capital, as can “angel” investors (see below) and friends and family. Bootstrapping First, it is worth pointing out that many successful ventures receive no outside funding of any kind. Entrepreneurs use their own savings, credit cards, a second mortgage, even personally guaranteed loans, to start their businesses. The appeal of this strategy is clear: 100% ownership of the equity. 2 New Venture Financing 802-131 Amar Bhidé conducted a study1 in the late 1980s that found that 80% of the 500 companies on Inc. Magazine’s list of the 500 fastest growing companies were started—and grown—with no outside equity capital. Indeed, the median start-up capital required was $10,000. Certainly, one factor that enables a bootstrap approach is the selection of a business without a particularly deep cash flow trough. Thus, inventing a new drug or starting a semiconductor manufacturing enterprise are businesses that would be difficult to bootstrap, simply because of the huge amounts of capital required. The ideal business for

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