To be able to distinguish among the five forms of entrepreneurial capital To consider how to attract financing from your family and how to bootstrap a business To identify how informal investors differ from other parts of the funding community To differentiate between debt and equity as methods of financing To examine commercial loans, social lending and public stock offerings as sources of capital To understand the stages of venture investing To study the market for venture capital and to review venture capitalists’ evaluation criteria for new ventures To discuss the importance of evaluating venture capitalists for a ‘best fit’ selection To discuss private placements as an opportunity for equity capital To examine the business angel market To describe new forms of entrepreneurial capital beyond financial capital To be familiar with Islamic finance and micro-credit To understand the criteria used by impact investors To appreciate the need for raising natural capital as part of an entrepreneurial venture.

1. Forms of entre-
preneurial capital

3. Chapter 14
Sources of capital for
entrepreneurial ventures

4. Objectives
1. To be able to distinguish among the five forms of entrepreneurial capital
2. To consider how to attract financing from your family and how to bootstrap a business
3. To identify how informal investors differ from other parts of the funding community
4. To differentiate between debt and equity as methods of financing
5. To examine commercial loans, social lending and public stock offerings as sources of capital
6. To understand the stages of venture investing
7. To study the market for venture capital and to review venture capitalists’ evaluation criteria for new
ventures
8. To discuss the importance of evaluating venture capitalists for a ‘best fit’ selection
9. To discuss private placements as an opportunity for equity capital
10. To examine the business angel market
11. To describe new forms of entrepreneurial capital beyond financial capital
12. To be familiar with Islamic finance and micro-credit
13. To understand the criteria used by impact investors
14. To appreciate the need for raising natural capital as part of an entrepreneurial venture.

5. But first
• Where does the money for new start-ups
usually come from?
• What about later as the company grows?
• Can you think of some creative ways to raise
funds?
• Has anyone ever used crowdfunding?
• Have you ever tried to raise money from your
family?
?

6. The times,
they are a-changin’
• Funding in the new era is not simply be
thrown at companies in the hope that
one in 10 is wildly successful.
• Today, funding goes only to
entrepreneurs who thoroughly
understand their customers’
requirements and who can ensure the
funder from the beginning that every
product delivers on its value.

7. Forms of entre-
preneurial capital

8. Sources of
financial capital
• Where to find start-up capital?
• What type of capital to use and when?
• Entrepreneurs have a number of sources of
financial capital as their ventures develop.
• The level of risk and the stage of the firm’s
development help determine the appropriate
source of financing for entrepreneurial
ventures.
• On the left are sources of capital we cover in
this chapter.
Each in its own time
Family
Bootstrap
Informal investors
Banks
Venture capitalists
Angel investors
Micro-credit
Peer-to-peer
Crowdfunding
Natural capital

9. • a
Sources of
financial capital
• Entrepreneurs have a number
of sources of financial capital as
their ventures develop.
• Notice that the level of risk and
the stage of the firm’s
development should determine
the appropriate source of
financing for the
entrepreneurial ventures.

10. How to get money
from your family
• Have you heard of the ‘kitchen table
pitch’?
• Know their motivations.
• Debt is better than equity for relatives
• Do follow-up with a written memo.
• Try to treat them as if they were
strangers. Have a lawyer prepare the
promissory note.
•
• Try to avoid a repayment schedule.
• Don’t give voting stock.
• Be sure to read Chapter 7 on Family
Business.

11. Informal
investing
• Informal investors are often from the 4Fs:
–Friends, family, founders and ‘foolhardy investors’
–Neighbours, work colleagues and even strangers
• Expected returns are affected by altruism
–Strangers expect higher returns than parents
–Men expect higher returns than women
–Older persons expect lower returns than younger
–Entrepreneurs expect higher returns than non-
entrepreneurs

12. Debt versus equity?
• Equity financing is best
in the early start-up
stages
• Use of debt to finance a
new venture involves a
payback of the funds
plus a fee (interest) for
the use of the money
(for example, to a
bank).

13. Debt financing through banks
• Short-term borrowing for working capital.
• Long-term debt to finance the purchase
of property or equipment.
• Banks will ask:
–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?

14. Other forms
of debt
financing

16. Equity financing
•What kinds of people or
organisations might buy
ownership in a new venture
and why?
•Can you sell shares in your
business before you make
money?
?

17. Equity financing
• No obligation to repay
• But, the entrepreneur gives up part
ownership
• Equity capital can be raised in two ways:
–Public stock offerings, called initial public offering
(IPO)
–Private placements, which involves private
investors purchasing shares or sometimes bonds
Early 19th-century German quity ledger

18. Early 19th-century German quity ledger
Equity financing

19. Public stock offering (by IPO)
• ‘Initial public offering’ (IPO)
• First-ever sale of shares to the public
• ‘Going public’ or ‘floating’
• The IPO market has been a rollercoaster since the
late 1990s
Nasdaq welcomes Facebook’s
IPO.

20. Private
placements
• The ideal small-business candidate
for private placement is a company
looking for growth or expansion
funding.
• A private placement is suitable
when you need an injection of
capital to jump to the next level of
growth and you have a proven
track record of profitability.

21. Venture capital
in the new era
• There was a time when an entrepreneur
with a bright idea could just walk into a
venture capitalist’s office in Silicon Valley
or Shanghai and get a heap of money to
develop that idea.
• Now those days are gone.
• But we are still building the same
innovative and world-changing products

22. Venture capital
in the new era
• Venture capitalists can provide:
–capital for start–ups and expansion
–market research and strategy
–management consulting functions
–contacts with prospective customers and suppliers
–assistance in negotiating technical agreements
–help in management and accounting controls
–help in employee recruitment
–help in risk management
–guidance with government regulations.

23. Funding
stages with VCs

24. Myths about VC
• Venture capital firms want to own
control of your company and tell
you how to run the business.
• Venture capitalists are satisfied
with a reasonable return on
investments.
• Venture capitalists are quick to
invest.
• Venture capitalists are interested in backing new ideas or high-technology
inventions – management is a secondary consideration.
• Venture capitalists need only basic summary information before they make
an investment.

25. Venture
capitalists’
objectives
• Different objectives from other capital lenders.
• Interested in security and return on investment (ROI).
• Best advice: delay outside investment as long as possible and to build
as much value as you can into your business before you seek VC
• Table 14.3 provides some commonly sought targets.
• 20-30% ROI would not be considered too high

26. Top factors VCs use to
evaluate your proposal
• Timing of entry
• Key success factor
stability
• Educational
capability
• Lead time
• Competitive rivalry
• Entry wedge imitation
• Scope
• Industry-related
competence
• See detailed Table 14.4
Factors in venture
capitalists’ evaluation
process

27. Business
angels
• Wealthy people
looking for investment
opportunities.
• Range from passive
(backing others’
judgements) through
to hands-on
• Angels invest as individuals (often as part of a group) whereas venture capital
generally comes via a company

28. Types of angel investors

29. New forms of
entrepreneurial capital
• Most textbooks stop here, but we carry
on!
• More to capital-raising than venture
capital or bank loans.
–Islamic finance
–Finding an ‘impact investor’
–Micro-credit
–Peer-to-peer lending
–Crowdfunding
–Raising natural capital

30. Islamic finance
Iran’sMelliBank
Engaging in entrepreneurial endeavours is encouraged
and even demanded in the teachings of Islam.

31. Impact investing
• Impact investing that prevents future
market meltdowns and avoids climate
change.
• Investing in recycling, solar, wind, water
and biofuels, greener transportation.
• Formerly called socially responsible
investing (SRI), sustainable investing
or ethical investing.
• Centres on the Principles for
Responsible Investment (PRI)
At
3rd pages add
glossary:
impact investor,
SRI,
PRI

32. Micro-credit
• Very small loans to
entrepreneurs who lack
collateral
• Informal financial service
providers
• Member-owned organisations
• Non-governmental organisation
(NGOs)
• Banks servicing ‘pre-banking
customers’
Available from Asia/Pacific Cultural Centre for UNESCO (ACCU).

33. Peer-to-peer lending
• Social lending removes costly
intermediaries known as banks
• Bringing pools of borrowers together
with individual investors.
• Loan of $1000 to a specific
borrower is often funded by $25
investments from 40 different
lenders.
• Social lending sites charge fees of
2-4%
Lending Club is the world’s largest online marketplace connecting borrowers and investors.

34. • Kickstarter $1b+ since
2009.
• Entrepreneurs collect
funds through the
Internet by ‘open
invitation’ to finance
their projects/ventures
• Usually there is a
reward to the funding
community for success

35. Raising natural capital
•Natural capital is typically sold, used, discarded and then
dumped back onto the ground.
•Entrepreneurial activity does not actually create or destroy the
Earth’s resources. It only changes the location, form and value
(usually it is downgraded value) of those resources.
•Since 1997, we have lost at least US$20 trillion a year globally in
non-marketed ecosystem services.
•Every product has a ‘hidden history’ that we rarely appreciate

36. Raising natural capital
Examples of Natural Capital
Atmospheric stabilisation CO2/O2 balance, stratospheric ozone, SO2 levels
Climate stabilisation Greenhouse gas production, cloud formation
Disturbance avoidance
Storm protection, flood control, drought recovery and how vegetation structure
helps control environmental variability
Water stabilisation Supply water for agriculture use (irrigation), industrial use or transportation
Water supply Water storage by watersheds, reservoirs and aquifers
Erosion control and sediment
retention
Prevention of soil loss by wind, runoff, storage of silt in lakes, wetlands, drainage
Soil formation Weathering of rock and accumulation of organic material
Nutrient cycling Nitrogen fixation, nitrogen/phosphorus, etc. nutrient cycles
Waste treatment Waste treatment, pollution control, detoxification
Pollination Providing pollinators for plants
Biological control Predator control of prey species
Habitat
Nurseries, habitat for migratory species, regional habitats for locally harvested
species, wintering grounds
Raw materials Lumber, fuels, fodder, crops, fisheries
Genetic resources
Medicine, products for materials, science, genes for plant resistance and crop
pests, ornamental species
Recreation Ecotourism, sports fishing, swimming, boating, etc.
Cultural Aesthetic, artistic, education, spiritual, scientific, Indigenous sites

37. Natural capital in a can of coke
1. Bauxite mined in Australia
2. Ore carrier carries it to Sweden or
Norway
3. Hydroelectric dams provide cheap
electricity to smelt into aluminium metal
4. Shipped to roller mills in Germany.
5. Heated to 500 Celsius and rolled to
eighth of an inch.
6. Sent to England, where sheets are
punched and formed into cans
7. Washed, dried, painted with a base
coat, and then product information.
8. Lacquered, flanged, sprayed inside with
a protective coating
9. Palletised, forklifted and warehoused.
10. Shipped to the bottler, where they are
washed and cleaned
11. Filled with water, flavoured syrup,
phosphorus, caffeine,carbon dioxide gas.
12. Sugar is harvested from beets in France
13. Phosphorus comes from Idaho
14. Caffeine is shipped from England.
15. Cartons are made from Sweden or Siberia
16. Palletised again, shipped to distribution
warehouse, and supermarket
17. The consumer buys 12 ounces of the
phosphate – tinged, caffeine-impregnated,
caramel-flavoured sugar water.
18. Drinking takes a few minutes; throwing the
can away takes a second.