Lecture on Financing Entrepreneurial Ventures

Introduction

• Speaker: Dr. Adam Jae Bok
• Focus: Real details of finance for entrepreneurial ventures
• Topics:
  • Internally generated funding
  • External capital
  • Sources of capital
  • Valuation and exit

Common Misconceptions about Business Financing

1. VCs and Angel Investors

   • Misconception: They fund most businesses.
   • Reality: Vast majority of companies do not receive such funding.

2. Banks Lending to Startups

   • Misconception: Banks are eager to lend.
   • Reality: Too high risk; loans often require personal guarantees.

3. SBA Loans

   • Misconception: SBA lends money to startups.
   • Reality: SBA guarantees loans but doesn’t directly lend.

4. Single Source of Funding

   • Misconception: Entrepreneurs use one source of funding.
   • Reality: Variety of funding mechanisms are necessary.

5. Government Grants

   • Misconception: Plentiful for startups.
   • Reality: Grants are specific, based on socio-demographics, geography, or technology.

Internally Generated Financing

• Types:
  • Self-Financing: Personal funds
  • Bootstrapping: Operational funds

Self-Financing

• Most Common Source: Founders' own funds

• Sources:

  • Personal savings
  • Credit card debt
  • Personal assets (sell/pledge)
  • Second mortgage
  • Second job or consulting

• Advantages:

  • Quick, no need for partners
  • No profit sharing
  • Simple exit opportunities

• Disadvantages:

  • No outside validation
  • No partners to share load
  • Limits growth speed
  • High risk of personal loss

Bootstrapping

• Concept: Use only available resources

• Benefits:

  • Reduces ownership dilution
  • Extends operational runway
  • Unveils hidden problems

• Rules for Bootstrapping:

  • Get operational quickly
  • Focus on breakeven/cash-generating projects
  • Offer high-value products
  • Direct personal selling
  • Avoid perfect team hiring
  • Focus on cash flow
  • Build relationships with banks

• Methods:

  • Lease instead of buying
  • Trade credit
  • Use other's facilities/equipment
  • Pre-sell products
  • Factoring accounts receivable
  • Convert debt to revenue
  • Equity for vendors (not recommended)

Examples

• Pre-selling: Tomotherapy machine sold to hospitals
• Factoring: Receive immediate cash by selling receivables
• Business Models Using Customer Cash:
  • Real estate, attorneys (retainer fees)
  • Gym memberships
  • Reselling market reports
  • Scarcity models

Introduction to External Capital

• Venture Capital:

  • High-risk, fast growth
  • Many VC-funded companies fail

• When External Capital is Needed:

  • Life sciences (expensive R&D)
  • Enterprise software (development and distribution)
  • Property-intensive industries
  • Long-term research or large infrastructure

• Types of External Capital:

  • Debt: From banks/lenders, fixed sum with interest
  • Equity: From investors, involves ownership

Debt vs. Equity

• Debt:

  • Stable investment
  • Limited upside, first claim on bankruptcy
  • Interest rates: 5-15%

• Equity:

  • Ownership
  • Unlimited upside, high risk
  • Higher expected return: 50% or more per year

• VC Approach:

  • Invest in specific sectors
  • Manage risk through expertise

Conclusion

• This lecture sets the foundation for financing discussions.
• Future topics:
  • Detailed exploration of debt and equity
  • Valuation and other related topics