GAINING FINANCIAL SUPPORT FOR AN OPPORTUNITY

Session 14

Sources and Types of Finance

• Investment capital is available from a number of sources, markets expand to ensure that (generally) supply expands to meet demand.

• Suppliers differentiate themselves not in what they supply, but in the way in which they supply it, the supplementary services they offer and what they expect in return.

• Considerations are: – The risk of the investment (probability that the return will

be less than expected);– The opportunity cost (the return that his potentially been

missed because alternative investment cannot be made).

Sources and Types of Finance

• Investment capital is available from a number of sources, markets expand to ensure that (generally) supply expands to meet demand.

• Suppliers differentiate themselves not in what they supply, but in the way in which they supply it, the supplementary services they offer and what they expect in return.

• Considerations are: – The risk of the investment (probability that the return will

be less than expected);– The opportunity cost (the return that his potentially been

missed because alternative investment cannot be made).

Risk versus Rate of Return

• Investors are positioned at different points along the risk- rate of return continuum. This depends upon the type and level of capital they provide and the level of risk they are prepared to accept.

• While entrepreneurs complain about a ‘funding gap’ , investors complain that entrepreneurs are too optimistic about

Sources of finance

• Entrepreneurs own capital – student loans; personal savings; lump sum from capital gains; redundancy money; inherited; liquidated holding from previous ventures.

• Family and friends • Internal Capital Networks – within communities, may

be subject to specific cultural norms and patterns of control.

• Retained capital – how this is managed depends on the company structure. The capital may be the entrepreneurs, but may also be the property of other investors.

Sources of Finance

• Business Angels – often equity based; private individuals who have money to spare. May also have knowledge and skill to share.

• Retail Banks – High Street Banks, will usually provide capital in the form of a load – they may seek collateral to reduce the risk.

• Corporate Banks – look for bigger investment opportunities or long range loans. May look for a significant commitment form the entrepreneur and asset security.

Sources of Finance

• Venture Capital – usually appropriate for companies seeking large investment and a fast rate of return. Usually equity based, with a clear exit strategy.

• Public flotation – offering shares for sale on the stock market, usually a minimum of £5million.Smaller companies can trade on the Alternative Investment Market (London) and its various European and International equivalents.

• Government - Governments invest in providing support for start-up companies (through training; guarantee schemes and other quasi-governmental bodies).

Sources of Finance

• Capital Partnerships – investment in a business as a strategic partner.

• Micro-finance – small loans (generally less than £50) to individuals or families in the developing world to help them to start a business. Its been very successful.

What might investors need to know?

• Will it make any money? But also:

• How much can they reply on the information presented to them by the entrepreneur? There is always information asymmetry. They experience ‘bounded rationality’ or decide on gut-feeling and instinct.

• What would you want to know?

Key questions:

• Is the venture the right type?– Do I need to know anything about the sector?– What stage of development is the business at?– Is it a new start-up or an MBO?

• What investment is required?– Is the investor the right type for the loan/investment

required?

• What return is likely?– How has the return been calculated over what period of

time?– Is it likely to reach target based on the management team? – Can you cope with the level of risk?

Key Questions

• What is the investment funding?– New start? Expansion? R&D? – Is it an aggressive growth strategy or incremental growth?

• What will they use the cash for?– New project development?– To cover a cash flow shortfall?– Funding a marketing or sales campaign?

• What is the potential for the new venture?– What is the market potential?– How much do you trust the team managing it?

Key Questions

• What are the risks?– How sure are you that it will deliver the return

anticipated?– How well have they anticipated the demand for this

product or service?– Do they need other expert opinion?– How quickly will you be able to exit the project?

• How does the investor get in/out?– How will they want the money, a lump sum or

instalments?– How will I be repaid? Shares; cash (lump sum/installments)

Key Questions

• How will I be able to monitor progress?– Business plan; progress reports; financial statements?

• What control will I have?– Monitoring is only of limited value, what if I need to act?– Will I be on the board? Can I buy or sell my shares?

• Communication– Even if the idea is sound, venture capitalists reject 95%

of proposals made to them. Communicating the message and the potential of the investment is vital.

Key Questions

• How will I be able to monitor progress?– Business plan; progress reports; financial statements?

• What control will I have?– Monitoring is only of limited value, what if I need to act?– Will I be on the board? Can I buy or sell my shares?

• Communication– Even if the idea is sound, venture capitalists reject 95%

of proposals made to them. Communicating the message and the potential of the investment is vital.

Key Questions

• How will I be able to monitor progress?– Business plan; progress reports; financial statements?

• What control will I have?– Monitoring is only of limited value, what if I need to act?– Will I be on the board? Can I buy or sell my shares?

• Communication– Even if the idea is sound, venture capitalists reject 95%

of proposals made to them. Communicating the message and the potential of the investment is vital.

Read the article

• “London Evening Standard to go free”

• What do you think of the strategy?