Getting Financing or Funding -- Unique Marketing Issues (Session 17-18) [Week 9]

GETTING FINANCING OR FUNDING

The Importance of Getting Financing or Funding

      The Nature of the Funding and Financing Process

Ø  Few people deal with the process of raising investment capital until they need to raise capital for their own firm.

o   As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area.

      Why Most New Ventures Need Funding

Ø  There are three reason most new ventures need to raise money during their early life

o   Three three reasons are shown on the following slide

Alternatives for Raising Money for a New Venture

Source of Personal Financing

      Personal Funds

Ø  The vast majority of founders contribute personal funds, along with sweat equity, to their ventures.

o   Sweat equity represents the value of the time and effort that a founder puts into a new venture.

      Friends and Family

Ø  Friends and family are the second source of funds for many new ventures

      Bootstrapping

Ø  A third source of seed money for a new venture is referred to as bootstrapping.

Ø  Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.

Ø  Many entrepreneurs bootstrap out of necessity.

Preparing to Raise Debt or Equity Financing

Step 1 → Determine precisely how much money is needed

Step 2 → Determine the type of financing or funding that is the most appropriate

Step 3 → Develop a strategy for engaging potential investors or bankers

Two Most Common Alternatives:

-          Equity Funding → Means exchanging partial ownership in a firm, usually in the form of stock, for funding

-          Debt Financing → is getting a loan

Preparing An Elevator Speech

Purpose:

-          An elevator speech is a brief,

-            carefully constructed statement

-            that outlines the merits of a

-            business opportunity.

-           There are many occasions when a

-            carefully constructed elevator

-            speech might come in handy.

-           Most elevator speeches are 45

-            seconds to 2 minutes long.

Sources of Equity Funding

Business Angels

-          Are individuals who invest their personal capital directly in start-ups.

-          The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process.

-          The number of angel investors in the U.S. has increased dramatically over the past decade.

-          Business angels are valuable because of their willingness to make relatively small investments.

o   These investors generally invest between $10,000 and $500,000 in a single company.

o   Are looking for companies that have the potential to grow between 30% to 40% per year.

-          Business angels are difficult to find.

Venture Capital

-          Is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential.

-          There are about 650 venture-capital firms in the U.S. that provide funding to about 2,600 firms per year.

o   Venture-capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms.

o   The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.

o   A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.

-          Venture capital firms fund very few entrepreneurial firms in comparison to business angels.

o   Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan.

o   Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider.

o   Still, for the firms that qualify, venture capital is a viable alternative for equity funding.

-          An important part of obtaining venture-capital funding is going through the due diligence process.

-          Venture capitalists invest money in start-ups in “stages,” meaning that not all the money that is invested is disbursed at the same time.

-          Some venture capitalists also specialize in certain “stages” of funding.

Initial Public Offering

-          An initial public offering (IPO) is a company’s first sale of stock to the public.  When a company goes public, its stock is traded on one of the major stock exchanges.

-          Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks.

-          An IPO is an important milestone for a firm.  Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

Reasons that Motivate Firms to Go Public:

-          Reason 1 → Is a way to raise equity capital to fund current and future operations.

-          Reason 2 → Raises a firm’s public profile, making it easier to attract high-quality customers and business partners.

-          Reason 3 → Is a liquidity event that provides a means for a company’s investors to recoup their investments.

-          Reason 4 → Creates a form of currency that can be used to grow the company via acquisitions. 

Sources of Debt Financing

      Banks

-          Historically, commercial banks have not been viewed as a practical sources of financing for start-up firms.

-          This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start-ups is a risky business.

o   Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.

      SBA Guaranteed Loans

-          The SBA Guaranteed Loan Program

o   Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.

o   The program operates through private-sector lenders who provide loans that are guaranteed by the SBA.

o   The loans are for small businesses that are not able to obtain credit elsewhere.

-          The 7(A) Loan Guaranty Program

o   The most notable SBA program available to small businesses.

      Size and Types of Loans

-          Almost all small businesses are eligible to apply for an SBA guaranteed loan.

-          The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000.

-          An SBA guaranteed loan can be used for almost any legitimate business purpose.

-          Since its inception, the SBA has helped make $280 billion in loans to nearly 1.3 million businesses.

Other Sources of Debt Financing

-          Friends and Family

-          Credit Cards

o   Should be used sparingly.

-          Peer-to-Peer Lending Networks

o   Examples include Propser.com and Zopa.com.

-          Organizations that Lend Money to Specific Groups

o   An example is Count Me In, an organization that provides loans of $500 to $10,000 to women starting or growing a business.

Creative Sources of Financing or Funding

Leasing

      Leasing

-          A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

-          The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

-          Most leases involve a modest down payment and monthly payments during the duration of the lease.

-          At the end of an equipment lease, the new venture typically has the option to stop using the equipment, purchase it for fair market value, or renew the lease. 

-          Leasing is almost always more expensive than paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or debt financing.

SBIR and STTR Grants

      SBIR and STTR Program

-          The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. 

-          These programs provide cash grants to entrepreneurs who are working on projects in specific areas. 

o   The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers working at universities or other research institutions.

      SBIR Program

-          The SBIR Program is a competitive grant program that provides over $1 billion per year to small businesses in early-stage and development projects. 

-          Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&D funds for awards to small businesses.

-          Guidelines for how to apply for the grants are provided on each agency’s Web site.

-          The SBIR is a three phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal.

-          Historically, less than 15% of all phase I proposals are funded.  The payoff for successful proposals, however, is high.

o   The money is essentially free.  It is a grant, meaning that it doesn’t have to be paid back and no equity in the firm is at stake.

o   The small business receiving the grant also retains the rights to any intellectual property generated as the result of the grant initiative.

Other Grant Programs

      Private Grants

-          There are a limited number of grants programs available.

-          Getting grants takes a little detective work.

-          Granting agencies are low key, and must be sought out.

      Other Government Grants

-          The federal government has grant programs beyond the SBIR and STTR programs.

-          Be careful of grant-related scams.

Strategic Partners

-          Strategic partners are another source of capital for new ventures.

-          Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market.

-          Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.

Unique Marketing Issues

The Process of Selecting a Target Market and Positioning Strategy

Market Segmentation

-          Involves studying a firm’s industry and determining the different target markets in that industry.

-          Markets can be segmented in a number of different ways, including:

o   Product type

o   Price point

o   Customers served

Selecting a Target Market

-          Once a firm has segmented the market, a target market must be chosen.

-          The market must be sufficiently attractive and the firm must have the capability to serve it.

-          The Netbook segment of the computer industry is new, and is being targeted by startups like Eee PC.

Establishing a Unique Position

-          After selecting a target market, the firm’s next step is to establish a  “position” within the market that differentiates it from its rivals.

-          A “position” is the part of a market that the firm is claiming as its own.

-          A firm establishing a unique position in its customers’ minds by drawing attention to two or  three of the product’s attributes.

-          Firms often develop a “tagline” to reinforce the position they have staked out in their market, or a phrase that is used consistently in a company’s literature and thus becomes associated with the company.

-          An example is Nike’s familiar tagline, “Just do it.”

o   The beauty of this simple three-word expression is that it applies equally to a 21-year-old triathlete and a 65-year-old mall walker

Selling Benefits Rather Than Features

-          Many entrepreneur make the mistake of positioning their company’s products or services on features rather than benefits.

-          A positioning or marketing strategy that focuses on the features of a product, such as its technical merits, is usually much less effective than a campaign focusing on what the merits of the product can do.

-          Consider the example of the following slide.

Establishing a Brand

      Establishing a Brand

-          A brand is the set of attributes—positive or negative—that people associated with a company.

o   These attributes can be positive, such as trustworthy, dependable, or easy to deal with.

o   Or they can be negative, such as cheap, unreliable, or difficult to deal with.

-          The customer loyalty a company creates through its brand is one of its most valuable assets.

      Brand Management

-          Some companies monitor the integrity of their brands through a program called “brand management.”

Different Ways of Thinking About the Meaning of a Brand

      Power of a Strong Brand

-          Ultimately, a strong brand can be a very powerful asset for a firm. 

      Cobranding

-          A technique that companies use to strengthen their brands is to enter into a cobranding arrangements with other firms.

-          Cobranding refers to a relationship between two or more firms where the firm’s brands promote each another.

The Four Ps of Marketing for New Ventures

      Product

-          Is the good or service a firm offers to its target market. 

-          The initial rollout is one of the most critical times in the marketing of a new product.

-          All firms face the challenge that they are unknown and that it takes a leap of faith for the first customers to buy their products.

o   Some startups meet this challenge by using reference accounts.

      Core Product vs Actual Product

Core Product → The product itself, such as an antivirus software program.

Actual Product → The product plus all the attributes that come with it such as quality level, features, design, packaging, and warranty.

Cost-Based Pricing → The list price is determined by adding a markup percentage to a product’s cost.

Value-Based Pricing → The list price is determined by estimating what consumers are will to pay for a product.

      Price

-          Price is the amount of money consumers pay to buy a product.

-          The price a company charges for its products sends an important message to its target market.

o   For example, Oakley positions its sunglasses as innovative, state-of-the-art products that are both high quality and visually appealing. 

o   This position in the market suggests a premium price that Oakley charges.

      Promotion

Promotion

-          Refers to the activities the firm takes to communicate the merits of its product to its target market.

-          There are several common activities that entrepreneurs use to promote their products and services.

Advertising

-          Advertising is making people aware of a product or service in hopes of persuading them to buy it.

Pluses and Minuses of Advertising

Pluses:

-          Raise customer awareness of a product.

-           Explain a product’s comparative features and benefits.

-           Create associations between a product and a certain lifestyle.

Minuses:

-          Low credibility.

-           The possibility that a high percentage of people who see the add will not be interested .

-           Message clutter.

-           Relative costliness compared to other forms of promotion.

-           Intrusiveness.

Steps Involved in Putting Together an Advertisement

Steps 1 → Identify the purpose of the ad

Steps 2 → Determine the target audience

Steps 3 → Select a medium

Steps 4 → Create the ad

Steps 5 → Select a place and time for the ad to appear

Steps 6 → Fulfill expectations

Google AdWords and AdSense Program

      AdWords

-          Allows advertisers to buy keywords on the Google home page.

-          Triggers text-based ads to the side (and sometimes above) search results when the keyword is used.

-          The program includes local, national, and international distribution.

-          Advertisers pay a certain amount per click.

-          Advertisers benefit because they are able to place their ads in front of people who are already searching for information about their product.

      AdSense

-          Allows advertisers to buy ads that will be shown on other Web sites instead of Google’s home page.

-          Google selects sites of interest to the advertiser’s customers.

-          Advertisers are charged on a pay-per-click or a per-thousand impression basis.

-          Advertisers benefit because the content of the ad is often relevant to the Web site.

-          Web site owners benefit by using the service to monetize their Web site.

Public Relations

-          One of the most cost-effective ways to increase the awareness of the products of a company is through public relations.

-          Public relations refer to efforts to establish and maintain a company’s image with the public.

-          The major difference between public relations and advertising is that public relations is not paid for—directly.

Place (Distribution)

-          Encompasses all the activities that move a firm’s product from its place of origin to the consumer. 

-          The first choice a firm has to make regarding distribution is whether to sell its products directly to consumers or through intermediaries (such as wholesalers and retailers).

-          Within most industries, both choices are available, so the decision typically depends on how a firm believes its target market wants to buy its product.