capital structure

• Entrepreneurial settings


  • Decisions regarding capital structure are largely the consequence of the subjective preferences of the founder(s) and the availability of capital
• Sources of capital for entrepreneurial ventures


  • Bootstrapping techniques
  • Banks
  • Angel investors
  • Venture capital (VC)
  • Seller financing
  • Crowdfunding
• Bootstrapping


  Using minimal outside investment capital and leveraging the operations of a business to fund growth (mostly through debt)
• Bootstrapping techniques


  • Personal, friends, and family
  • Customer prepayments
  • Vendor financing (extended terms)
  • Deferred employee compensation
• Bootstrapping key points


  • Risk of using funds from friends and family
  • Operations must quickly generate cash
  • Keep growth in check
• Banks key points


  • Run by people who think like bankers, not entrepreneurs
  • Unlikely to give money if desperately needed
  • Collateral and cash flow are key
  • Personal guarantees are largely unavoidable
• Angel Investors


  Wealthy individuals with an interest in early-stage entrepreneurial ventures
• Types of Angel Investors


  • Guardian angels
  • Operational angels
  • Entrepreneurial angels
  • Hands off angels
• Angel Investors key points


  • Not all angels are alike
  • If seeking more than just money, this needs to be made clear from the onset
  • Angels may have less practical impact than originally hoped
• Venture Capital key points


  • VCs invest only in high-potential startups
  • VCs bring a lot to the table, but also tend to take control
  • VCs are not a viable option for the overwhelming majority of startups
• Seller Financing


  The seller finances an acquisition of his or her firm and accepts a protracted payout (a debt arrangement) from the buyer
• Seller Financing examples


  • Family businesses
  • Legal, medical, and dental practices
  • Financial services firms
• Seller Financing key points


  • Frequently quicker and easier than obtaining outside financing
  • Debt-based transactions can be crippling for the buyer if things go wrong post-transaction
  • Acquisitions have a bad historical track record
• Crowdfunding


  A form of crowdsourcing which solicits funding from a large number of small participants
• Types of Crowdfunding


  • Rewards-based (neither debt nor equity) - Kickstarter and Indiegogo
  • Peer-to-Peer lending - Lending Club
  • Equity-based