Home of the "Fighting Bengals"
College of Entrepreneurial Studies (CES)
Reference: James B. Arkebauer, Venture
Obtaining money for an entrepreneurial company is really pretty simple--it's
just another sale. Your customer has something you want--their money.
You have something they want, equity or a piece of the action of the potential
growth of your enterprise.
The key, as in all sales, is to determine the right price and close the
sale. To do that, you have to develop a financial marketing mindset. Just
as you would prepare a marketing program to sell your product or service,
you need to prepare a financial marketing program.
That means you prepare a business plan and develop and practice a verbal
pitch, develop a marketing scheme, present the package, and close the
sale. It takes intimate knowledge, unbounded enthusiasm, and a scuff-resistant
Your business plan is going to show you how much money you will need,
if it should be debt or equity, and at what stage or time period it's
needed to accomplish what tasks.
By consulting with your peers, legal counsel, accountants and company
consultant, you will have determined the most proper legal structure for
your company as well as the proposed valuations. From this, you can then
develop your financial marketing program which in turn will help you narrow
in on the type of investor you will be seeking.
For seed and concept companies, this invariably means the entrepreneur
starts with "family and friends" money, and then proceeds on
to obtaining informal investor financing prior to attracting the interest
of the more formal investors such as venture capital firms. It will be
helpful if you understand the accepted "stages of growth" used
by all financing sources.
Understanding the Stages of Entrepreneurial Development
Prior to delving into the details of entrepreneurial financing, it's
helpful to establish an understanding of the traditional stages of development
for entrepreneurial companies. These are: Seed or Concept, Startup,
First, Second, Third, and Harvest. They are briefly described with
Status,Tasks, and Financing as follows:
Seed or Concept
Status. This is the wild-eyed, perhaps incurable, inventor
stage. There is an idea, a concept, no management team, no prototype,
and patentability has not been determined. No business plan, timetable,
or market research has been assembled. Founder(s) may be technicians.
Tasks. To begin development of a prototype, assemble
some key management, develop a business plan, assess market potential,
structure the company, and assess patentability or proprietary standing.
Financing. Traditional venture capital firms have little
interest in funding a company at this stage. The risk level is just too
high, and the time for achieving a payout or harvest is not determinable.
Personal savings or friend and family money funds this stage. It ends
with the completion of a seed stage business plan and the formation of
Status. At least one principal person of the company
is pursuing the project on a full-time basis. The prototype is being developed,
the business plan is being refined, a management team is being identified,
market analysis is being undertaking, and beta tests are being set up
or initial customers are identified. More formal funding is being accomplished.
Tasks. Complete and test the prototype and obtain evidence
of commercial interest. Assemble and identify an initial management team,
finish the business and marketing plans, establish manufacturing and initiate
Financing. Traditional venture capital firms may show
an interest at this stage, assuming that a top-rated management team is
assembled, patentability or proprietorship is proven, and marketability
is demonstrated. Fund raising is a major effort at this stage and it may
take from several months to a year or more.
Status. The company is now a going concern. The product
has proven manufacturable and is selling. If it's a service company, some
customers have tried the service. The management team is in place, the
company has experienced some setbacks, customers can confirm product usage,
marketing is being refined, adjustments are being made in the business
plan and the money raising efforts continue.
Tasks. To achieve market penetration and initial sales
goals, reach close to break even, increase productivity, reduce unit costs,
build the sales organization and distribution system.
Financing. At this stage, traditional venture capital
firms are interested in investment--in fact, it's their most preferable
stage. Financing is needed to get the production bugs worked out and to
support initial marketing efforts.
Status. Significant sales are developing as are assets
and liabilities. The company is sporadically achieving break even, and
cash flow management becomes critical. Second-level management is being
identified and hired. Export marketing is being explored and more sophisticated
management systems are being put into place.
Tasks. To obtain consistent profitability, add significant
sales and back orders, expand sales from regional to national, identify
international marketing plans, and obtain working capital to expand marketing,
accounts receivable, and inventory.
Financing. More sophisticated and second-round venture
capital financing comes into play at this stage. The founders and investors
are forming plans for the harvest
Third Stage (also Mezzanine Stage)
Status. All systems are really go and the potential
for a major success is beginning to be apparent. Snags are being worked
out in all areas from design and development of second-generation products;
to marketing and distribution; to management and all its applied systems.
Tasks. To increase market reliability, begin export
marketing, put second-level management in place, begin to "dress
up" the company for harvest.
Financing. At this stage, the company may need to obtain
"bridge" or "mezzanine" financing to carry increased
accounts receivable and inventory prior to harvest. There is a great amount
of pressure to prove second- and third-generation products, increase profitability
records, improve the balance sheet, and firmly establish market share
Stage Four: Or is the Harvest Near?
The end may be near for entrepreneurial companies. The company is sifting
and sorting out its options including going public, being acquired, selling
out, or merging. What started out as a dream has become an entrepreneurial
reality. The next challenge is to start all over again, but this time
with a pocketful of dollars.