Welcome to the Springboard Learning Center!
We want to share some of our best tips and advice for women entrepreneurs that are seeking growth capital for development and expansion.
VIDEO INSIGHTS FROM THE EXPERT NETWORK
Visit our 15-year library of video resources for the entrepreneur looking to refine their pitch, close the deal, learn about sources of capital, and otherwise explore the expertise of the Springboard network.
Click here to watch the videos.
There are 10 million women entrepreneurs in the United States. While over 1000 of them have participated in our accelerators and other programs, the goal of our Learning Center will be to reach even farther and make Springboard’s programming available to all women entrepreneurs, whether you are a current or future Springboard alumna, and whether you are actively seeking capital or just looking to better understand the sources of capital that are available.
Equity Capital Market Fundamentals
The ability to secure the cash or capital needed to launch and grow a venture is critical to its survival, and while the launch of a new venture is one of the most challenging endeavors a business professional can undertake, the financing of a new venture can be even harder. Fortunately, there are a number of ways in which to fund the launch and growth of a business. In addition to the most basic approach to funding a business, revenue, an entrepreneur may elect to secure capital from a variety of sources such as personal resources, other founders and managers, friends and families, strategic partnerships, debt financing, and equity capital.
The Springboard Enterprises Equity Capital Worksheet
Before you begin your search for equity capital, use the Springboard Equity Capital Worksheet to help you evaluate whether or not equity capital is right for your business. This easy questionnaire will help you to determine whether your company is a potential candidate for equity capital and whether you are ready to begin the search.
Sources of Capital
There are many ways to fund the launch and growth of your business. Sales, debt, and equity only scratch the surface of capital alternatives. Each financing approach has its own advantages and restrictions, and the type of financing that is best for your business is dependent on a number of factors including your company’s business model, financial state, operations, size, stage, industry,geographic reach, and other attributes. Additionally, you should consider your own vision for the company and the management team’s sensitivities with regards to ownership, control, and growth. Equity capital is not for every company and rarely is it the only source of funding.
Essentially, equity capital is money that is invested into a company in exchange for an ownership interest in that company. Traditionally, equity capital unlike debt is not intended to be repaid according to a specific schedule and is not secured (or guaranteed) by the company’s assets. Instead, an equity investor (i.e., the individual or entity that supplies the company with the money) expects that, within a certain time frame, the ownership percentage she holds will be worth more than the original amount she invested. You may be more familiar than you think with the concept of equity capital. Millions of people are public equity investors because they own shares in large corporations such as Microsoft and Wal-Mart, companies whose ownership interests are priced and traded publicly. Here when we say equity capital, we are referring to private equity capital, which represents money that is invested in private companies, or those that are not listed on the NYSE or NASDAQ exchanges.
Debt refers to capital that is loaned by a lender to a borrower, who is in turn obligated (1) to repay the original amount loaned–or the principal–within a specified time period, and (2) to pay interest on the principal. You are probably more familiar with debt capital than you think. Common types of debt include credit cards and mortgages.
|How do you know if debt capital is for your company?|
While the terms under which the loan agreement is made are often in writing and are legally enforceable, lenders seek to protect their investment by lending debt capital only to those entities which demonstrate the ability to repay it at a desirable interest rate. In some cases, lenders further protect their investment by offering secured debt capital. If secured debt capital is not repaid according to the agreed terms, a lender may have the right to take possession of the securitized assets–or assets that were promised to the lender in the event that the loan was not repaid.
Therefore, debt capital is most appropriate for those companies that can demonstrate stable cash flow and/or those companies that have a significant asset base.
|What are the types of debt capital?|
Debt capital ranges from credit cards and lines of credit to bank loans and high yield debt. The type of debt that is best for your company depends on many factors. For example, relevant factors include the amount of capital your company needs, the size of your company, and the financial state of the company (including the existing capitalization of the company, or how your company is currently financed).
|Where can I find debt capital?|
Depending on the type of debt your company seeks, there are numerous sources of debt capital, including commercial banks, credit unions, the government, credit card companies, community organizations, and specialty finance companies.
Alternative Capital Sources
What are other financing options besides equity and debt? The list of other financing options is very long, but can be classified into the following categories:
Nearly all entrepreneurs utilize personal resources to start a business. For example, many entrepreneurs start their business out of their homes, using their own administrative resources such as their own telephone, computer, furniture, vehicles, etc. In addition, before entrepreneurs secure customers and/or receive outside funding, they typically work for “free,” meaning that they are not compensated in the traditional sense for the time that they work. Moreover, some of them use their savings to pay for the initial launch costs like product development or marketing expenses. In fact, successful serial entrepreneurs often use the financial gains resulting from their previous ventures to launch new companies.
|Other Founders and Managers|
During the initial stages of a company’s life cycle, an entrepreneur can sometimes depend on her fellow founders and managers to support the business. For example, other founders may be able to contribute their own personal resources to the venture. Additionally, often other founders and managers will work for significantly less and/or deferred monetary compensation than they would otherwise require when helping to launch a business.
|Family and Friends|
The support of their family and friends is often very helpful when starting a business. Family and friends can contribute assistance similar to those described in Personal Resources. For example, a woman beginning her own catering firm may ask her daughters to act as servers for the first few engagements. Alternatively, a budding software entrepreneur receive a computer system as a birthday present from her family. Additionally, some entrepreneurs are lucky enough to turn to Family and Friends for significant financial support. The Friends and Family of very well-connected entrepreneurs are often business people themselves and can offer not only financial assistance, but also relevant business advice and industry expertise.
Customers are the most traditional source of capital. A new company will receive money–or revenue–for the products and/or services that it has provided to its customer. Ideally, the amount of the revenue is greater than the cost of producing the products and/or services. The difference between the revenue and the cost is profit, which can be plowed back into the company to fund its growth. High margin products and/or services, or goods for which the profits are relatively high as compared to the costs, are often good sources of capital.
Many of today’s high-growth companies incur expenses either (1) prior to being able to deliver a product or (2) at an initial level that cannot be covered by the initial revenues. However, these companies are sometimes able to secure advance revenue, or payment from customers for products and/or services that are to be delivered in the future. Also, many companies in their initial stages of development offer high margin services, the profits of which are used to fund product development and other expensive processes.
Suppliers can be a source of capital when they deliver a product or service necessary for a new company’s development before receiving payment. For example, if a new company orders and receives 5 computers for its employees in June and is not required to pay for them until October, the computer vendor is effectively a source of short-term capital. This type of financing, which involves the Accounts Payable line of a company’s balance sheet, is a form of debt capital.
Federal, state, and local governments have many programs that promote entrepreneurship and the advancement of technology through the disbursement of grants and awards and other types of assistance. These programs number in the thousands and are very diverse, and the eligibility of a company for these resources can depend on the company’s stage, industry, location, business description, owner, and other factors.
|Strategic Partners and Entities|
Many new companies are boosted by the support of partners that have a strategic interest in their development and success. Strategic partners can include large corporations, research universities, community groups, as well as other entities. These partners can provide assistance in the form of capital, personnel, office space, intellectual property, intangibles, etc.
Creating Your Pitch
When you’re raising equity, your pitch is the voice and face of your business plan.
Every organization needs a business plan, which is a comprehensive strategy describing how an entrepreneur plans to make her vision a reality. It clearly outlines the company’s purpose, products and services, market positioning, operations,management team, sources of revenue, cost structure, and growth potential. A business plan should contain the answers to any relevant questions that a potential investor would have.
When you pitch, you’re distilling your business plan to its essence. Sometimes, you have as little as 30 seconds; other times, you have 20 minutes. Those are precious seconds and minutes to tell your story. What will you say?
Your goal is to get investors excited about the opportunity and excited about your ability to make the opportunity happen. To get them interested, they have to believe that your company will generate significant returns for them. As you move through each element of the pitch, you must instill that belief and focus on what is most appealing to an investor. Creating Your Pitchwill guide you through what you need to do to hear the words, “Let’s set up a meeting to hear more.”
Your pitch will begin with an opening–your first opportunity to hook an audience. Investors will decide within the first 30 seconds whether or not you are credible and whether or not they will keep listening. It is critical that you communicate a well-reasoned, clearly articulated business proposition–tell your audience how you’re going to make money.
|Pitch Opening Tips|
- Focus on what would interest an investor (i.e., returns) rather than what would interest a customer
- Be bold and grab their attention
- State your value proposition right up front
- Use everyday, ordinary language–NOT JARGON
The best way for you to get your audience interested in your products and services is to describe a problem that your target market faces. Once potential investors understand the problem, they will want to hear about your company’s solutions.
|Problem and Solution Tips|
- Use a single real-life example. This specificity will save you time and help your audience understand the problem
- Quantify! Unless the problem has a cost or opportunity associated, there is no market, no matter how painful the problem is
- Illustrate one solution. Restrain yourself from talking about every product your company offers
- Anticipate your audience’s objections and address them. The audience will be thinking of those objections while you are talking
Accurately identifying and sizing your target market is one of the most difficult exercises that your company will face. Factors to consider include general economic conditions, sector growth, market penetration, volume, and price. Markets should always be defined using both “top-down relevance” and “bottom-up realism.”
- Do not overstate the size of your market.
- Never say that the market for your product or service is huge, and if you just capture X% you will be a $X billion company.
- Explain why the market is large and describe how it is segmented. Clearly identify and quantify your addressable part of that market.
The key to success is recognizing who is out there and positioning yourself so that you have a defensible competitive advantage. From the moment you start speaking, talk about your competitive advantage. Don’t wait until your competitive landscape slide to start addressing the competition. Allude to it in your opening, and then describe the problem and solution, illustrating your differentiation. Further detail the highlights of your offering when you get to your competitive landscape slide.
- Broadly describe the existing competition and include your channel partners, potential competitors and collaborators, and substitute products
- Identify barriers to entry that will keep others from duplicating your solution. What do you have that is proprietary?
- “We don’t have competition” is not an option. No Competition = No Market
- If you use a 4-quadrant description, the axes you lay out should already be familiar to your audience
- Tell the audience which competitors could become future partners or collaborators and why
Critical components of your business plan include the revenue model, a description of the cost structure and projections. The revenue model distinguishes each income stream and the cost structure details the expenses associated with those income streams. The revenue and cost schedules should be forecasted into the future to construct a set of projections, which should show margins, EBITDA and key profitability metrics (e.g., profitability by product line, costs as percentage of sales, etc.).
You should include as part of your presentation information to support the business model such as: “We’re going to sell this many products to this number of clients or partners for this amount of money, resulting in a gross margin of this. Of those gross profits, this is how much we can bring down to the bottom line.
|Business Model Tips|
- Show potential investors a clear, accurate income statement and cash flow statement. Don’t attempt to hide expenses—venture capitalists will find them
- The best way to help an investor understand how the basic business model works is to provide them with the unit economics
- Discuss your revenue streams in terms of price and volume and what combination of the two components it will take to reach your projections
- Depending on the stage of your company, potential investors may want to see a balance sheet
- Consider using a projected cash shortfall to transition into a discussion about the proposed use of funds
When you talk about accomplishments, use of funds, and milestones, investors get an idea of your company’s stage, how well the team has executed against plan thus far, and how carefully you have thought through what is needed to achieve your intent. For our purposes, we define the terms as:
- Accomplishments: What the company has accomplished to date
- Use of funds: How the company plans to use the money being raised
- Milestones: Specific measurable accomplishments that investors will use to evaluate the company’s future progress
Accomplishments help potential investors to determine your company’s stage and to assess the company’s progress to date. They can include:
- Funds raised? From whom?
- Product development stage?
- Revenue and/or EBITDA to date?
- Patents secured?
- Major customers and/or partnerships?
- Consider highlighting your most compelling accomplishments in the first minute to pique your audience’s interest
- A clear use of funds table indicates to your audience that you have thought through how the company will use the money
- Milestones make you get specific and help to measure the tangible progress. For example, if your company needs capital to build a sales force, investors may expect to see by a certain date, the more effective sales force having achieved a certain increase in the number of customers
You’ve heard it said, “They’re investing in the management team, not the idea.” It is essential to project confidence and to speak with clarity throughout the entire presentation.
|Management Team Tips|
- The management team must possess and also project strong domain expertise. Potential investors will not back a team that seems to be learning the ropes about an industry
- What attracts the investor is the jockey—not the horse. Talk about yourself with confidence, and convince them that you are an A player with an A team
- Always talk about your background and accomplishments. Often, people tend to skip it to avoid the discomfort of talking about themselves. You are the leader of the company. You must sell yourself.
- Emphasize tangible accomplishments (e.g., grew sales x% from $X thousand to $X million, raised $X million in venture capital for previous start-up which was then sold to this company for $X million). Your team’s past accomplishments will sell better than job titles, responsibilities and cumulative years of experience
- Determine which milestones are most critical for your business to successfully make it to the next phase of operations, and tailor the presentation of your management team to the task at hand by highlighting those accomplishments that illustrate that your team can reach those goals
Potential investors will focus on the exit—the point at which they will make their money. There are only 2 options for an exit strategy: merger/acquisition or IPO. Provide a couple of credible exit alternatives with supporting evidence (e.g., precedent transactions, publicly traded comparables, etc.) and potential valuations.
|Exit Strategy Tips|
- Be specific. Who are the potential acquirers? What are valuation multiples you are using to determine your exit? Name precedent transactions or public comparables you are using to support those multiples.
- It is not sufficient to simply say, “We will either be acquired or be positioned for an IPO”
- Have more than one exit alternative. For example, if you believe that your company will be acquired, it is better to identify several potential buyers rather than just one
Start off with a bang and end with energy and a message they’ll remember! As you formulate your pitch and in your closing, remember that your goal is to secure a round of meetings to further discuss your business plan.
Be creative, show your strength and passion, and convince them your company is an opportunity for returns that they cannot afford to miss
- Don’t wind down your pitch with a boring, “Here’s a summary of what I’ve talked about.” Close with something that will help the audience remember you.
- Never forget that your goal is to get a meeting