Chapter 18: Sources of Capital

Tom Byers, Stanford University,
Andrew Nelson, University of Oregon
and Richard Dorf, University of California, Davis

In this chapter, we describe the capital that may be available from various sources. Entrepreneurs can estimate the capital required for their new business by reviewing the financial projections they prepare using the methods detailed in Chapter 17. In examining the projections and the cash flow statement, it becomes clear how much capital will be needed and when. This chapter addresses the task of creating an investment offering that will meet the venture’s needs and potential investors’ requirements for an attractive return.

The entrepreneurs may provide some of the required capital, and friends and family may help with modest investments. Government grants, bootstrapping, and crowdfunding can also supply necessary capital to launch a venture. Debt financing from a bank or other financial institution may be another option.

Most high-growth ventures that expect to grow on a significant scale will need outside capital from experienced investors, such as angels and venture capitalists. Typically, several stages of investment will be required over the life of the business. The entrepreneurs also must determine what percentage ownership of the venture is offered to the investors. This determination is based on the valuation of the new enterprise at each stage and on what the entrepreneurs are willing to sacrifice in terms of ownership.

Ventures with proven value can raise additional growth capital via an initial public offering (IPO), a secondary offering, or a sale to a growth equity or private equity investment firm. Early investors and employees can often harvest a portion or all of the value created by these options or by secondary markets or a merger and acquisition transaction.

1. “Start on Your Own” with Mark Suster, Upfront Ventures

2. “Reasons Not to Sell” with Geoff Donaker, Yelp

3. “A Steve Jobs IPO Story” with Ed Catmull, Pixar

Continue to Chapter 19