Financing and Equity Capital
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Rhonda Allegro has spent most of her spare time in the last 10 months either in the library at the local university or at the Small Business Development Center (SBDC) housed there. A little more than a year ago, she decided to launch a retail music store specializing in musical instruments, supplies, and hard-to-find sheet music and music books. She also plans to set up a "marketplace" between music students and teachers, collecting a finder's fee for each match-up. Rhonda set a goal of developing a complete business plan within a year, and now, 10 months later with her plan completed, she is ahead of schedule.
Rhonda was the creator of the plan, but she had plenty of help building it. She used the services of the university's SBDC, a friend who is an accountant at a Big Six firm and a friend who is an attorney. She thought that her plan was a good one, but she was excited when the SBDC counselors encouraged her to enter a statewide competition sponsored by a local venture capital firm for the best business plan. She could hardly believe it when her plan won in the retail division!
Now, all that remains is launching the business. Rhonda has $75,000 that she plans to invest in the business, but her financial forecasts indicate that she will need another $650,000. Two banks already have turned her down, both citing the risk involved in small business startups. One of the SBDC consultants suggested that Rhonda consider searching out equity capital. "That sounds promising, but how do I find equity investors? Where do I start my search? What are my options?"
1.Answer Rhonda's questions.
2.Which equity sources would you recommend to Rhonda? Explain.
3.What are the advantages and disadvantages of using equity capital?
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Solution Summary
Based on the case, this solution answer's Rhonda's questions, including recommending equity sources to Rhonda. It also looks at the advantages and disadvantages of using equity capital.
Solution Preview
Interesting questions! Please see response attached (alos below) I hope this helps and take care.
RESPONSE:
1. What are my options?"
There are basically two options for start-up businesses. Equity capital or financing is money raised by a business in exchange for a share of ownership in the company. Owning shares of stock outright or having the right to convert other financial instruments into stock of that private company represents ownership. Two key sources of equity capital for new and emerging businesses are:
1. Angel investors/Private and
2. Venture capital firms
- Typically, angel/private capital and venture capital investors provide capital unsecured by assets to young, private companies with the potential for rapid growth (Potential ADVANTAGE). Such investing covers most industries and is appropriate for businesses through the range of developmental stages. Investing in new or very early companies inherently carries a high degree of risk. But venture capital is long term or "patient capital" that allows companies the time to mature into profitable organizations (ADVANTAGE).
- Angel and venture capital is also an active (potential DISADVANTAGE, if you prefer to be your own boss) rather than passive form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return on the investment. This requires active involvement and almost all venture capitalists will, at a minimum, want a seat on the board of directors (Potential Disadvantage).
- Although investors are committed to a company for the long haul, that does ...
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