EE204: Business Management for
Electrical Engineers and Computer Scientists

Alternate Sources of Funding

Below are several sources of funds for both start-ups and established companies. The list is not exhaustive but is meant to give a broad perspective of where to obtain funds and the relative merits of those sources.

Source Primary Role in Typical Financing Strategy Positives Negatives Cost
Self Initial money to at least document or demonstrate the idea to the point where other investors can understand it Nobody's permission required It's your money to lose However much you are willing to risk
Family and Friends If more money is needed to get the idea to an invest-able point and the individual's funds are limited These investors don't ask many tough questions You could alienate friends and family if the money is lost Friends and family and their money
Angel investors (ex: informal group of knowledgeable individuals) Early in the company concept stage Some coaching and contacts Some meddling by investors and regular results reporting 5-10% of the company
Venture capital (ex: traditional VCs, the Sandhill Rd. crowd) Early stage typically before product and team are built Don't have to pay the money back. VCs can also bring advice and partners VCs involvement in the company may challenge management Typically 20-50% ownership of the company
Suppliers and trade credit (ex: parts vendors with net 60 day terms) Available early in product development and pre production period if the vendor believes in the product and its customers Easy source of credit Few Bundled in the price paid for the product or service
Commercial bank (ex: Bank of America) Available after the company has revenues and profits Low cost Money must be paid back in the future Current market rates for borrowed funds
Institutional investors (ex: Liberty Mutual , AETNA) Invest just prior to an initial public offering Typically pay a premium for stock Few Equity is sold slightly cheaper than at the time of the IPO
Asset based lenders (ex: GE Credit capital) Can be early in the life of a company where lender holds title to equipment in the company Non equity source of additional cash Requires monthly cash payments and the company risks repossession of equipment if the business does not meet certain financial milestones Higher than straight bank debt
Public equity (ex: NASDAQ) Historically has occurred when a company is $10M or greater in revenues and profitable. Some companies today go public on the basis of a hot concept with little revenue and a period of substantial losses ahead. Access to large amounts of capital. Liquidity for investors Scrutiny of investors, inability to give employees very low cost options, cost of public accounting and reporting, defocusing of top management away from the customer and toward Wall Street High in terms of management time and energy