Startup Funding Assignment

Running on Empty Case: When 23-year-old Ross McDowell decided to open a retail store specializing in running shoes, he was quite comfortable making decisions about the kinds of shoes he would stock in the stores inventory, the decor of the retail space, and how to reach his potential customers. A competitive runner since the sixth grade, McDowell knew which shoes would sell best to his target audience, and he knew that he needed to round out his merchandise mix with hats, shirts, energy drinks and snacks, and other accessories. What he wasnt so sure about, however, was how to find the financing for his business. I came from a middle class family and didnt have the money myself, he explains.

Gaining access to adequate capital is a challenge for many entrepreneurs but can be an especially vexing problem for those in the start-up phase, where risks are highest. Launching a business with too little capital is a recipe for failure, as many entrepreneurs have learned. According to the SBAs Office of Advocacy, in one-third of small business bankruptcies, entrepreneurs cite financial problems as the cause of their companies failure. Most entrepreneurs dig deep into their own pockets first before turning to friends and family members for the capital to launch their businesses. In many cases, however, these sources cannot provide sufficient capital to cover start-up costs. After emptying their own pockets and those of their friends and family members, where do entrepreneurs turn for the capital they need?

Before approaching any potential lender or investor, McDowell knew that he needed to put together a business plan that spelled out just how much money he would need to launch his store and how he planned to use it. The most common pitfall is that everyone thinks sales will be bigger than they are and costs will be less than they are, says John Hammersley, director of loan programs for the SBA. McDowell researched the fixed expenses he could expect, including rent, utilities, and a salary for himself so he could pay his living expenses. Then he estimated how much it would take to equip the store, including items such as shelving, storage racks, cash registers, signs, and couches for customers to sit on. To make sure that he did not underestimate these costs, McDowell assumed that he would pay retail prices for everything. He also included wages for a part-time employee and advertising costs and came up with a total of $22,000.

With plans for the stores fixtures in place, McDowell needed to stock it with inventory. He decided to carry six different brands and, after meeting with sales representatives from all six companies, selected 25 popular styles of running shoes. Adding in the costs of the accessories such as shirts, shorts, hats, and other items brought the total cost estimate to $50,000. McDowell estimated that his monthly operating expenses would be $6,500, but his business plan included strategies for reducing them by generating publicity for the new store and promoting it at running events and local schools. Youve got to be resourceful, he explains. McDowells plan called for raising enough start-up capital for his shoe store to survive for three months without any revenue at all. McDowell managed to come up with 10 percent of the $72,000 start-up cost he estimates he will need to open the store. The question he faces now is where the remaining 90 percent will come from.

Questions

Describe the advantages and the disadvantages of both equity financing and debt financing for Ross McDowell.

Explain why the following funding sources would or would not be appropriate for McDowell: family and friends, angel investors, an initial public offering, a traditional bank loan, asset-based borrowing, or one of the many federal of SBA loans. If any of these funding sources are not appropriate for Ross McDowell at this stage in his business explain when they might be appropriate in the future for his running shoe store.

In what ways could Ross McDowell attract the capital (e.g., funding) he needs for his business? What steps would you recommend he take before approaching the potential sources of funding you have identified?

Do you think Ross McDowells shoe store would be an attractive investment for venture capital firms? Why or Why not? What could Ross do specifically to make his company more attractive to venture capital investors?