-- payroll-centered -- direct (ex.: professional services)
-- payroll-centered -- support (ex: insurance cos.)
-- inventory driven (ex.: car dealerships)
-- space/rent driven (e.g.: restaurants)
-- marketing/advertising driven (e.g., AOL)
-- fixed asset-driven (e.g., car makers; silicon chips?)
Porter’s Generic Competitive Strategies
-- overall cost leadership
Porter’s 5 Forces Driving Industry Competition
-- rivalry among existing firms
-- potential entrants
-- substitute products
-- bargaining power of suppliers
-- bargaining power of customers
The ideal plan is a written version of the business model and the business strategy.
Components of a Business Plan
Table of Contents
Industry Analysis / Product Description / Marketing Plan
(Design and Development Plans)
Manufacturing / Operations Plan
Critical Risks, Problems and Assumptions
Components of the Financial Plan
Statement of the amount of financing sought, and why funding is needed.
Historical financial data back three years (if applicable):
statements of cash flow
monthly, years 1-3; annual, years 4,5
An indication of the gain from investing.
Probable exit strategy, and time-frame for exit.
How to Write a Great Business Plan by William Sahlman
Relative importance of the business plan, and why
Factors to Emphasize in a Business Plan:
The risks & rewards
What numbers do matter:
The breakeven point
When cash flow turns positive
Slope of the curve indicates the burn rate
Attributes of a Good Financial Plan
The plan focuses on the evolution of cash.
For what purposes is the founder group seeking funding? (Acquisition of fixed assets? Current assets? R&D?)
How much cash does the founder group need, and what is the timing of the need?
When does the firm start to generate positive free cash flow?
The plan reflects founders’ awareness that managerial accounting is more important than financial accounting.
Conveying the business model clearly is more important than presenting projections in formats conforming to generally accepted accounting principles.
Financial Forecasting and Business Plans
Managerial accounting is more important than financial accounting
Supporting schedules present key assumptions; these are needed for credibility.
Forecasts are guesses, so the assumptions are important.
Choosing the right level of aggregation can be tricky.
The “unstructured approach” shows that financial accounting need not be followed to be informative.
Understanding how key financial statements helps in presenting informative projections.
Overview of Sources of Funds & Securities Laws
A Leitmotiv :
Raising money is hard work. Money is nearly unavailable at the early stages of a firm’s life. At some point you will probably have to “bootstrap”: get by with small amounts of funds, usually personal ones, and use strategies and behaviors that generate cash flow.
These problems are very hard to overcome. That’s why “bootstrapping” is usually necessary.
starting a venture with modest personal funds
using personal funds plus revenue internally generated by the new firm to finance capital expenditures and growth.
Idea Stage Concept Stage Product Develop- ment Stage Test marketing Stage Seed Financing A Round B Round C Round D Round Mez- zaine Start-up Financing
External Equity Sources of Funds
Entrepreneurs (& Families & Friends)
--- "The typical angel is a 47-year-old white male with a college education earning $100,000 per year and having a net worth (excluding a home) of $1 million. Most have substantial business and financial experience and prefer to invest in companies at the start-up or infant growth stage.”
--- probably invest mostly in the $250,000 - $1 m range,
-- less than what ventures capitalists invest
-- more than what entrepreneurs have
External Equity Sources of Funds
-- Advantages of using Angels
-- will invest in early stage firms (unlike VCs)
-- will invest in high-tech firms
-- require lower returns: 35-50% per year
VC: 60-75% per year
-- take less equity and less control than VCs
-- Disadvantages of using Angels
-- may be unable to assess the business idea
-- may have no experience starting a business
-- may bring no useful skills or contacts
angels investing individually hold highly undiversified portfolios; networks circulate bplans and make pooled investments
to be an “accredited investor” angels must comply with SEC Rule 501.
External Equity Sources of Funds: Venture Capital
VC firms are limited partnerships
limited partners are investors
general partners are the fund managers
Key evaluation criteria:
appropriate annual rates of return:
seed stage: 60-75%
start-up stage: 50-60%
harvest: 30% or less
VCs gather info before investing. (“due diligence”)
Advantages of VC: experience, expertise
Disadvantages of VC: want to run the show
External Equity Sources of Funds Private and Public Stock Offerings
Focus on cash alone. Bootstrappers need strong cash flow from the start to cover costs and save for expansion.
Cultivate banks before the business becomes creditworthy.
Bootstrap Finance Again
Bootstrap Finance Again
Neal Hunter, founder, former CEO of Cree Research
Cree founded in 1987 by 6 NCSU graduates
Raised $350m in equity before going public in ’93.
Months 1-2: $28,000 2 nd mortgage, credit cards
Months 3-4: $20,000 friends and family
Months 5-8: $400,000 private investors
Months 9–12: $2.8m private investors
Sources of funds: home equity loans, credit cards, family and friends, government contracts (SBIR), private equity, operating income.
Summary and Conclusions
Business plans are like war plans; they describe a future that never happens. Preparing them is useful nevertheless. You can’t get funding without one.
Financial projections can be useful if well-crafted. They must be supported by reasonable assumptions and focus on the things that matter: evolution of the firm’s ability to generate cash, eventual return on investment.
Raising money is really hard because start-up and young firms are informationally opaque. (Bootstrapping.) As firms become less opaque, more funding sources become available.