Planning a New Business


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  • Key Points The purpose of a financial strategy is to provide the business with the appropriate financial structure and funds to achieve its overall objectives. In addition, it examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. Financial strategy usually attempts to maximize the financial value of the business. Time: 5 minutes/first hour Program Introduction Instructor’s Notes: Introduce yourself only if you haven’t in another session. Set up with the importance of a financial strategy.
  • Key Points I hope you had an opportunity to work on the class assignment question, we will review finance after looking at resource needs and funding needs & options. Time: 5 minutes / first hour Session Five Agenda Instructor’s Notes: Review the agenda and elaborate as needed.
  • Key Points What is/will be your #1 business start-up expense? Possible answers: Equipment (capital, furniture), operating supplies (just to get started?), people/staffing, location (try not to tied up your money in real estate, look at other options), regulatory equipment, promotional supplies (look for inexpensive ways to promote), forms (business cards, stationary, envelopes, mailings, etc.), others SMALL GROUP DISCUSSION Divide into small groups of 3-4 each. Please try to get with someone you haven’t in past sessions. Discuss each others #1 expense in the first year. Then, brainstorm ways to cut expenses, be creative, help each other! Time: 15 minutes / first hour Entrepreneurs’ Discussion Instructor’s Notes: In small groups of 3-4 people each, have participants discuss their #1 business start-up expense in the first year. Then brainstorm ways to cut those expenses. Encourage peers to help them cut expenses by sharing ideas they have for each other. Then open to larger group for additional help/feedback.
  • Key questions What are your financial projections for this venture for the first 3-5 years? Are these projections based on debt or equity financing? How do these projections compare with industry norms? What assumptions are the projections based on? What are the venture’s most significant costs? How much money do you need? Key Tips Focus on what your company needs, not on what you believe you can raise. Think in terms of your company’s stages of growth: each will have specific capital requirements. Once you’ve defined and scheduled your capital needs, figure out the best source of funding for each stage of development... Time: 10 minutes / first hour What are Your Funding Needs? Instructor’s Notes: The participants were asked to consider these questions--as a homework assignment from session four. Ask them if they have any questions. Then facilitate discussion around the question: How do these projections compare with industry norms? Do not force anyone to reveal their numbers--unless they volunteer.
  • Key Points: What funding resources do you have to draw on? Next slide is federal or state loans... Time: 10 minutes / first hour Funding Options Instructor’s Notes: Discuss Personal Financing and Friends & Family as a resource for funding.
  • Available Loans (Typical): Short-Term Loans (one month-to-one year) Long-Term Loans (made for longer than a year) Often reluctant to deal with start-up businesses. Look for a good credit history, personal assets, and income within company(want a personal guarantee). Reluctant if the owner has little or no experience running a business. Time: 5 minutes/ Second hour Banks Instructor’s Notes: Review the objectives of banks when providing funding. Elaborate as needed.
  • - 7.6 - 11.5 - 14.8 - 21.3 - 54.5 - 105.9 - 40.6 - 21.4 - 18.2
  • Key Point Income statements are sometimes called a profit and loss statement or an operating statement. It shows your total sales minus your cost of goods sold and your operating expenses over some specific time frame, usually a year to five (on a business plan). Time: 8 minutes/ second hour The Financial Plan Instructor’s Notes: Set up the slides to follow.
  • Key Points A pro forma is a projected financial performance statement. In your business plans you will need to provide the following pro forma, in 5-year estimates. When we come back from the network break, we will review each statement, and I will answer any questions you have. Time: 5 minutes / second hour Pro Forma Instructor’s Notes: This is a set-up for the following slides--quick overview.
  • Key Points Determines the value of the business. Includes: Revenue (gross sales, net sales, cost of sales, gross profit) and Operating Expenses (advertising, general & administrative). Time: 10 minutes / third hour Profit and Loss (P&L) Instructor’s Notes: Provide a sample form. Review the purpose and components of a P$L statement.
  • Key Points Projecting sales is more art than science, and at best will be an imprecise affair. Forecasting sales is usually seen as the single most difficult part of financial projections. Too many outside factors affect sales level: economic conditions, competition, changes in consumer and business buying patterns, even the weather. But you still have to estimate the level of sales your business will attract. The sources mentioned on the slide can help make reasonable guesses. Express your sales forecasts in dollars, keeping in mind units sold times price equals total sales. You will use the sales forecast in both the projected profit and loss statement (P&L) and in your cash flow projection. The three-column approach is the most effective and easiest way to project sales. Break your goods and services down into small chunks (ex. Product line covers 25 products). After estimating the gross sales figures for in the worst case and best case scenarios, choose an in between figure for most likely. Add up the total of the most likely column and spread it over the 12 months of the cash flow projections (from your financial worksheet.) Time: 5 minutes / third hour Sales Projections Instructor’s Notes: Review the information on the slide and key points.
  • Key Points Cash flow pro forma will identify what your investment requirements are. Growth can eat up your cash flow in first 1-3 years. Investors expect to see “red ink” up to two years in business, but it better start leveling off after that. You may make a large profit from the beginning but still have increasing cash flow demands (ex. Production demands going up) There is nothing more damaging to a small business than to experience a cash shortage. If you don’t have a projected cash flow plan--you could be asking for trouble. Good sales = good cash flow. Check the credit of all prospective customers. Deposit all checks on a daily basis. Good collections = better cash flow. Invoice and follow-up with customers. Provide a sample form. Time: 5 minutes / third hour Cash Flow Instructor’s Notes: Describe a cash flow statement. Provide a sample form.
  • Key Points Tells you early on, what is happening with the business. Comparing one business to another using balance sheets is always informative and valuable. The balance sheet includes: Assets (current, fixed) ,Liabilities (current, long-term) and Net Worth. Provide participants a sample form. Time: 5 minutes Balance Sheet Instructor’s Notes: Clarify the purpose and contents of a balance sheet.
  • Key Points Assumptions are detailed descriptions of how you came up with the figures. The trick is making reasonable assumptions that those concerned with the start-up feel are valid. Some considerations for assumptions: Inventory turnover, accounts receivable collection period, accounts payable payment period, purchasing in volume, extent of star-up and future capital expenditures, interest rates on debt, effective income tax rate, expected capacity and utilization of plant and equipment; availability of suppliers and components,production downtime, holidays, overtime, sales and share of the market based on characteristics of market, pricing, competition, and trends in the industry, growth and success based on management training and learning curve. Others, Depending on Scope and Purpose of Business Plan Time: 5 minutes / third hour Financial Assumptions Instructor’s Notes: Review the list of financial assumption categories and key points.
  • Profile of an ideal Entrepreneur -- from the venture capitalist perspective:(source Harvard Business Review Nov/Dec 1998) Is qualified in a “hot” area of interest. Tells a compelling story and is presentable to outside investors. Has a good reputation and can provide references that show competence and skill. Gets along with the investor group. Understands the cost of capital and typical deal structures and is not offended by them. Is sought after by many VCs. Has realistic expectations about process and outcome Delivers sales or technical advances such as FDA approval with reasonable probability. Time: 7 minutes / third hour Financial Assumptions--Mistakes Instructor’s Notes: Read through the list of mistakes made with financial assumptions. Comment as needed.
  • Key Points Marketing requires an aggressive approach. Finance has a conservative methodology. Remember the audience. Time: 3 minutes / third hour Marketing & Finance Approaches Instructor’s Notes: The purpose of this slide is to show how different the marketing and finance approach is to business.
  • Time: 5 minutes / third hour Managing Your Finances Instructor’s Notes: Review the list of tips on the slide and elaborate and add if necessary.
  • Planning a New Business

    1. 1. Planning a New Business & the Entrepreneur Session 5 Funding & Finance Presented by Scott Wilson February 2004
    2. 2. Session Agenda <ul><li>Entrepreneurs’ Discussion. </li></ul><ul><li>Funding Needs and Options. </li></ul><ul><li>Venture Capital Industry. </li></ul><ul><li>The Financial Plan. </li></ul><ul><li>Financial Assumptions. </li></ul><ul><li>Business Plan Update. </li></ul>
    3. 3. Entrepreneur’s Discussion: <ul><li>What is/will be your #1 business start-up expense? (in the first year; fixed or variable) </li></ul>P a y c h e c k f o r D e p t . o f T r e a s u r e r J o h n D o e P a y c h e c k f o r D a t e D e p t . o f T r e a s u r e r J a n e D o e D a t e
    4. 4. Class Assignment: What are Your Funding Needs? <ul><li>What are your financial projections for this venture for the first 3-5 years? </li></ul><ul><li>Are these projections based on debt or equity financing? </li></ul><ul><li>How do these projections compare with industry norms? </li></ul><ul><li>What assumptions are the projections based on? </li></ul><ul><li>What are the venture’s most significant costs? </li></ul><ul><li>How much money do you need? </li></ul>
    5. 5. Funding Options <ul><li>Your Personal Finances. </li></ul><ul><li>Friends and Family Members. </li></ul><ul><li>Federal or State Loans. </li></ul><ul><li>Venture Capital Industry. </li></ul>
    6. 6. Small Business Administration Programs <ul><li>The SBA Offers Three Loan Programs: </li></ul><ul><ul><li>7(a) Loan Guarantee </li></ul></ul><ul><ul><li>Microloan </li></ul></ul><ul><ul><li>504 Certified Development Company loans </li></ul></ul><ul><li>The SBA does not currently have funding for direct loans nor does it provide grants or low interest rate loans for business start-up or expansion. </li></ul>
    7. 7. Banks <ul><li>Most are very conservative. </li></ul><ul><li>Often reluctant to deal with start-ups. </li></ul><ul><li>Look for a good credit history, personal assets, and income within company. </li></ul><ul><li>Reluctant if the owner has little or no experience running a business. </li></ul>
    8. 8. Overview of Private Investors <ul><li>Potential Private Company Investors. </li></ul><ul><li>Factors to Determine Most Appropriate Investor. </li></ul><ul><li>Factors Influencing Fundraising Success. </li></ul><ul><li>The Venture Capital Process: </li></ul><ul><ul><li>Operational Mechanics, Financial Operations, Motivations Needs. </li></ul></ul><ul><ul><li>What VC’s are looking for??? </li></ul></ul><ul><ul><li>What a Company should look for in a VC. </li></ul></ul><ul><ul><li>Investment Process Time Line. </li></ul></ul>
    9. 9. Overview of Private Investors <ul><li>Mike Frank’s 10 Commandments (GP of Advanced Technology Partners). </li></ul><ul><li>Florida VC’s Top 10 Pet Peeves. </li></ul><ul><li>Angel Investing: </li></ul><ul><ul><li>Facts/Nature of Angel Investments. </li></ul></ul><ul><ul><li>Disadvantages. </li></ul></ul><ul><ul><li>Initial Considerations/Angel Motivators. </li></ul></ul><ul><ul><li>Types of Angels. </li></ul></ul><ul><ul><li>Where Do You Find Angels??? </li></ul></ul><ul><li>VC Industry. </li></ul><ul><li>Deal Terms/ Sample Term Sheet. </li></ul>
    10. 10. Potential Private Company Investors: <ul><li>Owners, Friends & Family. </li></ul><ul><li>Angel Investors. </li></ul><ul><li>Venture Capital Firms. </li></ul><ul><li>Private Placement Institutional & Individual Investors. </li></ul><ul><li>Corporate Partners. </li></ul>
    11. 11. Owners, Friends, and Family <ul><li>Benefit of speed and maintaining control. </li></ul><ul><li>Favorable valuation/terms to “known & friendly” people. </li></ul><ul><li>Delay dilution until, a later & higher valuation reached. </li></ul><ul><li>Owners Investment demonstrates founder’s commitment to business (critical to a VC who wants owner to have skin in the game). </li></ul><ul><li>Downside: </li></ul><ul><ul><li>Possibly creating personal conflict or “taking advantage” of persons who may lack investment sophistication & experience and may have unrealistic expectations of returns. </li></ul></ul><ul><ul><li>Investors usually not helpful to business or future fundraising efforts. </li></ul></ul>
    12. 12. Angel Investors <ul><li>Usually wealthy and experienced business individuals who desire and are willing to invest time and money. (Will expand later) </li></ul><ul><li>Studies show more money invested by angels than VC’s in the seed and early stage of a business, many VC’s have minimum first round, thus angels fill void. </li></ul><ul><li>Less due diligence and documentation than a VC, can close financing quickly. </li></ul><ul><li>Usually, invest close to home. </li></ul><ul><li>May or may not bring added value to business i.e. strategic relationships. </li></ul><ul><li>Usually lack significant capital for follow-on investment. </li></ul>
    13. 13. Venture Capital <ul><li>VC’s typically bring extraordinary value to it’s portfolio companies. </li></ul><ul><li>Very difficult to obtain. </li></ul><ul><li>Extensive due diligence and documentation, so house must be in order. </li></ul><ul><li>Substantial equity dilution. </li></ul><ul><li>Loss of control, especially if milestones not met. </li></ul><ul><li>Not as patient as angel investor, need exit from investment in 3 to 5 years. </li></ul><ul><li>Very time consuming, is not the best path for many businesses. </li></ul>
    14. 14. Private Placements <ul><li>Can be cost-effective means of raising capital. </li></ul><ul><li>Be wary of field of placement agents/investment bankers, must be a broker/dealer under Florida and Federal law. </li></ul><ul><li>Company must comply with exemptions under Federal and State blue sky laws, these laws regulate offering process, publicity and communications, disclosure and information requirements and the offer and sale of the securities in question, so experienced counsel needed. </li></ul><ul><li>Be wary of significant “upfront fees”. </li></ul><ul><li>Requires preparation and significant documentation (subscription documents and private placement memorandum). </li></ul><ul><li>If not conducted by experienced placement agent or investment banker, high risk of not being consummated after significant time and expense. </li></ul>
    15. 15. Corporate Partners <ul><li>“ Strategic alliance” or partnership with an established operating company may serve as means to raise capital. </li></ul><ul><ul><li>Joint venture. </li></ul></ul><ul><ul><li>Licensing agreement. </li></ul></ul><ul><ul><li>Marketing or distribution arrangement. </li></ul></ul><ul><li>Capital can also be provided through strategic arrangements and relationships with customers, vendors and suppliers. </li></ul><ul><li>Tread carefully: Strategic partners often have far greater resources than you. i.e. resources used against you if dispute or conflict arises. </li></ul>
    16. 16. Corporate Partners <ul><li>Can limit your flexibility to engage in other alliances, acquisitions and transactions; you may find yourself controlled, or your future substantially affected or limited, by a much larger company with its’ own agenda and priorities (which may not include the successful development of your business). </li></ul><ul><li>Be careful regarding protection of confidential and proprietary info. </li></ul><ul><li>Probably should not enter into relationship if doing it to primarily raise capital. </li></ul>
    17. 17. Factors to Help Determine Which Type of Investor is Most Appropriate: <ul><li>Amount of money you need. </li></ul><ul><li>Proposed use for money. </li></ul><ul><li>Size and profitability of company. </li></ul><ul><li>Anticipated rate of company growth. </li></ul><ul><li>Projected future value of company. </li></ul>
    18. 18. Factors within Management’s Control that Influence Fund Raising Success: <ul><li>Timing and planning of fund raising campaign. </li></ul><ul><li>Quality and completeness of management team. </li></ul><ul><li>Quality of company’s plan for expansion. </li></ul><ul><li>Company’s historical results of operations. </li></ul><ul><li>Strength or weakness of company’s internal systems. </li></ul><ul><li>How well company uses outside advisors. </li></ul><ul><li>How well management understands the fund raising process, as evidenced by the quality of it’s fund raising plan. </li></ul>
    19. 19. Outside Factors that Influence Fund Raising Success: <ul><li>Volume of money available for investment. </li></ul><ul><li>Popularity of company’s business sector to investors. </li></ul><ul><li>Activity level of public markets. </li></ul><ul><li>Investor familiarity with your industry. </li></ul><ul><li>Intensity of competition in your market. </li></ul><ul><li>Stage of your company’s development. </li></ul>
    20. 20. How does Venture Capital Work? <ul><li>A Venture Capital firm invests time, energy, advice, and money in private companies in the early stages of growth. </li></ul><ul><li>These investments are made in exchange for a percentage of the ownership in the company. </li></ul><ul><li>Money is a commodity. </li></ul><ul><li>The real value in a gaining support from a VC lies in their ability to to provide support with the growth, management, and competitive position of the business. </li></ul>More than just money...
    21. 21. How does Venture Capital Work? <ul><li>To understand how VC’s make decisions, it is important to understand their operations and motivations. </li></ul><ul><li>VC’s create unique investment vehicles called “funds”. </li></ul><ul><li>VC’s solicit investment from a variety of sources including wealthy individuals, pension funds and university endowment funds. This money is “committed” but not immediately sent to the VC. </li></ul><ul><li>Over time these funds are paid in the form of installments called “draw downs” or “capital calls.” </li></ul>Operations Fund “n” Cash Investors University Endowments Pension Funds Wealthy Individuals
    22. 22. How does Venture Capital Work? <ul><li>Capital calls are requested as the VC identifies targets in which to invest. </li></ul><ul><li>Money is invested in a company in exchange for a portion of the equity (ownership) in that company. </li></ul><ul><li>When all of the money is invested, a VC firm will seek investment to create a new fund. </li></ul><ul><li>Typically, a fund may have a limited period of time to invest (2 to 3 years). </li></ul><ul><li>A typical VC firm will undergo fundraising every other year - or more frequently if needed. </li></ul>Operations Fund “n” Start-up Start-up Start-up Cash Endowments Pension Funds Wealthy Investors Investments
    23. 23. How does Venture Capital Work? <ul><li>The goal of a VC is to grow the value of the companies in their respective portfolio and exit their investment either in a sale or IPO. </li></ul><ul><li>Portfolio companies might be purchased in exchange for cash or securities. </li></ul><ul><li>In either case the resulting cash and securities is distributed back to the Partnership. </li></ul>Operations Fund Investors Cash and/or securities Venture Partners Limited Partners
    24. 24. <ul><li>Although the ROI is significant, the percentage invested is not consistent with the percentage of the fund returned: </li></ul><ul><li>For their expertise the Venture Partners are handsomely rewarded with a disproportionately large share of the results, referred to as a “carried interest” usually around 20%. </li></ul><ul><li>2-3% of the value of the fund is paid annually to the management company to cover operations and employee salaries. </li></ul>How does Venture Capital Work? Operations Amount Invested 10% Limited Partners Fund 90% Amount Returned Venture Partners 29% Limited Partners 69% 2% VC Management Company Venture Partners
    25. 25. How does Venture Capital Work? <ul><li>What does all of this mean? </li></ul><ul><ul><li>Like mutual fund managers, Venture Partners are investing other peoples money and are rewarded based on their ability to identify the potentially brilliant ideas and help make them successful. </li></ul></ul><ul><ul><li>Also like Mutual fund managers, future success is based on the ability to draw investors and create a larger fund next year. </li></ul></ul><ul><li>The impression of investors is based not only on the ROI of the fund, but on the visibility of “home run” wins within the fund portfolio. </li></ul>Think of it like a wacky mutual fund for the rich and powerful...
    26. 26. In search of Funding <ul><li>A Venture Partner will use a variety of criteria to assess and analyze both the entrepreneur and the idea. What many look for is a combination of: </li></ul><ul><ul><li>A High Quality Entrepreneur. </li></ul></ul><ul><ul><li>HOME RUN potential. </li></ul></ul><ul><ul><li>A compelling Model. </li></ul></ul><ul><ul><li>An Experienced Team. </li></ul></ul><ul><ul><li>A Company that has been DERISKED. </li></ul></ul><ul><ul><li>Financial Viability. </li></ul></ul><ul><ul><li>Personality & Fit. </li></ul></ul>What are VC’s looking for ?
    27. 27. The Funding Process <ul><li>What should a company be looking for in a VC partner? </li></ul><ul><ul><li>An investor with the right connections. </li></ul></ul><ul><ul><li>Industry Knowledge. </li></ul></ul><ul><ul><li>National and or Global Reach. </li></ul></ul><ul><ul><li>Fit. </li></ul></ul><ul><ul><li>Prestige. </li></ul></ul>
    28. 28. The Investment Process Time Line <ul><li>Initial Contact : After entrepreneur's homework, investigation and assessment of appropriate VC, executive summary sent via “trusted source”. </li></ul><ul><li>Screening : Most opportunities submitted (75-80%) screened out and eliminated, after brief review (don’t fit VC objectives, criteria and preferences, most because of stage of development, location, man. depth or track record, market or industry focus, competitive dynamics, amount required to invest). </li></ul><ul><li>Closer Look : (20-25%) Some level of further review i.e. full read of business plan, financial information and projections; inquiries and background checks with local contacts and others, telephone calls to respond to specific questions, less than half will get opportunity to meet with lead VC. </li></ul>
    29. 29. The Investment Process (continued) <ul><li>Due Diligence; Valuation : (4%) subjected to some greater level of “due diligence”, meetings with key management, perhaps customers, office/facility tours, competitive and market analyses, more intensive business, financial and technical inquiry and review, typically a discussion regarding Valuation . </li></ul><ul><li>Term Sheet : (less than 2%) presented with term sheet or “letter of intent”, ensures parties are on the same page regarding key terms </li></ul><ul><li>Definitive Agreements & Funding : (1%) result in signed definitive agreements and funding. Timing will depend upon level of detail in term sheet, business owner and it’s counsel prior preparation, sophistication and experience, the VC’s approval process and schedule and absence of surprises. </li></ul>
    30. 30. “10 Commandments” for Companies Seeking Financing <ul><li>“ Thou shalt focus, focus, focus thy plan” </li></ul><ul><ul><li>make sure strategy is a rifle shot, not a shotgun blast. </li></ul></ul><ul><ul><li>carve up target markets finely and restrict yourself to two or three well defined segments. </li></ul></ul><ul><li>“ Thou shalt weave a story” </li></ul><ul><ul><li>create excitement around plan. </li></ul></ul><ul><ul><li>show energy, enthusiasm and excitement when you present. </li></ul></ul><ul><ul><li>cover long term vision, then spell out short term practicalities of its implementation. </li></ul></ul>
    31. 31. <ul><li>“ Thou shalt understand thy audience” </li></ul><ul><ul><li>research and understand target audience – both for plan and pitch. </li></ul></ul><ul><ul><li>understand prospective investors job, history, area of expertise, prior areas of investment, etc. </li></ul></ul><ul><li>“ Thou shalt arrive via referral” </li></ul><ul><ul><li>reference will instantly give you credibility, visibility and the investors attention. </li></ul></ul><ul><li>“ Thou shalt be crisp in thy plan” </li></ul><ul><ul><li>keep business plan succinct. </li></ul></ul><ul><ul><li>typically 25 pages, executive summary no more than 2 pages. </li></ul></ul>
    32. 32. <ul><li>6. “Thou shalt fine-tune thy presentation” </li></ul><ul><ul><li>plan your pitch and pitch your plan (one bite at apple!). </li></ul></ul><ul><ul><li>no more than an hour. </li></ul></ul><ul><ul><li>have back-up slides for common questions. </li></ul></ul><ul><ul><li>prepare in advance reference list . </li></ul></ul><ul><li>7. “Thou shalt thoroughly research and evaluate current and prospective competition” </li></ul><ul><ul><li>all start-ups have competition of one sort or another. </li></ul></ul><ul><ul><li>honestly assess relative status. </li></ul></ul><ul><ul><li>openly discuss management team’s background strengths and weaknesses . </li></ul></ul>
    33. 33. <ul><li>8. “Thou shalt get real about financial projections” </li></ul><ul><ul><li>they may come back during the structuring of deal. </li></ul></ul><ul><li>9. “Thou shalt not obsess on valuation” </li></ul><ul><ul><li>it is important, but don’t be penny-wise and pound-foolish. By understanding this hopefully everyone gets a piece of a much larger pie. </li></ul></ul><ul><li>10. “Thou shalt understand potential exit strategies” </li></ul><ul><ul><li>investors need to know how they are getting out of investment. </li></ul></ul><ul><ul><li>be explicit about potential buyers and rationale for their interest in your company. </li></ul></ul>
    34. 34. Top 10 Pet Peeves of Florida VC’s <ul><li>Not specifying in the Business Plan the amount of capital being sought. </li></ul><ul><li>Not providing contact information. </li></ul><ul><li>Not explaining how the company’s technology works. </li></ul><ul><li>Not mentioning if there are patents. </li></ul><ul><li>Using too broad of a market to show market size (i.e.) showing a market size of the computer market when the company makes keyboards. </li></ul><ul><li>Executive bios that don’t list companies worked for and titles held or Business Plans focusing on one founder and not the management team. </li></ul><ul><li>Including unnecessary graphics. </li></ul><ul><li>Using fuzzy numbers that can be easily researched. </li></ul><ul><li>Focusing on valuation during the first meeting. </li></ul><ul><li>Business Plans that begin with “How the Internet has Changed the World.” </li></ul>
    35. 35. In Search of Capital Understanding Angel Investors
    36. 36. THE FACTS <ul><li>The Angel market is the oldest and biggest market for venture capital. </li></ul><ul><li>U.S. has close to three million angels, investing more than $50 billion* in entrepreneurial firms each year, National Venture Capital Association suggests it may be $100 billion annually. </li></ul><ul><li>Business Angels fund 30 to 40 times as many entrepreneurial ventures as do venture capitalists. </li></ul><ul><li>Early-stage deals receive around 60-70% of angel funds invested, compared to around a quarter of all deals for venture capitalist; so who is the real risk taker? </li></ul><ul><li>May be difficult to find, as many prefer anonymity; no directories, however, recent increase in angel clubs and organized angel funds. </li></ul><ul><li>* Benjamin and Margulis, 1996 </li></ul>
    37. 37. Nature of Business Angel Investments <ul><li>Most Angels are value-added investors – contribute their business skills. </li></ul><ul><li>Angels are more geographically dispersed. </li></ul><ul><li>Obtaining money has a leveraging effect – heightens a VC’s interest in the company. </li></ul><ul><li>Level of Due Diligence minimal compared to a VC. </li></ul><ul><li>Exiting their investment and rate of return usually of lesser concern than a VC. </li></ul><ul><li>May rely more on gut feeling, some rely very little on financial projections where as VC’s decisions are almost completely based on comprehensive Due Diligence. </li></ul>
    38. 38. Nature of Business Angel Investments <ul><li>Angels prefer smaller size investments than VC’s. </li></ul><ul><li>Angels usually invest in start-ups and early-stage ventures, ones having the most difficulty obtaining outside funds. </li></ul><ul><li>Angels make investments in virtually all industry sectors. </li></ul><ul><li>More flexible in financial decisions than VC’s: </li></ul><ul><ul><li>Longer investment horizons (“patient money”). </li></ul></ul><ul><ul><li>Shorter investment processes, and lower targeted rates of return. </li></ul></ul>
    39. 39. Disadvantages of Angel Investors <ul><li>Less likely to make follow-on investments. </li></ul><ul><li>Prefer to have a say in running of firm, which may cause an issue if they don’t have experience in the company they fund. </li></ul><ul><li>Many turn out to be “Devil,” self-serving motives, rather than promoting good of firm (difficult). </li></ul><ul><li>Do not have national reputation and prestige of big-name institution. </li></ul>
    40. 40. Initial Considerations <ul><li>Who is this person? </li></ul><ul><li>What is their motivation for investing? </li></ul><ul><li>Make sure they have no unexpected demands. </li></ul><ul><li>Avoid conflicts of interest. </li></ul><ul><li>What does the Angel bring to the table beyond money? </li></ul>
    41. 41. What does the Angel Bring to the Table Beyond $$$$? <ul><li>Alliances with larger corporate partners through technology exchange, OEM or other agreements. </li></ul><ul><li>Assistance with equity offerings, financing, joint venture and acquisitions. </li></ul><ul><li>Industry contacts with potential customers, vendor and financing institutions. </li></ul><ul><li>Assistance in strategy, financing and recruiting issues. </li></ul><ul><li>Assistance in locating knowledge and functional experience to help grow business. </li></ul><ul><li>Management assistance – day-to-day or periodic. </li></ul><ul><li>External contact network. </li></ul><ul><li>PASSION. </li></ul>
    42. 42. What Motivates the Angel Investor? <ul><li>Improve self image, self-esteem and recognition. </li></ul><ul><li>Obligation to give back. </li></ul><ul><li>Get “first crack” at next high-rise stock prior to IPO. </li></ul><ul><li>Habit, addicted to the high-risk “rush”. </li></ul><ul><li>Fun and exciting, the “joy of giving.” “You never know how much you know until a small company turns to you.” </li></ul><ul><li>ROI 30% minimum. </li></ul>
    43. 43. The Value-Added Investor <ul><li>Very experienced investors and former investment bankers and venture capitalists. </li></ul><ul><li>Very strong network of co-investors whom they leverage and who trust their judgment. </li></ul><ul><li>Extremely active and involved but only for short periods. </li></ul><ul><li>Want to help grow businesses and have fun doing so. </li></ul><ul><li>Tend towards industry concentrations. </li></ul><ul><li>Invest in businesses close to home. </li></ul><ul><li>Normally invest $50,000 to $250,000 per deal. </li></ul>
    44. 44. Consortium of Individual Investors <ul><li>Loose group of private, individual investors (unrelated, typically 3-6). </li></ul><ul><li>Significant entrepreneurial experience. </li></ul><ul><li>Make their own decisions, so may not always invest as a team. </li></ul><ul><li>Invest $50,000 to $500,000 per deal. </li></ul><ul><li>Seek firms with a competitive advantage in which they can be passively involved. </li></ul>
    45. 45. The Partner Investor <ul><li>Buyer in disguise. </li></ul><ul><li>Very high need for control. </li></ul><ul><li>Is trying to build network or has developed some co-investor relationships. </li></ul><ul><li>Would prefer acquisition of established company but lacks financial resources. Wants to be president (buy a job). </li></ul><ul><li>Able to invest $250,000 to $1,000,000. </li></ul>
    46. 46. The Family of Investors <ul><li>Family money is pooled and a trusted, skilled family member coordinates investment activity. </li></ul><ul><li>Very astute investor, serves as “Gate Keeper.” </li></ul><ul><li>Contribute experience, intense involvement for short periods of time. </li></ul><ul><li>Invest $100,000 to $1,000,000. </li></ul>
    47. 47. The Barter Investor <ul><li>Provides what you would have used capital to buy in exchange for equity. </li></ul><ul><li>Participative – not passive. </li></ul><ul><li>Early-stage preference. </li></ul><ul><li>Offers infrastructure (an incubator model). </li></ul><ul><li>Loses interest when you no longer need what they can provide. </li></ul><ul><li>Invests up to $250,000. </li></ul>
    48. 48. The Unaccredited Private Investor <ul><li>Less experienced, less affluent private investor. </li></ul><ul><li>Looking for a role in earlier-stage situations. </li></ul><ul><li>Not a patient investor – has to get money out in 3-5 years. </li></ul><ul><li>Must “really get to know” entrepreneur. </li></ul><ul><li>“ Spreads his/her apple around,” making multiple small investments. </li></ul><ul><li>Used to invest in real estate. </li></ul><ul><li>Has to justify investment to spouse. </li></ul><ul><li>Invests $10,000 to $25,000 maximum. </li></ul>
    49. 49. Where Do You Find Angels? <ul><li>Advisors (Accountants, Attorneys, Brokers). </li></ul><ul><li>Country Clubs. </li></ul><ul><li>Charity Events. </li></ul><ul><li>Investment Seminars. </li></ul><ul><li>Investment Clubs. </li></ul><ul><li>VC Clubs. </li></ul>
    50. 50. The Venture Industry
    51. 51. The VC Industry has Grown Dramatically in the Past Few Years Investments Source: VentureXpert™ Database by VE & NVCA
    52. 52. What’s going on??? <ul><li>VC’s still finding promising opportunities in a wide range of sectors including: software, communications, internet infrastructure, medical/health and Biotechnology. </li></ul><ul><li>However, most VC’s are spending existing resources on current portfolio companies. </li></ul><ul><li>Good time for VC’s to invest, valuations are low and talented workers are available. </li></ul><ul><li>VC’s may be showing more interest in early-stage and first-round deals, because near-term exit prospects for later-stage weak. </li></ul><ul><li>Exit strategy – Mergers & Acquisitions, IPO markets quiet. </li></ul>
    53. 53. Conclusion <ul><li>Venture Capital will continue to be difficult to raise. But… </li></ul><ul><li>Venture Capital has always been difficult to raise (except for 1999-2000). </li></ul><ul><li>There is considerable venture capital available to invest. </li></ul><ul><li>All essential resources other than capital will be easier to obtain (talented people, real estate, professional services). </li></ul><ul><li>Tight capital will mean less competition and better businesses. </li></ul><ul><li>Valuations will drop, considerably. </li></ul><ul><li>All of this is good for the best VC’s and entrepreneurs (and the public). </li></ul>
    54. 54. Would you invest in this company? Microsoft Corporation, 1978 Bill Gates
    55. 55. The Financial Plan <ul><li>Funding Request/Terms of Investment </li></ul><ul><li>Pro Forma </li></ul><ul><li>Financial Assumptions </li></ul>
    56. 56. Pro Forma 5-Year Estimates <ul><li>Projected... </li></ul><ul><ul><li>Income (P&L) Statement </li></ul></ul><ul><ul><li>Cash Flow Statement </li></ul></ul><ul><ul><li>Balance Statement </li></ul></ul>
    57. 57. 5-Year Profit and Loss (P&L) Pro Forma <ul><li>Determines Value of Business </li></ul>
    58. 58. Projecting Sales Source: David Bangs, Jr. “The Start-Up Guide” <ul><li>Sources </li></ul><ul><ul><li>Your Accountant or Financial Advisor </li></ul></ul><ul><ul><li>Trade Association Figures </li></ul></ul><ul><ul><li>Others in Your Line of Business </li></ul></ul><ul><li>Three-Column Approach </li></ul>Worst Case Most Likely Case Best Case A._______________________________________________ B._______________________________________________ Total: Total: Total:
    59. 59. 5-Year Cash Flow Pro Forma <ul><li>Identifies Investment Requirements. </li></ul><ul><li>Growth Can “Eat Up” Cash Flow in First 1-3 Years. </li></ul><ul><li>Investors Expect to see Red Ink up to Two Years in Business. </li></ul><ul><li>Usually Have Increasing Cash Flow Demands During Growth. </li></ul>
    60. 60. 5-Year Balance Sheet Pro Forma <ul><li>Shows Early on, What is Happening With The Business. </li></ul>
    61. 61. Financial Assumptions <ul><li>Revenues </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Headcount/Salaries </li></ul><ul><li>Expenses </li></ul><ul><li>Inventory </li></ul><ul><li>Accounts Receivable </li></ul>
    62. 62. Financial Assumptions Common Mistakes <ul><li>Failing to Provide Assumptions </li></ul><ul><li>Unrealistic Projections </li></ul><ul><li>No Financial Statement </li></ul><ul><li>Underestimating Taxes or Operating Expenses </li></ul><ul><li>Unclear Terms </li></ul><ul><li>Taking Too High Risk </li></ul><ul><li>Spending Too Much on Salaries </li></ul><ul><li>Spending too Much on Salaries & “Fringes” </li></ul><ul><li>Proposing a Low ROI </li></ul><ul><li>Failing to Project the Downside if Sales Don’t go as Expected </li></ul><ul><li>Not Showing Tax Benefit </li></ul><ul><li>Not Having Your Financial Statements Checked by a Reputable Accountant </li></ul>
    63. 63. Marketing and Finance Approaches <ul><li>Marketing... </li></ul><ul><ul><li>Aggressive Approach </li></ul></ul><ul><li>Finance... </li></ul><ul><ul><li>Conservative Approach </li></ul></ul>
    64. 64. Managing Your Finances <ul><li>Do not spend all your time managing the books, hire an accountant. </li></ul><ul><li>Financial Management is too important to get it wrong or neglect it. </li></ul><ul><li>When starting out you want to seek professional advice. </li></ul><ul><li>Take an IRS Tax Seminar and standard financial accounting practices course. </li></ul>