One Two Four Entrepreneurial Financial Strategies

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Entrepreneurial Financial Strategies
Anjana Vivek
www.venturebean.com
beanie@venturebean.com

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Overview
One..two….four!

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ONE
Money is only one dimension

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TWO
Valuation in an entrepreneurial venture is often driven by the following two factors:
Expected Cash Burn and
Stake promoters are willing to give away and acceptable to investors

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FOUR
Four things to watch
Revenue
Profits
Cash flow
Value

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Financial Forecasts

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FINANCIAL FORECAST: Overview
This is based on and driven by your business model
It helps to spend significant time thinking of your business strategy and business model
A business model develops and evolves over time – it is not static

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Business modelThe following are some key areas to be considered while developing a business model and plan- Business / idea- People behind idea/project- Market size expected- Marketing strategy- Competition- Financials- Other information which makes this complete

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Think
Long term
Medium term
Short term

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Balance Sheet
Profit and Loss Account
Cash Flow
NOTE
If you do not understand the basics of financial statements you may spend time to learn
Financial statements are communicating tools for business i.e. business language
You do not need to be an accountant or MBA to understand the basics

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May be
Monthly
Quarterly
Annual
In the initial years, these may be monthly or quarterly, in the long term, may be annual

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Look at
Various revenue streams
Capital expenditure (land, computers, vehicles, furniture etc.)
Revenue expenditure (Salary, raw material cost, maintenance and repair costs etc.)
You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW?

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Think through
Requirements of cash infusions at different stages of the business
Resource constraints
Possible valuations at these stages

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FINANCIAL FORECAST: Preparation
Use tools available – i.e. spreadsheets
Link and create templates, suitable to your requirement

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FINANCIAL FORECAST: Preparation
Uncertainties and unknowns can be captured through:
Scenario and sensitivity analysis
Templates that allow for different scenarios – i.e. optimistic, pessimistic, expected,
i.e. by making the changes in the input, the output financials should show the impact

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Valuation;
Negotiations

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VALUATIONValuation is based on:- intangibles and - tangiblesValuation can be computed in multiple ways, the popular methods:- multiples of revenue; profit etc.- multiples of key drivers, eg.user base- cash flow based

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VALUATIONValuation may be driven by - the stake the entrepreneur is willing to give up at a particular stage of investment in the business and - the amount of money required by the business at that stage

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VALUATIONDifferent persons can value the same business differently because they may- use different methods of valuation- use variations in the methods - have different inputs in the methodsThus, valuation perceptions can vary, and we do have situations where there are divergent views on valuation

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VALUATIONDeals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance

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NEGOTIATIONS: Preparation
It is useful to think through:
What you want from a proposed transactions
Transaction/deal maker issues
Transaction/deal breaker issues
The point where you may be need to walk away

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Put yourself in the shoes of the other party
Prepare for a due diligence
Break up the transaction issues into small sub-issues which could be dealt with separately, rather than as a package
Think through the steps post the transaction

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Prepare with a list of possible questions that may be asked and how you will answer them
Who will negotiate, will it be based on the area, i.e. business issues, legal issues etc. …would these be handled by the subject matter specialists?
Understand the strengths and gaps of your team members

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Transition;
Roles of stakeholders

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TRANSITIONLook at the stage of your business and plan accordingly Growing to the next level may lead to issues such as- letting go of control- letting go of leadershipAre you ready for this?

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ROLES Plan on roles and responsibilities of team members; stakeholders Plus thinkthrough issues of contribution- in money- in kind- in intangibles

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to trigger thinking…

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Entrepreneurial finance
Entrepreneurship has many definitions, has elements of risk-taking, innovation and pursuit of opportunities relentlessly without regard to resources controlled
One needs to understanding finance in the context of entrepreneurial firms

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Finance involves
resource allocation
cost of capital
deciding on funding source
managing working capital needs and ….most importantly
managing cash

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Evaluation of business opportunities
from start-up stage to later stage companies
Understanding the value drivers of the business
Exploring options to create value,
for the business
for the stakeholders

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Needs understanding of
People
Business
Environment
Deal issues
Synergies

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Sources of funding
Funding gap can be met from multiple ways, traditional, new ways of funding and looking at creative options
Can you think of these and list them
Each option has its own advantages and disadvantages; can you think of what these could be?

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Sources of funding - I
Funding gap can be met from
Equity investment
Angel investment
Venture capital investment
Debt financing

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Sources of funding - II
Funding gap can also be met from
Strategic investment
Increasing revenue by
changing product mix or
cash flow timing
Innovatively sourcing cash

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Some examples
IT product development company being let down by investor
Confectionery/chocolate producer needing extra funds to meet expected surge in demand during the Christmas Season

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Utilisation of funds
Funds raised are invested in
Available opportunity
Opportunity that is latent and not obvious
Creating opportunity
Based on strategy of entrepreneurs, which may change and evolve over time
The question to be asked: Is value being created or is there an attempt to create value?

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Entrepreneurial finance and financial strategy in Summary
Strategic financial planning
for short term, medium term and long term
Preparing and implementing
business plans, financial forecasts
Review of funding options
Continuous monitoring and updation
setting up internal controls, management information systems
Preparing for alliance partnerships
including due diligence review, valuation and negotiation, deal terms and conditions
Value creation

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THANK YOU
Wishing you all success

One Two Four Entrepreneurial Financial Strategies

by Anjana Vivek

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