Course 10 - Startup Financuals


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Course 10 - Startup Financuals

  1. 1. Class 10Start-Up FinancialsAntofagasta,  Chile,  July  2011­‐    @depeteam  With  the  Support  of:   1  
  2. 2. INDEX•  People•  Intro.•  Seeking Funds•  Funding Strategy•  Funding Process•  Basic Startup Vocab•  Financial Statements & Models•  Corfo Opportunities•  GROUP WORK
  3. 3. PEOPLELos emprendedores invitados
  4. 4. Basic Start-Up Financials
  6. 6. key value customer activities proposition relationships key customerpartners segments cost revenuestructure key streams resources channels 6
  7. 7. Start a business not a Startup A business without a path to profit isnt a business, its a hobby.Jason Fried, Rework
  8. 8. Startup ObstacleLack of Financial Resources •  Soften this obstacle by encircling it with action-oriented questions.
  9. 9. Why dont we just call plans what they really are: guesses. Start referring to your…financial plans as financial guesses…Now you can stop worrying about them as much. Jason Fried, Rework
  10. 10. Real opportunity?1.  Your money for commercialization;2.  Your 1st dollar of sales from your 1st customer;3.  Before reaching Breakeven Sales;4.  Incoming sales = outflowing costs.
  11. 11. Outside Money is Plan Z
  12. 12. Spending other peoples money may sound great, but … Addictive Bad deal Control Distracting“Cashing out vs. quality Customers vs. Investor
  13. 13. You needless thanyou think Do you really need…
  14. 14. Seeking Funds
  15. 15. Use  of   Sources   Funds   of  Funds  Seeking   Funding   The   Funding   Funds   Strategy   Process   Types  of   Stages   Firms   of  Dev.  
  16. 16. Lifestyle  Types  of   Personal  Goals    Family   Needs   Firms    1M  annual  sales   Limited  Upside   High  Growth    1  in  20  Businesses   Large  Returms   Larger  Fiancial  Responsibility  
  17. 17.   OperationsUse  of     Hiring Competent ManagementFunds     Sales and Distribution   Support and Service   Administration   Working Capital   Accounts Receivable   Inventory   Capital Expansion Technology   Equipment   Leasehold Improvements
  18. 18. Sources  of  Funds   Where can companies get the money? –  Grants/Government –  Internal Cash-Flow –  Angels/Friends and Family –  VCs
  19. 19. Sources   Risk  vs.  Investment   of  Funds   Timeline   RiskFounders Friends and Family Angels Venture Capitalists Acquisitions Equity Markets Banks Time Seed Startup Early Growth Expansion Maturity
  20. 20. Founders: Sources   Highest risk of  Funds   Typically invest up to $100K Use their own savings Ask friends to join them Offer a piece of company as incentive – Risk outlined in Operating AgreementFounders Work without salary (may defer on books) Provide space (garage/basement) Ask for favors (legal advice, accounting) Should all be highly active Time Seed Startup Early Growth Expansion Maturity
  21. 21. Sources   Friends and Family of  Funds   High risk Typically invest up to $200k Can be quick money Personal relationship risk Risk Part of networking for your business Have consistent agreements drawn andFounders approved by a lawyer Friends and Keep records Family Generally passive investors Valuation Time Seed Startup Early Growth Expansion Maturity
  22. 22. Angels Sources   Moderate to high risk of  Funds   Typically invest $50K to $1M Perform due diligence Groups may work as a syndicate Can help with next round of funding Risk 1/3 of deals at the seed stageFounders May take seat on board Friends and In 2004: 225,000 Angels invested $22.5B Family in 48,000 ventures Angels Time Seed Startup Early Growth Expansion Maturity
  23. 23. VCs Sources   Moderate risk of  Funds   Typically invest $2.5M to $10M Perform due diligence Can help with next round of funding 6% of deals at the seed or startup stage Risk Generally lead a round Will take seat on boardFounders Friends and In 2004: $21B in 2,876 ventures $7M average Family Angels Venture Capitalists Time Seed Startup Early Growth Expansion Maturity
  24. 24. Sources   of  Funds   Banks More likely to loan when cash flow is good and assets on the books Borrow on receivables and other Risk assets Acquisitions/Equity:Founders IPOs are rare Friends and Acquisitions are much more Family common Angels Venture Capitalists Acquisitions Equity Markets Banks Time Seed Startup Early Growth Expansion Maturity
  25. 25. Funding Strategy
  26. 26. Funding  Strategy   Debt,  Equity,       Guerrilla  Financing  
  27. 27. Funding   Strategy   Debt•  Banks    Loan  Officers   –  Make  sure  to  bring  your  execu2ve  summary  and  financial  statements   with  you.    •  Banks  lend  money  based  on  solid  collateral   and  on  your  ability  to  repay  the  loan.     –  Collateral  is  an  asset  that  can  be  sold  to  cover  the  debt  in  case  you   default  on  the  loan
  28. 28. Funding   Equity Strategy  Equity  -­‐    term    used  to  describe  money  that  is  provided  to  a  business  in  exchange  for  ownership  in  the  company  Angel  and  Venture  Capital  Investors  Their  goal:  5-­‐10x  in  5-­‐7  years  
  29. 29. Funding   Strategy   Guerrilla Financing•  A  state  of  mind  rather  than  a  discrete  funding   category.  •  ImaginaZon,  creaZvity,  out-­‐of-­‐the-­‐box   thinking,    invenZveness    
  30. 30. Funding   Guerrilla Financing Strategy   1.  Rent   2.  Equipment:  Lease  or  buy  at  aucZon  or  on   eBay.   3.  Salaries:  Offer  stock  or  future  bonuses  for   lower  wages.   4.  MarkeIng:  Several  companies  can  share   costs  in  a  cooperaZve  adverZsing  project.  5.  Labor:  Use  contract  labor  and  interns.    6.  Legal  services:  stock  for  services  7.  Other  people’s  credit:  interest  for  loan  8.  Advance  payments  from  customers:  Ask  for  prepayments  for  future   delivery.  9.  Barter:  Trade  goods  or  services    
  31. 31. Funding   Strategy   Investment Scenario•  Investor  wants  in   –  Put  in  100k  ;  ValuaZon  400k  -­‐  Company  Value:  500k   –  He  owns  20%  •  Analysis  –  Hopes  company  will  be  sold  for  5M   –  Return  on  Investment  (ROI)  %    =     •  ((Future  Value  (FV)  −  Present  Value  (PV))  /  Present  Value)    x  100   –  ROI  (%)  =  ((400k  −  100k)/100k)  ×  100  =  300%  
  32. 32. The Funding Process
  33. 33. The   Funding   Phase  0:  The  Format   Process  –  Here  is  what  is  done  now,  here  is  how  much  it  costs...  –  Here  is  what  we  are  offering,  here  is  how  much  it   saves...  –  Here  is  our  market...  (Clients,  Partners,  etc.)  –  Here  is  what  we  need  from  you...  
  34. 34. The  Funding   Phase  1:  Before  the  Mee2ng  Process  – Develop  a  list  of  likely  funding  targets.    – Send  a  compelling  cover  leker  (without  hype)   along  with  your  execuZve  summary.  (Do  HW)    – 15-­‐to  20-­‐minute  PowerPoint  presentaZon,   and  make  invisible  slides  – Rehearse    Role-­‐play  
  35. 35. The   Funding   Phase  2:  During  the  Mee2ng   Process  •  Leave  all  emoZons  at  the  door—except  for  passion.    •  Approach:  1.)  PosiZoned  for  exciZng  growth,  2.)  You  are   stable  and  not  desperate  for  capital,  and  3.)  A  capital   infusion  at  this  Zme  would  enable  the  more  rapid  growth.    •  Avoid  exaggeraZon,  defensiveness,  and  salesmanship.  •  It  is  not  the  Zme  for  discussions  on  valuaZon  or  any  other   negoZaZon  points.  If  it  comes  up  during  the  meeZng,   indicate  that  your  mind  is  open.    
  36. 36. The   Funding   Phase  3:  AGer  the  Mee2ng   Process  •  It  is  important  that  your  expectaZons  be  reality  based.    •  Aner  one  week,  it  is  appropriate  to  contact  the   investor  to  sense  his  or  her  level  of  interest.  If  there  is   no  interest,  ask  for  advice  to  improve    Evolve  •  Your  odds  improve  as  you:   –   Become  obsessive-­‐compulsive  about  cash  flow.   –   Become  an  expert  communicator  and  win-­‐win  negoZator.   –   Adapt,  evolve,  never  give  up.  
  37. 37. The   Funding   Interest  from  an  Investor   Process  •  Begin  to  discuss  terms  and  condiZons  of   investment  (term  sheet).   – Don’t  begin  to  negoZate.  Seek  professional   legal  advice.  •  Due  Diligence   – It  is  a  two-­‐way  street.  
  38. 38. Stages of Development
  39. 39. No (Further) Equity Partners Go this route!
  40. 40. - You have an idea - Writing the business plan - Investigating the marketStages   -  Looking for people to join youof  Dev.   -  Creating a prototype/demo of product or service -  Investigating patentsMoney High Growth Lifestyle TimeSeed Startup Early Growth Expansion Maturity
  41. 41. - You have a new business - Business plan is solidStages   - Patents, if any, may be in processof  Dev.   - Product demo or prototype has traction – interested clients/investors - Maybe some initial sales - Key management, in place or on sidelinesMoney High Growth Lifestyle TimeSeed Startup Early Growth Expansion Maturity
  42. 42. -  Success in marketplaceStages   -  Hiring sales and marketing -  Hiring operationsof  Dev.   -  Office space/warehouse/manufacturing -  Equipment purchasesMoney High Growth Lifestyle TimeSeed Startup Early Growth Expansion Maturity
  43. 43. -  Growing quickly -  More hiringStages   -  Transition from initial admin/operations to full scale - Move offices to accommodate hiresof  Dev.   - New production facilities/hardware - Invest in marketing - Invest in product development -  Competition takes noticeMoney -  Fire-fighting, keeping the wheels on High Growth Lifestyle TimeSeed Startup Early Growth Expansion Maturity
  44. 44. -  Continued growth -  Formalize organization - Departments are createdStages   -  Who is that person?of  Dev.   -  National presence in market space -  Focus turning to margins and efficiencyMoney High Growth Lifestyle TimeSeed Startup Early Growth Expansion Maturity
  45. 45. Basic Startup Financial Vocabulary
  46. 46. Valuation –the economic value ofa company
  47. 47. •  Stock Types – Common Stock - % of equity ownership expressed in shares normally held by founders – Preferred Stock –liquidation preference, which means in a sale (or liquidation) of the company, the preferred stock holders will have the option of taking their cost out or sharing in the proceeds with the founders as common stock holders
  48. 48. Stock Vesting –Member purchases a block of CommonStock and the company retains arepurchase right to buy the stock back.The repurchase right of the companydiminishes over time so thatthe company eventually has no right torepurchase the stock, i.e. the stockbecomes fully vested.
  49. 49. Stock vs. Options –  Stock: money is earned in proportion to the value of the company –  Options: Not the stocks themselves but time limited contracts to benefit from the right to buy or sell that stock.
  50. 50. Employee Stock Option•  Opportunity for employees to purchase stock in the company they work for, often at a discount from market value
  51. 51. Convertible Debt –When a company borrows moneyfrom an investor and the intention ofboth the investors and the companyis to convert the debt to equity atsome later date. 
  52. 52. P/E Debt: ratio market stock price toafter-tax earnings –  The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. –  Higher P/E ratios - risky investments vs. low P/E ratios, •  High P/E ratio signifies high expectations. –  Comparing P/E ratios is most valuable for companies within the same industry.Dividends vs. Reinvestment
  53. 53. Assets vs. Expenses•  Expenses are deductible against income, so they reduce taxable income.•  Assets are not deductible against income.•  What a company spends to acquire assets is not deductible against income. –  e.g., money spent on inventory is not deductible as expense until the inventory is sold. At that point the money spent becomes a cost of goods sold or cost of sales. And then it reduces income.
  54. 54. Assets vs. Expenses
  55. 55. Example of Start-Up Financing
  56. 56. Financial Statements Models
  57. 57. Financial Statements–  Income Statement (Profitability)–  Balance Sheet (Investment targets source)–  Statements of Cash Flow (meeting obligations)
  58. 58. Key Elements of Financial StatementsRevenues Cost of Sales –  Product –  Infrastructure –  Services –  Support= Gross Revenue –  Cost of Services = Gross IncomeOther costs –  RD After Taxes, –  Sales Marketing Depreciation, –  General Admin Amortization= EBITDA = Net Income
  59. 59. Basic Financial Models–  Online Software Subscription •, 37 Signals–  Software development licensing •  Microsoft, Oracle, Mobile apps–  Marketplace •  Ebay, Expedia–  User Demand Aggregation •
  60. 60. Things Not to Do•  Wait until the last minute to raise money –  Digital River and ExactTarget layoffs•  Get more money than you need –  WebVan vs. Simon Delivers/PeaPod Models•  Spend money on “buzz” –  Beyond.Com “Naked Guy” SuperBowl Ad –  Cyberian Outpost “Wolves” SuperBowl Ad•  Spend money on party –  1999 throws $10M party after $23M VC Raise
  61. 61. Things To Do•  Have skin in the game•  Fail fast, fail small, try again, find a model•  Focus on revenues, margins – this will make raising money easier and valuations better•  Don’t be a big business too soon•  Focus on the size of the pie and not the size of your piece•  Get excited, be confident and think big•  Look for similar business models
  62. 62. Questions?
  63. 63. Corfo Funds•  For startupsMás info:
  64. 64. Corfo para Startups•  Capital Semilla –  Para emprendedores innovadores en el desarrollo de sus proyectos de negocios, mediante el cofinanciamiento de actividades para la creación, puesta en marcha y despegue de sus emprendimientos. –  Cuánto subsidia? Hasta 75% del monto total del proyecto con un tope máximo de $40 millones. –  Mayor info: programas/capital_semilla
  65. 65. Corfo para Startups•  Subsidio Semilla de Asignación Flexible (SSAF) –  tiene por objetivo la creación de un Fondo de Asignación Flexible (SSAF) que apoye a emprendedores innovadores con proyectos de alto riesgo en el desarrollo de sus empresas en etapas tempranas para la creación, puesta en marcha y ejecución de éstas. –  Cuánto subsidia? Hasta 75% del monto total del proyecto con un tope máximo de $700 millones anuales. –  Más info: programas/ subsidio_semilla_de_asignacion_flexible_ssaf
  66. 66. Corfo para Startups•  Empaquetamiento Tecnológico para Nuevos Negocios –  Apoya el proceso de empaquetamiento de negocios sofisticados, desde el punto de vista tecnológico, y con alto potencial de crecimiento. Se entiende por empaquetamiento tecnológico, el proceso de desarrollo de productos que presentan una oportunidad comercial demostrable. –  Cuanto subsidia? Hasta el 80% del presupuesto total de proyecto, con un tope máximo a solicitar a Innova Chile de un subsidio no reembolsable de $20 millones para la primera etapa y de $180 millones para las dos etapas. –  Más info: programas/ empaquetamiento_tecnologico_para_nuevos_negocio s
  67. 67. Corfo para Startups•  Capital de Riesgo para Empresas Innovadoras –  Financiamiento para la creación o expansión de empresas con proyectos innovadores que tengan un alto potencial de crecimiento. CORFO lo entrega en la forma de un crédito de largo plazo a Fondos de Inversión, para que éstos inviertan en dichas empresas mediante aportes de capital o créditos. –  Cuánto subsidia? El monto depende de las características y necesidades del proyecto, y según se haya definido en el proceso de negociación entre la empresa y el Fondo. Este aporte se realiza mediante un aumento de capital. –  -Más info: programas/ capital_de_riesgo_corfo_para_empresas_innovadoras
  68. 68. Corfo para Startups•  Redes de Capitalistas Ángeles –  Es un subsidio que apoya la organización, formalización y operación de Redes de Capitalistas Ángeles, que aumenten las inversiones en empresas innovadoras de alto potencial de crecimiento.•  Cuánto subsidia? Hasta 70% del total del proyecto, con un tope máximo a solicitar para el primer año de ejecución del proyecto de $80 millones y de $100 millones anuales para los siguientes años. Los proyectos contemplarán un plazo máximo de ejecución de 6 años.•  Más info: programas/redes_de_inversionistas_angeles
  69. 69. GROUP WORK A ensuciarse lasmanos