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Finance And Business Planning
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Finance And Business Planning Presentation Transcript

  • 1. Keys to Financing the New Venture Alec Johnson, Ph.D. University of St. Thomas
  • 2. The Problem
    • “ Small business management is cash flow management.” Dr. Robert Pricer, Weinert Applied Ventures Program, Unviersity of Wisconsin
    • “ Cash is King.” Dave Stassen, Partner, St. Paul Venture Capital
    • “ You’re not an entrepreneur until you’ve written payroll checks on Friday and spent the weekend collecting the cash to cover them.” Keith Streckenbach, founder and CEO of PharmacyOneSouce.com
  • 3. Entrepreneurial Finance vs. Corporate Finance
    • Differences from Corporate Finance
      • Diversification and Value
      • Involvement of Investors
      • Harvesting
  • 4. The Problem - Objectives Minimize Cost Maximize Return Maintain Control Maximize Ownership Minimize Involvement Minimize Risk Entrepreneur Investor
  • 5. The Problem - Management
    • What is the Ultimate Task of an Entrepreneur?
    • Job #1 is Risk Management
    • Largest risk is Financial and question becomes “How?”
  • 6. The Problem - Structure
    • Type, i.e. Do I use debt, equity or some combination.
    • Timing, i.e. When do I need it?
    • Amount, i.e. How much do I need?
  • 7. Type – Two General Classes
    • Debt
      • Represents a fixed cost
      • Represents more risk
      • Cheapest type of outside financing
    • Equity
      • No interest payment
      • No obligation to repay
      • Most Expensive type of financing
  • 8. Sources of Debt Financing
    • Friends and Family
    • Banks
    • Leasing
    • Factoring
  • 9. Bank Financing
    • Commercial banks are the largest source of external capital for growing firms.
    • Problems:
      • Lack of collateral
      • Lack of earnings history
  • 10. Leasing
    • Often used technique to acquiring assets without having to purchase them.
    • Two types of Leases:
      • Operating Lease
      • Capital Lease
  • 11. Factoring
    • Factors buy company’s accounts receivables at a discount.
    • Recall R&R case.
    • Gets cash to company quickly, but must have cost of factor available in profit margin.
  • 12. Equity
    • When to use equity?
      • Every company has some form of equity.
      • Founders raise equity when:
        • there is no collateral to secure debt
        • insufficient cash flow to secure debt
        • required growth capital more than banks can provide.
  • 13. Types of Equity Instruments
    • Typically used in small business placements:
      • Common Stock
      • Preferred Stock
  • 14. Types of Equity Instruments
    • Common Stock Characteristics:
      • Most common form of issuance
      • Last in liquidation = ?
      • Represents Entire ownership of firm.
  • 15. Types of Equity Instruments
    • Preferred Stock Characteristics:
      • Pays dividends
      • Preference in liquidation
  • 16. Types of Equity Instruments
    • Preferred Stock Characteristics:
      • Looks a lot like Debt!
      • Used by Venture Capitalists to gain position in liquidity event while minimizing risk.
  • 17. Types of Equity Investors
    • Angel Investors
    • Venture Capitalists
  • 18. Types of Equity Investors: Angels
    • Typical Angel Investor
      • Private individual (not an institutional fund)
      • Age: 47 –54 years
      • Gender: Male
      • Net Worth: $1,000,000 +
  • 19. Types of Equity Investors: Angels
    • Typical Angel Investor
      • Education: Bachelors or greater
      • Average Investment: $59,000
      • Preferred Stage: Start-up (56%) and infant or young (24%)
  • 20. Types of Equity Investors: Angels
    • Typical Angel Investor
      • Required Rate of Return: 15% - 45%
      • Length of Investment 3 – 10 years
      • “Patient Money”
  • 21. Types of Equity Investors: Venture Capital
    • Typical Venture Capital Firms
      • Institutional Firm
      • Raises money from various sources, including Angels
      • Creates “pool” of capital, a fund.
      • Develops portfolio of firms under management
  • 22. Types of Equity Investors: Venture Capital
    • Typical Venture Capital Firms
      • Average Investment: $1 M to $50 M per investment.
      • Industries: High Growth, early or later stages
      • Services Provided: None to direct management decision making and board control.
      • Required Rate of Return: 10X in 3-5 years.
      • Typically invest using Preferred Stock
  • 23. Venture Capital Investments, Q2 2001 2.2% of Venture Capital invested in Midwest!
  • 24. Timing – Sources of New Venture Financing* *Adapted from: Smith and Smith, Entrepreneurial Finance, 2000 IPO Venture Capital Banks/Lessors Angels/Partner Entrepreneur/ Friends/Family Exit Rapid Growth Early Growth Start-Up Development
  • 25. Timing - Cash Needs
    • Goal is to manage risk to business and to investor.
    • Minimize risk by staging investments
    • Establish stages by developing solid business plan and financial projections!
  • 26. Case Study – Ascend Medical
    • Facts:
        • Development stage Medical Device company.
        • Prototype of catheter for stroke victims nearly complete.
        • Market need unclear.
        • FDA process is three years and $30M in expense
        • No guarantee of approval.
  • 27. Case Study – Ascend Medical
    • Analysis – Type?
        • Debt is not an option.
        • Angels to get the product through prototype development, further market study, conduct focus groups with doctors. $500,000.
        • Venture Capital to take it through FDA process and initial market launch. $45M
  • 28. Case Study – Sporto
    • Facts:
        • Start up phase winter apparel company
        • One season’s sales under it belt
        • Moderate growth plans
        • Required funds: $1.5 M
        • Needs immediate funds of $100,000 to expand sales organization and $1.4 M to expand product line and related marketing expenses over the next 18-24 months
  • 29. Case Study – Sporto
    • Analysis – Type?
        • Venture Capital not an option – growth too slow
        • All debt not an option – unless financials can demonstrate adequate cash flow and plenty of collateral available.
        • Private equity with debt mix is viable option
        • Factoring after sales grow, leasing office equipment
        • Alternative?
  • 30. Case Study – Sporto
    • Analysis – Timing?
        • Could split rounds up, reduce overall cost of capital.
        • Rounds are close enough that it might make sense to raise all at one time.
        • Unless founder gets lucky? Example
  • 31. The Big Picture – Business Plan Competitor Analysis Environmental Trends Customer Analysis Business Plan Functional Plans Pro formas Financing Evaluation-CMOPs
  • 32. Business Plans
    • What is a business plan?
      • Something you produce because the bank expects it?
      • Something you produce because every says you should?
      • ?
  • 33. Business Plans – Make Your Argument
    • Argument contains some consistent themes
      • What is the product or service?
      • Who is MOST likely to buy it?
      • How much are they willing to pay for it?
      • How many of “THEM” are there?
  • 34. Business Plans – Make Your Argument
    • Argument contains some consistent themes
      • Who is MOST likely to buy it?
      • Where and How will they purchase the product?
      • How will I let them know about it?
      • Does my team have the ability to execute the plan?
  • 35. “ Everything should be made as simple as possible, but not more so.” Albert Einstein
  • 36. Business Plan-The Purpose
    • A Sales Document to Raise Capital
    • A Road Map to Developing a Successful Organization- Do we have a product the market wants and do we have an organization that can see it to market?
    • The Plan makes an argument for why the business will be successful!!!!!
  • 37. Business Plan Outline
    • Executive Summary
    • Company History
    • Major Products/Services
    • Marketplace
    • Competition
    • Marketing Plan
    • Operations-Manufacturing
    • Management Team
    • Risks
    • Financial Analysis
  • 38. Company Description
    • What business are you in?
    • What are your:
      • products or services?
      • customers?
      • applications? (Different uses and needs satisfied
    • What is your distinctive competence?
    • What is your competitive advantage?
    • What is your Mission Statement
  • 39. Sustainable Competitive Advantage
    • Versus Distinctive Competence
    Ask the question “What do we have that can’t be replicated by our competitors?” vs. “What are we good at?”
  • 40. Mission Statement
    • What do we do?
    • How do we do it?
    • Who do we do it for?
    Example: Brew – On - Premise
  • 41. Market Analysis & Marketing
    • Industry description and outlook
    • Target markets (segments)
    • Competition
    • Reaction from prospective customers
    • Marketing activities (strategy/pricing)
    • Selling activities
    • The Key is your Feasibility Study
  • 42. Example 1: Brew on Premise $423 ($527) $32,703 367,085 (54%) Dane County, Wisconsin $449 ($585) $35,322 225,339 (52%) Boulder County, Colorado Median Rent (upper quartile) Median Income Total Population (% age 24-55)
  • 43. Example 1 - Brew on Premise  
    • Counties are comparable
    • 15 batches per day in Boulder
    • Ratio of target population 1.6:1
    • Expected revenues for Badgerland to reach 24 batches per day after 2 years of operation.
  • 44. Example 2 – Ascend Medical
    • Different approach to argument
    • Focus isn’t one likely demographic
    • Focus is on treatable number of cases
  • 45. Example 2 – Ascend Medical
    • Process:
      • Population growth through 2010 (Source: US Census)
      • “Target” population not important. All medical research data based on incidence in US population.
      • Medical data implies number of treatable cases by type of stroke.
  • 46. Example 2 – Ascend Medical
    • Process:
      • Once number of treatable cases established by type of stroke, can then establish type of treatments received.
      • Those requiring clot removal (vs. stenting, etc.) are established as likely candidates for this procedure.
      • 356,000 treatable cases today, growing to 560,000 in 2010.
  • 47. Management and Ownership
    • Key management positions
    • Background of personnel
    • Board of Directors
    • Ownership
    • Starting a business is about building a successful organization and working in a “team.”
    • Does your team cover all the necessary roles or have you developed a plan to cover areas that are weak?
  • 48. Management Franchise Software, Medical Device, etc. Low High Moderate Granite Gear Level of Sophistication
  • 49. Product Development Level of Complexity Franchise Software, Medical Device, etc. none high moderate Granite Gear
  • 50. Time To Market Franchise Software, Medical Device, etc. short high moderate Granite Gear
  • 51. Time to Profitability Franchise Software, Medical Device, etc. Short < 6 months High >24 months Moderate 9 to 18 months Granite Gear
  • 52. Market Risk Franchise Software, Medical Device, etc. High Low Moderate Granite Gear Product Acceptance
  • 53. Capitalization Franchise Software, Medical Device, etc. Low < $50,000 High > $2M Moderate $500K to $2M Granite Gear
  • 54. Risks
    • Competitive Risks
    • Technological Risks
    • Organizational Risks
    • Main Point: Identify them and develop a plan to deal with them if and when they arise.
  • 55. Funds Required and Their Uses
    • How much money do you require now?
    • How much will you require over the next five years?
    • How will the funds be used?
  • 56. Funds Required and Their Uses
    • Debt/Equity mix
    • What terms do you ask? (Let the commercial money market help you select winners)
    • Do you plan to “harvest?” Be explicit about the deal you offer…
  • 57. Financial Data
    • Historical financial statements and projections for the next five years
    • Key assumptions
  • 58. Appendices
    • Resumes
    • Pictures of products
    • Sales literature
    • Supporting published market studies or trade journal articles
    • Patents
  • 59. The Big Picture Competitor Analysis Environmental Trends Customer Analysis Business Plan Functional Plans Proformas Financing Evaluation-CMOPs