SMU Training Track #7: How to Finance Your Business

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In this event attendees will gain insight into how to position their efforts and business model to be aligned with the best Capital pool. They will also receive tips on where to go and how to access Capital successfully.

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SMU Training Track #7: How to Finance Your Business

  1. 1. Raising Capital<br />
  2. 2. Agenda<br /> Background<br /> Define Capital<br /> New Venture Cycle<br />Stages in Cycle<br />Cash Flow Forecast<br />Business Opportunity<br />Capital Ladder Puzzle<br />Top 10 traps to avoid<br />
  3. 3. 1) Background<br /> Finance / Capital Markets<br />Intrapreneur 25 Years<br /> B.S. Finance / MBA Rotman<br /> Argentari Group<br />Buy Side advisor opportunity assessment<br />Manage investment early stage ventures<br />Independent financial valuations<br />Angel Investor<br />Chairperson Ryerson Angel Network<br />NOT SELLING OR BUYING<br />
  4. 4. 2) What is Capital?<br />
  5. 5. What is Capital<br />FUNCTIONAL DEFINITION<br />The Value of ContractualFinancial and Human Assets Invested by the Founder(s) and Others in a business.<br />
  6. 6. Capital Assets<br />Financial<br />Human<br />PAYMENT<br />VALUATION<br />
  7. 7. Assets<br />Financial<br />PAYMENT<br />Cash<br />Hard Assets<br />VALUATION<br />External Market<br />
  8. 8. Capital Assets<br />Financial<br />Human<br />PAYMENT<br />Expertise<br />Cash<br />Hard Assets<br />Idea<br />VALUATION<br />External Market<br />Internal Assessment<br />
  9. 9. Contractual Capital<br />Equity<br />Debt<br /><ul><li> I borrowed $50,000 from my Dad and promised to re pay him.
  10. 10. My Uncle Jim let me use his basement he usually rents for $2,000 a year for free.
  11. 11. I have an equal partner who I work with.
  12. 12. I promised to compensate Joe, a programmer who wrote the software. It usually costs $10,000.
  13. 13. I have a grant from the government for $8,000.
  14. 14. Sally contributed a tractor a worth $23,000 that we use in the business.
  15. 15. The lawyer gave me 6 months to pay my bills.</li></li></ul><li>Capital Investing<br />Debt Capital<br />Business Plan<br />DEBT<br />Profit<br />0<br />Time<br />DEBT<br />
  16. 16. Capital Investing<br />Equity Capital<br />Business Plan<br />EQUITY<br />Profit<br />Profit<br />0<br />Time<br />EQUITY<br />
  17. 17. Equity Value as seen by Founder<br />Capital<br />Business Plan<br />Profit<br />0<br />Time<br />
  18. 18. Equity Value as seen by Others<br />Business Plan<br />Capital<br />Profit<br />0<br />Time<br />
  19. 19. What is Capital<br />FUNCTIONAL DEFINITION<br />The Value of ContractualFinancial and Human Assets Invested by the Founder(s) and Others in a business.<br />
  20. 20. 3i) New Venture Business Cycle<br />Tried to copy a Graph<br />
  21. 21. Page 16<br />
  22. 22. Page 17<br />
  23. 23. Page 18<br />
  24. 24. Page 19<br />
  25. 25. Page 20<br />
  26. 26. 3i) Stages<br />Stage 1: Mind to Money<br />The first Aha moment<br /> Research<br /> Business Plan<br /> The Real Aha Moment<br /> Real Business Plan<br /> In Depth Research<br /> Detailed Plan / Budget<br />
  27. 27. 3i) Business Cycle<br />Stage2: Proof of Concept<br />Detailed Budget<br />Prototype Specs<br />Prototype Built<br />External Hurdles Overcome<br />Start of First Cycle<br />One Cycle Completed<br />
  28. 28. 3i) Business Cycle<br />Stage3: Sell, Adapt<br />Detailed Marketing Plan<br />Sales Tracking<br />CMO<br />Stumble<br />Fall<br />Get up<br />
  29. 29. 3i) Business Cycle<br />Stage 4: Sell, Profit, EXIT<br />CFO<br />Cost control<br />Leadership<br />Business acumen<br />Management ability<br />Shareholder relations<br />
  30. 30. 3ii) Cash Flow<br />Stage 1:<br /> Mind to Money<br />Stage2: <br />Proof of Concept<br />Stage3: <br />Sell, Adapt<br />Stage 4: <br />Profit, EXIT<br />CASH FLOW<br />
  31. 31. 3ii) Cash Flow<br />Stage 1:<br /> Mind to Money<br />Stage2: <br />Proof of Concept<br />Stage3: <br />Sell, Adapt<br />Stage 4: <br />Profit, EXIT<br />CASH FLOW<br />
  32. 32. 3ii) Cash Flow<br />Stage 1:<br /> Mind to Money<br />Stage2: <br />Proof of Concept<br />Stage3: <br />Sell, Adapt<br />Stage 4: <br />Profit, EXIT<br />CASH FLOW<br />
  33. 33. 3iii) Classify Opportunity<br /> Also ran<br /> New and Improved <br /> Marriage Play <br /> Medium Change<br /> Industry Transplant <br /> Category / Segment Killer<br /> Technology leap<br /> Model Disruption<br />R&D, Proof of Concept, Sales<br />
  34. 34. 4) Capital Ladder<br />
  35. 35. 4) Capital Ladder<br />
  36. 36. Raising External Capital boils down to <br />THE ASK<br />
  37. 37. 3ii) Cost of Capital<br />VENTURE RISK<br />Stage 1:<br /> Mind to Money<br />Stage2: <br />Proof of Concept<br />Stage3: <br />Sell, Adapt<br />Stage 4: <br />Profit, EXIT<br />CASH FLOW<br />Hi Cost Capital<br />Lo Cost Capital<br />
  38. 38. 3ii) Cost of Capital<br />VENTURE RISK<br />Stage 1:<br /> Mind to Money<br />Stage2: <br />Proof of Concept<br />Stage3: <br />Sell, Adapt<br />Stage 4: <br />Profit, EXIT<br />CASH FLOW<br />Hi Cost Capital<br />Lo Cost Capital<br />
  39. 39. Capital Puzzle<br />Grants<br />V.C.<br />I.P.O.<br />Angels<br />3 F’s<br />
  40. 40. Investor Segments<br />N / A <br />
  41. 41. 3 F’s Overview<br /><ul><li>Perceived Value:
  42. 42. Support
  43. 43. Validation
  44. 44. Idea Generation
  45. 45. True Value:
  46. 46. First Round Real Money
  47. 47. NEGATIVE NET RETURN
  48. 48. Segment Breakdown:
  49. 49. Comfort: 35%
  50. 50. Cynics: 55%
  51. 51. Cash: 5%
  52. 52. Critics: 5%</li></ul>Tips<br /><ul><li>Use debt not equity
  53. 53. Silent Partners
  54. 54. Financial s of F = your risk
  55. 55. The third F is Fools </li></li></ul><li>Grants<br /><ul><li>Perceived Value:
  56. 56. Free Money
  57. 57. Validation of Business
  58. 58. Public Credibility
  59. 59. True Value:
  60. 60. Program Funded
  61. 61. Best kind of Capital
  62. 62. Segment Breakdown:
  63. 63. Ineligible: 85%
  64. 64. Resources: 10%
  65. 65. Cash: 5%</li></ul>Tips<br /><ul><li>Knowledge of the system
  66. 66. Time is not a factor
  67. 67. Avoid Agents / Never pay for the service
  68. 68. Read fine print
  69. 69. Holder of I.P.
  70. 70. Equity Stake
  71. 71. Debt
  72. 72. SR& ED, IRAP, MaRS, EDC, = Grant
  73. 73. A loan is a loan</li></li></ul><li>Loans<br /><ul><li>Perceived Value:
  74. 74. Like Equity
  75. 75. Leverage
  76. 76. Doesn’t Effect Equity
  77. 77. True Value:
  78. 78. NOT EQUITY
  79. 79. Great place for 3 F’s
  80. 80. Drains Cashflow / Equity
  81. 81. Shareholders Prefer
  82. 82. Segment Breakdown:
  83. 83. Personal Gty: 95%
  84. 84. Collateral: 4.8%
  85. 85. Company: .2%</li></ul>Tips<br /><ul><li>Convertible debt is at the option of the Lender, not the founder
  86. 86. Personal Guarantee usually required
  87. 87. Partners joint and severed
  88. 88. Collateral haircut required on all Assets
  89. 89. Signing for a loan is a loan
  90. 90. Lenders want to be all equal
  91. 91. Commitment for life
  92. 92. Vendor financing = Payment Terms
  93. 93. Community based loans are available
  94. 94. Schedule A’s not interested
  95. 95. Red Light Syndrome</li></li></ul><li>Accelerators<br /><ul><li>Perceived Value:
  96. 96. Quasi Equity Investment
  97. 97. Chosen Few
  98. 98. Quick step to Cash
  99. 99. True Value:
  100. 100. Group Environment
  101. 101. Mentorship / Reputation
  102. 102. Facilities / Rolodex
  103. 103. Segment Breakdown:
  104. 104. Real: ?%
  105. 105. Bogus: ?%
  106. 106. Advisory Boards ?%
  107. 107. Landlords ?%
  108. 108. Govt ?%</li></ul>Tips<br /><ul><li>Read Agreement carefully
  109. 109. Facilities have market value (REGUS)
  110. 110. Number of successes
  111. 111. Industry Expertise (Tech)
  112. 112. Agent for Capital
  113. 113. People are the asset
  114. 114. # of ventures per cycle
  115. 115. Credibility / Term
  116. 116. Conversion Terms / Timing / Cost</li></ul>Only Cash is as good as Cash<br />
  117. 117. Angels<br /><ul><li>Perceived Value:
  118. 118. Real Equity Investors
  119. 119. Unlimited Cash
  120. 120. War Hero’s
  121. 121. True Value:
  122. 122. Financial Oversight
  123. 123. Real World Mentorship
  124. 124. Operating Cash
  125. 125. Primer: Investor Relations
  126. 126. Segment Breakdown:
  127. 127. Cynics: 30%
  128. 128. Critics: 40%
  129. 129. Consualtants:20%
  130. 130. Capitalists: 10%</li></ul>Tips<br /><ul><li>Dragons Den is a TV Show
  131. 131. Due Diligence / Legal Agreement
  132. 132. Number of groups / organisations
  133. 133. Idea + Business Acumen+ Showman
  134. 134. Jockeys not horses (execute fair idea)
  135. 135. Plenty of ponies
  136. 136. Know your #’s
  137. 137. Max 15 % of individual portfolio
  138. 138. High Risk Return and Involvement
  139. 139. Exit Key with limited dilution
  140. 140. Limited Funding Capability (80’s dead)</li></ul>VALUATION<br />
  141. 141. Private Equity/CPC/Venture Capital<br /><ul><li>Perceived Value:
  142. 142. Big Time Equity
  143. 143. Source all future capital
  144. 144. Advisors
  145. 145. True Value:
  146. 146. Validation
  147. 147. Capital
  148. 148. Driver to an Exit
  149. 149. Segment Breakdown:
  150. 150. Small : $250 - $2Mil
  151. 151. Medium: $ 2 - $5
  152. 152. Large: $5 - $15</li></ul>Tips<br /><ul><li>Investment bankers / Advisors / Brokers
  153. 153. Detailed Due Diligence
  154. 154. Extensive Legal Agreement
  155. 155. Source of Capital / Return Criteria
  156. 156. Many Industry Specific
  157. 157. Canada = California
  158. 158. Last sector to recover
  159. 159. # of investments
  160. 160. Exit / Exit / Exit</li></li></ul><li>Valuation 101<br /><ul><li>Value today
  161. 161. Discounted Cash Flow
  162. 162. Risk Premium 50%
  163. 163. Comparatives
  164. 164. U.S. Vs Canada
  165. 165. Other Investors
  166. 166. Real Money
  167. 167. Credibility of Lead
  168. 168. Valuation Agents
  169. 169. Questionable Value
  170. 170. External Factors
  171. 171. Speed
  172. 172. Terms
  173. 173. Value founder time/money/effort
  174. 174. Expected return
  175. 175. Operating vs. financial control
  176. 176. Assets
  177. 177. Salaries
  178. 178. Collateral</li></ul>Stage 1:<br />Stage2: <br />Stage3: <br />Stage 4: <br />Cash Flow<br />Value<br />
  179. 179. Investor Segments<br />EXIT<br />The one with the gold, makes all the rules<br />Golden Rule: <br />
  180. 180. 5) Top TEN Traps to Avoid<br />Unrealistic Valuation<br /><ul><li>Require $500,000
  181. 181. Want to keep 80% equity
  182. 182. Pre money Valuation = $2Mil</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Confuse Market Potential with Sales potential: <br /><ul><li>2% of $2 Billion market
  183. 183. U.S. Cousin</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a Quick Linear Progression<br /><ul><li>Reality is Curved
  184. 184. Demonstrates Inexperience</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br /><ul><li>3 F’s will love you no matter what
  185. 185. Fairly value start-up services</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br /><ul><li>80% of nothing vs. 15% of something</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br /><ul><li>Evil preventing my dream from coming true
  186. 186. Shareholders share my vision and passion</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br />No serious skin in the game<br /><ul><li>Level of commitment
  187. 187. Value of Personal Capital</li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br />No serious skin in the game<br />Discount Bootstrapping<br />Largest source of Capital<br />Normal course of business<br />
  188. 188. Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a quick Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br />No serious skin in the game<br />Discount Bootstrapping<br />Miss Grant / SRED / forgivable loan opportunities<br /><ul><li>Overvalues Equity </li></li></ul><li>Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br />No serious skin in the game<br />Discount Bootstrapping<br />Miss Grant / SRED / forgivable loan opportunities<br />Gain all education through Experience vs. Academics<br />
  189. 189. Top TEN Traps to Avoid<br />Unrealistic Valuation<br />Overstate Market Potential<br />Assume a Linear Progression<br />Allocate Equity too soon<br />Hold on to Equity too long<br />Misunderstand the role of Capital<br />No serious skin in the game<br />Discount Bootstrapping<br />Miss Grant / SRED / forgivable loan opportunities<br />Gain all education through Experience vs. Academics<br />

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