Financial strategies for value creation

1. 1 www.venturebean.com Entrepreneurial Financial Strategies Anjana Vivek www.venturebean.com beanie@venturebean.com

2. 2 www.venturebean.com Entrepreneurial Financial Strategies Overview One..two….four!

3. 3 www.venturebean.com ONE Money is only one dimension

4. 4 www.venturebean.com 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

5. 5 www.venturebean.com FOUR Four things to watch Revenue Profits Cash flow Value

6. 6 www.venturebean.com Entrepreneurial Financial Strategies Financial Forecasts

7. 7 www.venturebean.com 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

8. 8 www.venturebean.com 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

9. 9 www.venturebean.com Think Long term Medium term Short term FINANCIAL FORECAST: Overview

10. 10 www.venturebean.com 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 FINANCIAL FORECAST: Overview

11. 11 www.venturebean.com May be Monthly Quarterly Annual In the initial years, these may be monthly or quarterly, in the long term, may be annual FINANCIAL FORECAST: Overview

12. 12 www.venturebean.com 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? FINANCIAL FORECAST: Overview

13. 13 www.venturebean.com Think through Requirements of cash infusions at different stages of the business Resource constraints Possible valuations at these stages FINANCIAL FORECAST: Overview

14. 14 www.venturebean.com FINANCIAL FORECAST: Preparation Use tools available – i.e. spreadsheets Link and create templates, suitable to your requirement

15. 15 www.venturebean.com 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

16. 16 www.venturebean.com Entrepreneurial Financial Strategies Valuation; Negotiations

17. 17 www.venturebean.com 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

18. 18 www.venturebean.com 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

19. 19 www.venturebean.com 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

20. 20 www.venturebean.com VALUATIONDeals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance

21. 21 www.venturebean.com 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

22. 22 www.venturebean.com NEGOTIATIONS: Preparation 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

23. 23 www.venturebean.com NEGOTIATIONS: Preparation 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

24. 24 www.venturebean.com Entrepreneurial Financial Strategies Transition; Roles of stakeholders

25. 25 www.venturebean.com 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?

26. 26 www.venturebean.com ROLES Plan on roles and responsibilities of team members; stakeholders Plus thinkthrough issues of contribution- in money- in kind- in intangibles

27. 27 www.venturebean.com Entrepreneurial Financial Strategies to trigger thinking…

28. 28 www.venturebean.com 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

29. 29 www.venturebean.com Entrepreneurial finance Finance involves resource allocation cost of capital deciding on funding source managing working capital needs and ….most importantly managing cash

30. 30 www.venturebean.com Entrepreneurial finance 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

31. 31 www.venturebean.com Entrepreneurial finance Needs understanding of People Business Environment Deal issues Synergies

32. 32 www.venturebean.com 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?

33. 33 www.venturebean.com Sources of funding - I Funding gap can be met from Equity investment Angel investment Venture capital investment Debt financing

34. 34 www.venturebean.com 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

35. 35 www.venturebean.com 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

36. 36 www.venturebean.com 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?

37. 37 www.venturebean.com 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

38. 38 www.venturebean.com THANK YOU Wishing you all success