Session 5 financing strategies

10. © Copyright 2003, Venture Capitalist’s Goals • 40% Internal Rate of Return on Investment, as minimum yield. • 5-100 Times Their Investment, Within Five Years. • Anticipated Revenues Must Grow to Exceed $50 Million/Year. • Managed Risk

11. © Copyright 2003, Bank’s Expectations • You Have Assets (Collateral) -- To Secure Return of Bank’s Money • Income (Earnings) Within The Company • You Personally Guarantee Pay-Back (Personal Assets). • Very Low Risk.

14. © Copyright 2003, About Presenting to Investors • Grab the Investors’ Attention Immediately • Focus on Validity of the Business/Investment Opportunity, Not the Technology or Service • Justify Your Assumptions • Test Your Presentation on each a CPA & a Marketing Person. • Make Presentations Somewhere Between Aggressive and Conservative.

15. © Copyright 2003, The Financial Plan • 5-Year Profit and Loss (P&L) Pro Forma • 5-Year Balance Sheet Pro Forma • 5-Year Cash Flow Pro Forma • Underlying Assumptions • Use of Proceeds • Prior Investments Received Know, but don’t present, all of the underlying detailsKnow, but don’t present, all of the underlying details

18. © Copyright 2003, 5-Year Cash Flow Pro Forma • Identifies Investment Requirements. • Rapid Growth Can Consume All Cash Flow within First 1-3 Years. • Most Investors Expect to See Red Ink from 12-24 Months in The Enterprise. • Usually Have Increasing Cash Flow Demands During Growth.

19. © Copyright 2003, Underlying AssumptionsUnderlying Assumptions • Has to Make Sense! • Must Be Error-Free. • Investors Will Do an Independent Study as Part of Their Due Diligence Process. • Venture Capitalists Will Identify and Critique All Key Assumptions. • Do Your Homework!

20. © Copyright 2003, Uses of ProceedsUses of Proceeds • Relates to Cash Flow Projection • Do Not Ask for Money That Isn’t Supported By Cash Flow Projections (One of Most Common Problems). • Easier to Convince Investors If There Is Some Operating History. • If You Aren’t Prepared, or Your Enterprise Isn’t Ready, Do Not Waste a Venture Capitalist’s Time.

21. © Copyright 2003, Prior InvestmentPrior Investment • How Much Have You Invested in the Business? • Are You Investing More into the Business? • Venture Capitalists Are Increasingly Willing to Invest If You Also Invest.

22. © Copyright 2003, The Financial AssumptionsThe Financial Assumptions • Revenues • Cost of Goods • Expenses • Inventory • Accounts Receivable • Headcount/Salaries These can be the most important details!These can be the most important details!

23. © Copyright 2003, OrganizationalOrganizational Learning Curve • Experience Leads to Cost Reduction. • Worker Learning Effects Can Occur Quickly. • Total Learning Effect = Competitive Advantage. • Learning Rate Tends to Level Off.

25. © Copyright 2003, Spreadsheet ComponentsSpreadsheet Components • Revenue Projection Charts • Cost of Goods Sold • Head Count • Salaries • Expenses 6.4%3.5%1.9%0.9%0.1%OUR SHARE OF TOTAL MARKET 32.0%25.1%19.0%13.8%4.4% 141,650,00063,900,00028,350,00011,250,0001,325,000OUR TOTAL CHANNELS 443,066,912254,218,720148,840,00081,740,00030,000,000TOTAL OT CHANNELS 20.0%14.0%10.0%6.7%3.0%OUR TECHNOLOGY % OF TOTAL 2,215,334,5601,815,848,0001,488,400,0001,220,000,0001,000,000,000TOTAL CHANNELS 20062005200420032002

28. © Copyright 2003, Key PointsKey Points • Plan to Spend Money on Marketing and Inventory. • Pay Attention to Accounts Receivable. • Don’t Oversell -- Charge What Market Will Bear. • Don’t Hold Back Any Information From Venture Capitalists. • Begin to Think About What You Will Do With Profits.

29. © Copyright 2003, Executive SummaryExecutive Summary In 2-or-3 Pages, Briefly Describe: • Elevator Pitch (2-3 sentonces!!!) • Your Industry/Sector • Company Vision • Company Mission • Corporate Legal Description • Product/Service - What it does, how much it sells for, proprietary position • Market - Who’s going to buy, what is the sales channel. • Operations • Management Team • Investment Required • Financial Proforma • Note: Develop each topic for five years