Key to finance

1、keys to financing the new venture alec johnson, ph.d. university of st. thomas 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 “youre not an e

2、ntrepreneur until youve written payroll checks on friday and spent the weekend collecting the cash to cover them.” keith streckenbach, founder and ceo of pharmacyones entrepreneurial finance vs. corporate finance differences from corporate finance diversification and value involvement of investors h

3、arvesting the problem - objectives minimize costmaximize return maintain control maximize ownership minimize involvement minimize risk entreprene ur investor the problem - management what is the ultimate task of an entrepreneur? job #1 is risk management largest risk is financial and question become

4、s “how?” 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? type two general classes debt represents a fixed cost represents more risk cheapest type of outside financing equity no interest payment no obligati

5、on to repay most expensive type of financing sources of debt financing friends and family banks leasing factoring bank financing commercial banks are the largest source of external capital for growing firms. problems: lack of collateral lack of earnings history leasing often used technique to acquir

6、ing assets without having to purchase them. two types of leases: operating lease capital lease factoring factors buy companys accounts receivables at a discount. recall r&r case. gets cash to company quickly, but must have cost of factor available in profit margin. equity when to use equity? every c

7、ompany 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. types of equity instruments typically used in small business placements: common stock preferred stock types of

8、equity instruments common stock characteristics: most common form of issuance last in liquidation = ? represents entire ownership of firm. types of equity instruments preferred stock characteristics: pays dividends preference in liquidation types of equity instruments preferred stock characteristics

9、: looks a lot like debt! used by venture capitalists to gain position in liquidity event while minimizing risk. types of equity investors angel investors venture capitalists types of equity investors: angels typical angel investor private individual (not an institutional fund) age: 47 54 years gende

10、r: male net worth: $1,000,000 + 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%) types of equity investors: angels typical angel investor required rate of return: 15% - 45% l

11、ength of investment 3 10 years “patient money” 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 types of equity investors: ve

12、nture 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 sto

13、ck venture capital investments, q2 2001 2.2% of venture capital invested in midwest! 0 0 5 5 1 01 0 1 51 5 2020 2525 3030 co mmu n i c a t i o n s a n d ne t wo r ki n g co n s u me r a n d bu s i n e s s se r v i c e s bi o p h a r mse mi c o n d u c t o r sme d sf t wrre t a i l e r sco n s u me r

14、 & bu s . dol l ars share timing sources of new venture financing* developmentstart-upearly growth rapid growthexit entrepreneur/ friends/family angels/partner banks/lessors venture capital ipo *adapted from: smith and smith, entrepreneurial finance, 2000 timing - cash needs goal is to manage risk t

15、o business and to investor. minimize risk by staging investments establish stages by developing solid business plan and financial projections! case study ascend medical facts: development stage medical device company. prototype of catheter for stroke victims nearly complete. market need unclear. fda

16、 process is three years and $30m in expense no guarantee of approval. 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 pro

17、cess and initial market launch. $45m case study sporto facts: start up phase winter apparel company one seasons 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 expe

18、nses over the next 18-24 months 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, lea

19、sing office equipment alternative? 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 the big picture business plan competitor analysis environmental t

20、rends customer analysis business plan functional plans pro formas financing evaluation-cmops business plans what is a business plan? something you produce because the bank expects it? something you produce because every says you should? ? business plans make your argument argument contains some cons

21、istent 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? 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? ho

22、w will i let them know about it? does my team have the ability to execute the plan? “everything should be made as simple as possible, but not more so.” albert einstein business plan-the purpose a sales document to raise capital a road map to developing a successful organization- do we have a product

23、 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! business plan outline executive summary company history major products/services marketplace competition marketing plan operations- manufacturing management

24、team risks financial analysis 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 sustainable competitiv

25、e advantage versus distinctive competence ask the question “what do we have that cant be replicated by our competitors?” vs. “what are we good at?” mission statement what do we do? how do we do it? who do we do it for? example: brew on - premise market analysis & marketing industry description and o

26、utlook target markets (segments) competition reaction from prospective customers marketing activities (strategy/pricing) selling activities the key is your feasibility study example 1: brew on premise total population (% age 24-55) median incomemedian rent (upper quartile) boulder county, colorado 2

27、25,339 (52%)$35,322$449 ($585) dane county, wisconsin 367,085 (54%)$32,703$423 ($527) 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. example 2

28、ascend medical different approach to argument focus isnt one likely demographic focus is on treatable number of cases example 2 ascend medical process: 1.population growth through 2010 (source: us census) 2.“target” population not important. all medical research data based on incidence in us populat

29、ion. 3.medical data implies number of treatable cases by type of stroke. example 2 ascend medical process: 1.once number of treatable cases established by type of stroke, can then establish type of treatments received. 2.those requiring clot removal (vs. stenting, etc.) are established as likely can

30、didates for this procedure. 3.356,000 treatable cases today, growing to 560,000 in 2010. 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 cove

31、r all the necessary roles or have you developed a plan to cover areas that are weak? management franchise software, medical device, etc. lowhighmoderate granite gear level of sophistication product development level of complexity franchise software, medical device, etc. nonehighmoderate granite gear time to market franchise software, medical device, etc. shorthighmoderate granite gear time to profitability franchise software, medical device, etc. short 24 months moderate 9 to 18 months granite gear ma