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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 entrepreneur u
2、ntil 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 FinanceDiversification and ValueInvolvement of InvestorsHarvesting,The Probl
3、em-Objectives,Minimize Cost,Maximize Return,Maintain Control,Maximize Ownership,Minimize Involvement,Minimize Risk,Entrepreneur,Investor,The Problem-Management,What is the Ultimate Task of an Entrepreneur?,Job#1 is Risk Management,Largest risk is Financial and question becomes“How?”,The Problem-Stru
4、cture,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,DebtRepresents a fixed costRepresents more riskCheapest type of outside financing,EquityNo interest paymentNo obligation to repayMost Expensive type of financi
5、ng,Sources of Debt Financing,Friends and FamilyBanksLeasingFactoring,Bank Financing,Commercial banks are the largest source of external capital for growing firms.Problems:Lack of collateralLack of earnings history,Leasing,Often used technique to acquiring assets without having to purchase them.Two t
6、ypes of Leases:Operating LeaseCapital 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 company has some form of equity.Founders raise equity wh
7、en:there is no collateral to secure debtinsufficient cash flow to secure debtrequired growth capital more than banks can provide.,Types of Equity Instruments,Typically used in small business placements:Common StockPreferred Stock,Types of Equity Instruments,Common Stock Characteristics:Most common f
8、orm of issuanceLast in liquidation=?Represents Entire ownership of firm.,Types of Equity Instruments,Preferred Stock Characteristics:Pays dividendsPreference in liquidation,Types of Equity Instruments,Preferred Stock Characteristics:Looks a lot like Debt!Used by Venture Capitalists to gain position
9、in liquidity event while minimizing risk.,Types of Equity Investors,Angel InvestorsVenture Capitalists,Types of Equity Investors:Angels,Typical Angel InvestorPrivate individual(not an institutional fund)Age:47 54 yearsGender:MaleNet Worth:$1,000,000+,Types of Equity Investors:Angels,Typical Angel In
10、vestorEducation:Bachelors or greaterAverage Investment:$59,000Preferred Stage:Start-up(56%)and infant or young(24%),Types of Equity Investors:Angels,Typical Angel InvestorRequired Rate of Return:15%-45%Length of Investment 3 10 years“Patient Money”,Types of Equity Investors:Venture Capital,Typical V
11、enture Capital FirmsInstitutional FirmRaises money from various sources,including AngelsCreates“pool”of capital,a fund.Develops portfolio of firms under management,Types of Equity Investors:Venture Capital,Typical Venture Capital FirmsAverage Investment:$1 M to$50 M per investment.Industries:High Gr
12、owth,early or later stagesServices Provided:None to direct management decision making and board control.Required Rate of Return:10X in 3-5 years.Typically invest using Preferred Stock,Venture Capital Investments,Q2 2001,2.2%of Venture Capital invested in Midwest!,Timing Sources of New Venture Financ
13、ing*,*Adapted from:Smith and Smith,Entrepreneurial Finance,2000,Timing-Cash Needs,Goal is to manage risk to business and to investor.Minimize risk by staging investmentsEstablish stages by developing solid business plan and financial projections!,Case Study Ascend Medical,Facts:Development stage Med
14、ical Device company.Prototype of catheter for stroke victims nearly complete.Market need unclear.FDA process is three years and$30M in expenseNo guarantee of approval.,Case Study Ascend Medical,Analysis Type?Debt is not an option.Angels to get the product through prototype development,further market
15、 study,conduct focus groups with doctors.$500,000.Venture Capital to take it through FDA process and initial market launch.$45M,Case Study Sporto,Facts:Start up phase winter apparel companyOne seasons sales under it beltModerate growth plansRequired funds:$1.5 MNeeds immediate funds of$100,000 to ex
16、pand sales organization and$1.4 M to expand product line and related marketing expenses over the next 18-24 months,Case Study Sporto,Analysis Type?Venture Capital not an option growth too slowAll debt not an option unless financials can demonstrate adequate cash flow and plenty of collateral availab
17、le.Private equity with debt mix is viable optionFactoring after sales grow,leasing office equipmentAlternative?,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?E
18、xample,The Big Picture Business Plan,Competitor Analysis,Environmental Trends,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 s
19、hould?,Business Plans Make Your Argument,Argument contains some consistent themesWhat 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 themesWho is MOST likel
20、y 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?,“Everything should be made as simple as possible,but not more so.”,Albert Einstein,Business Plan-The Purpose,A Sales Document to Raise CapitalA Road Map to De
21、veloping 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!,Business Plan Outline,Executive SummaryCompany HistoryMajor Products/ServicesMarketplaceCompetition,Ma
22、rketing PlanOperations-ManufacturingManagement TeamRisksFinancial Analysis,Company Description,What business are you in?What are your:products or services?customers?applications?(Different uses and needs satisfiedWhat is your distinctive competence?What is your competitive advantage?What is your Mis
23、sion Statement,Sustainable Competitive 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
24、,Industry description and outlookTarget markets(segments)CompetitionReaction from prospective customersMarketing activities(strategy/pricing)Selling activitiesThe Key is your Feasibility Study,Example 1:Brew on Premise,Example 1-Brew on Premise,Counties are comparable15 batches per day in BoulderRat
25、io of target population 1.6:1Expected revenues for Badgerland to reach 24 batches per day after 2 years of operation.,Example 2 Ascend Medical,Different approach to argumentFocus isnt one likely demographicFocus is on treatable number of cases,Example 2 Ascend Medical,Process:Population growth throu
26、gh 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.,Example 2 Ascend Medical,Process:Once number of treatable cases established by type of stroke,can then establish t
27、ype 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.,Management and Ownership,Key management positionsBackground of personnelBoard of DirectorsOwnershipStarting a bus
28、iness 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?,Management,Franchise,Software,Medical Device,etc.,Low,High,Moderate,Granite Gear,Level of Sophistication,Product Developmen
29、t,Level of Complexity,Time To Market,Time to Profitability,Franchise,Software,Medical Device,etc.,Short 6 months,High 24 months,Moderate 9 to 18 months,Granite Gear,Market Risk,Franchise,Software,Medical Device,etc.,High,Low,Moderate,Granite Gear,Product Acceptance,Capitalization,Franchise,Software,
30、Medical Device,etc.,Low$50,000,High$2M,Moderate$500K to$2M,Granite Gear,Risks,Competitive RisksTechnological RisksOrganizational RisksMain Point:Identify them and develop a plan to deal with them if and when they arise.,Funds Required and Their Uses,How much money do you require now?How much will yo
31、u require over the next five years?How will the funds be used?,Funds Required and Their Uses,Debt/Equity mixWhat 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,Financial Data,Historical financial statements and p
32、rojections for the next five yearsKey assumptions,Appendices,ResumesPictures of productsSales literatureSupporting published market studies or trade journal articlesPatents,The Big Picture,Competitor Analysis,Environmental Trends,Customer Analysis,Business Plan,Functional Plans,Proformas,Financing,Evaluation-CMOPs,
