Transcript Table 1-1 Example of Stakeholder Analysis

Outline: Chapter 9
Financing Over the Life of a Venture
Common Misconceptions about
Entrepreneurial Financing
 The Diverse Nature of Business
Financing
 Financing Smaller Businesses with
Modest Growth Potential
 Financing High Growth, High Potential
Ventures
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Copyright 2009 Cornwall, Vang & Hartman
Common Misconceptions about
Entrepreneurial Financing
Venture Capitalists Fund Most Businesses
 Banks Lend to Start-ups
 SBA lends money directly to
entrepreneurs
 Entrepreneurs Tend to Rely on One Single
Source of Funding
 Government Grants are a Good Source
of Money for Small Businesses
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The Diverse Nature of Business
Financing
The Nature of the Business Model
 Aspirations of the Entrepreneur
 The Stage of Development of the
Business Venture
 Fitting the Pieces of the Financing Puzzle
Together
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Financing a Small Business - Modest Growth
Figure 9.1
Pre-launch
Start-up
Growth
Transition
Bootstrapping
Self, friends, and family
Equity financing
Debt financing
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Financing a High-Growth, High-Potential Venture
Figure 9.2
Pre-launch
Start-up
Growth
Transition
Bootstrapping
Seed financing from angels
Equity financing from VCs
Debt financing
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Outline: Chapter 10
Start-up Financing From the Entrepreneur, Friends
and Family
Self-financing
 Advantages and Disadvantages of Selffinancing
 Friends and Family Financing
 Structure of Funds Invested
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◦ Loan
◦ Equity
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Most Common Sources of Financing
Figure 10.1
Pre-launch
Start-up
Growth
Transition
Self, friends, and family
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Advantages and Disadvantages of Self-Financing
Table 10.1
Advantages
Disadvantages
Relative ease of securing funding
May limit size and scope of start-up
Avoid complexity created by adding
partners
Better alignment with
entrepreneur’s aspirations
No dilution of profits or gains
May limit ability to grow
Increases exposure to personal risk
from business failure
Entrepreneur may lack all necessary
experience, contacts, skills, and/or
knowledge
Eventual exit process is often
simpler
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Friends and Family Financing
Determine True Motivations
 Use a Formal Business Plan
 Provide Accurate, Objective, and Full
Information about the Business
 Keep Boundaries
 Tax Planning
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Outline: Chapter 11
Bootstrapping
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Why bootstrap?
Bootstrapping Administrative Overhead
Bootstrapping Employee Expenses
Bootstrapping Operating Expenses
Bootstrap Marketing
The Ethics of Bootstrapping
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Bootstrapping Throughout the Life of a Venture
Figure 11.1
Pre-launch
Start-up
Growth
Transition
Bootstrapping
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Bootstrapping
Defined as the “process of finding creative
ways exploit opportunities to launch
and grow businesses with the limited
resources available for most start-up
ventures.”
Cornwall, J. (2010). Bootstrapping. Englewood Cliffs, NJ: Pearson/Prentice-Hall.
Copyright 2009 Cornwall, Vang & Hartman
Why Bootstrap?
Often necessary for small businesses to
get started
 Difficulty in raising money for growth
 Preserves the value and wealth of a
business
 “Extend the Runway”
 Reduce risk associated with debt
financing
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Rules of Bootstrapping
Rule #1: Overhead matters
 Rule #2: Employee expenses are usually
the highest single recurring cost
 Rule #3: Minimize operating costs
 Rule #4: Marketing matters, but know
your customers and how they make
decisions
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Bootstrapping Administrative Overhead
Space
 Furnishings and office equipment
 Administrative salaries
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Bootstrapping Employee Expenses
Employee “stretching”
 Independent contractors
 Employee leasing and temporary
employees
 Student interns
 Equity compensation
 Non-monetary benefits
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Bootstrapping Operating Expenses
Outsourcing
 Just-in-time inventory techniques
 Effective cost accounting
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Bootstrap Marketing
Know your customer
 Focus on the impact of message, not
“volume”
 Focus on benefits for customer
 Understand the market niche
 Spend your marketing dollars wisely
 Marketing is a process, not an event
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The Basic Bootstrap Marketing Tools
Word of Mouth
 Business cards
 Blogs
 Brochures
 Banners and signs
 Newsletters
 Direct mailing/e-mailing
 Publicity
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Word of Mouth
Motivate customers to talk about
business
 Create incentives to spread the word
 Ask customers to “sell”
 Create a “buzz” campaign
 Viral marketing
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Business Cards
Design is important
 Include needed data about business
 Use quality paper
 Use color
 Include description and/or slogan
 Use both side of card
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Blogs
Be consistent in blogging
 Do not blog merely to promote business
 Take time to create quality blog
 Be patient – blogging takes time to build
following
 Be cautious what you write!
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Outline: Chapter 12
External Sources of Funds: Equity
Angel Investors
 Strategic Partners
 Private Placement
 SBIC
 The Downside of Equity Financing
 Working with Outside Investors
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Equity Financing
Figure 12.1
Pre-launch
Start-up
Growth
Transition
Equity financing
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Downside of Equity Financing
Dilution of ownership
 The risk of sharks
 Dynamics of adding on new partners
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Working with Equity Investors
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Business plan
Confidentiality agreement
Letter of Intent
Modifications of shareholder agreements
Communication with shareholders
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Outline: Chapter 13
External Sources of Funds: Debt
Short-term debt
 Long-term debt
 Forms of debt overlooked by
entrepreneurs
 Working with bankers
 Downside of debt
 Developing a Financing Plan
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Debt Financing
Figure 13.1
Pre-launch
Start-up
Growth
Transition
Debt financing
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Short-term Debt
Expected to be paid within one year
 Most often used to finance short-term
expenditures such as inventory, supplies,
payroll, etc.
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Short-term Debt
Trade debt
 Institutional Creditors
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◦ Banks
◦ Asset-based lenders
◦ Factors
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Long-term Debt
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Beyond one year
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Most often used to fund fixed asset
purchases
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Long-term Debt
Banks: term loans
 Leasing companies
 Real estate lenders
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Criteria for Lending by Bankers
Ability of the business to generate enough
cash flow to easily make interest and
principle payments
 Entrepreneur’s ability to personally pay
back the loan if the business fails
 Assets to serve as collateral
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Key Loan Documents
Loan proposal
 Loan document
 Personal guarantees
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Downside of Debt
Increased risk during economic slowdown
 Impact on proceeds from business sale
 Restrictive covenants
 Personal guarantees
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Example of Assets and Potential Funding Generated
Table 13.1
Estimated
value
Percentage
financed
Potential funding
generated
$50,000
70%
$35,000
Accts. Receivable (<60 $80,000
days)
70%
$56,000
Inventory
$20,000
30%
$ 6,000
Leasehold
Improvements
$10,000
50%
$ 5,000
Building
$120,000
70%
$84,000
Undeveloped Land
$40,000
40%
$16,000
Equipment
$15,000
80%
$12,000
Total of Business
Funding Sources
$335,000
Asset
Customer Purchase
Orders
$214,000
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Outline: Chapter 14
Financing the High Growth Business
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What Venture Capitalists and Private Equity
Funds Provide – The Four “C’s”
Integrating Profitability into the Business Plan
Stages of the Firm
Stages of Business Funding
The Dark Side of Venture Capital Financing
Initial Contact with a Venture Capitalist
Initial Public Offering (IPO)
The Process of the IPO
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Financing a High Growth Venture
Figure 14.1
Pre-launch
Start-up
Growth
Transition
Venture capital equity financing
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The “Four Cs” of Venture Capital
Capital
 Contacts
 Counsel
 Credibility
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Stages of High Growth Business Funding
Initial stage
 First round financing
 Second round financing
 Late round financing
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Initial Stage Funding
File for incorporation
 Write business plan
 Find office and development space
 Completion of initial design
 Hire key development personnel
 Complete prototype unit
 Complete prototype testing
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First Round Financing
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Secure key vendors
Hire key service or manufacturing personnel
Rent or build manufacturing facility
Purchase manufacturing equipment
Market testing
First sales contract
Production of first manufactured unit
First 100, 1000, 10000 units, etc.
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Second Round Financing
Break-even level of sales
 Development of next generation of
product
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Late Round Financing
Initial public offering
 Sale of business
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Initial Contact with a Venture Capitalist
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Funding amount
Duration
Summary of the project
Use of funding
Confirm how the transaction will be liquidated
Existing investment in the project
Names of bankers, lawyers, accountants and
consultants
Unusual or sensitive information
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Venture Capital Term Sheet
Amount the venture capitalist wishes to invest.
 Percentage of ownership to the venture capitalist.
 The nature of the investment such as loan, stock, warrants,
etc.
 Governance rights of the venture capitalist.
 Right to eventually register shares for a public offering.
 Remaining conditions to be met by the entrepreneur such
as periodic reports, financial statements, etc.
 An estimate of valuation of the company.
 Specific requirements on what the money is to be used
for or specific assets that must be purchased with the
funds.
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Initial Public Offering
Advantages
Disadvantages
Diversification and liquidity
Reporting costs
Ability to raise new cash
Disclosure of information
Valuation
Maintenance of control
Future business deals
Publicity
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Process of the IPO
1.
2.
3.
4.
5.
6.
Selecting an investment banking firm
The decision to underwrite or not
underwrite
Getting the paperwork in order and
certifying the price of the offering
The road show
Determine the size of the book
The first day of trading
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Outline: Chapter 13
Business Valuation
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General concepts that guide the determination of
value
Basic information required for a valuation
Estimating a firm’s cash flow and determining its
value
Definition of cash flow
Estimating the cash flow for a particular year
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Concepts that Guide the
Determination of Value
1.
2.
3.
4.
5.
6.
7.
Fair market value
Going-concern value
Highest and best use
Future benefits
Substitutes and alternatives
Discounted cash flow analysis
Objectivity
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Information Required for a Valuation
Income statements and/or tax returns
 Balance sheet
 Rates of return consistent with the risk
level
 Interviews with current owners and staff
 Assessment of future business environment
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Discounted Cash Flow
Incorporates all other principles
 Income-oriented approach
 Can use EBITDA
 Needs a required rate of return
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Perceived Rates of Return
Publicly traded company
 Privately held company
 Angel investors
 Venture capitalists
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12-18%
20-35%
20-50%
35-80%
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Estimating Cash Flow
EBIT
 +owner’s salary
 -reasonable salary
 +depreciation
 +personal expenses
 =EBITDA
 -equipment purchased
 -inventory investment
 =Free Cash Flow
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Calculating Value
Enter zero for Cf0
 Enter each year’s unique free cash flow
 For final year enter the sum of the
terminal cash flow and the year’s free cash
flow
 Enter required rate of return as interest
rate
 Calculated NPV is the value of the firm
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Market Comparison Approach
 Price/Earnings
 Price/Pre-tax Earnings
 Price/Cash Flow
 Price/EBITDA
 Price/Dividend
 Price/Sales
 Price/Assets
 Price/Book Value
 Price/Customer
 Price/Unit
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Market Comparison Problems
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Line of business
Geographic area
Age of assets
Listing status
Costs of inputs
Level of
establishment
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Sale terms
Standing of
ownership
Size
Financing
Time period
Similar buyer
Copyright 2009 Cornwall, Vang & Hartman
Outline: Chapter 14
Exit Planning
Self-assessment revisited
 The ethical side of the entrepreneur’s
transition
 A model of exit planning
 Exit options
 The process of selling a business
 Post exit issues
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Copyright 2009 Cornwall, Vang & Hartman
Exit Planning
The process of preparing for the transition of
both the entrepreneur and the business
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Exit Through Ownership Transfer
Type of Exit
Advantages
Disadvantages
Asset Sale
Cash sale
Immediate tax on
full sale
Lower face value
sale price
Clean break
Earn-out possible
Stock Sale
Higher face value
of sale price
Tax deferment of
Copyright
Cornwall, Vang & Hartman
sale 2009
price
Potential volatility
of stock from sale
Restrictions on
sale of stock
Exit Through Partial or Limited Transfer
Type of Exit
Advantages
Merger
Potential
synergies
Tax deferment of
sale price
IPO
Disadvantages
Cultures may
clash
Limited
opportunity for
immediate cash
Taking some cash Limits on sale of
out possible
stock
Can bring in
professional
management
Copyright
2009 Cornwall, Vang & Hartman
Exit Through Partial or Limited Transfer
(Continued)
Type of Exit
Advantages
Strategic Alliance Reduces risk to
existing value
ESOP
Can maintain
business culture
Family Business
Transfer
Can maintain
business culture
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Disadvantages
May be long time,
if at all, to actual
exit
May be long time,
if at all, to actual
exit
Challenges of
generational
succession
Exit Through Bankruptcy
Type of Exit
Advantages
Disadvantages
Bankruptcy
Orderly end to
business
Ethical challenges
Copyright 2009 Cornwall, Vang & Hartman
Results in no
realization of
wealth from
business
Can hurt
entrepreneur’s
ability to fund
future deals
Exit Through Liquidation
Type of Exit
Advantages
Disadvantages
Liquidation
May result in
more value,
especially for
service business
No value for
going concern
Can be viewed as
“failure”
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Exit Planning
1.
2.
3.
4.
5.
6.
7.
Re-examine owners’ aspirations
Evaluate timing issues
Consider ethical issues of exit plans
Set specific financial goals, and the timeframe
to achieve these goals, based on owners’
aspirations related to wealth
Establish a specific plan to meet financial goals
Begin external audit or review
Evaluate possible exit options
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Figure 14.4
Sale Process of a Business
Initial Inquiry
10 % of deals proceed to next stage
Letter of Intent
Deal Price and Basic Structure Agreed Upon
50 % of deals proceed to next stage
Due Diligence
50 % of deals proceed to next stage
Purchase Agreement and Closing
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