Transcript EIW- Introduction

Finding funding for your business idea
Developing and pursuing a strategy
Topics
1.
2.
3.
4.
5.
6.
7.
8.
Refresh on objectives of business activity
Knowing where you are in the value chain
Crafting a strategy to establish what you need
Funding is fundamental
Uses can determine sources
Reflections on failure
Appreciate an iterative process requires passion
Planning for the long haul
Colin K. Drummond
[email protected]
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Business activity
What is the role of investment?
Inputs
Raw Materials
Components
Financial
Capital
Physical assets
Technologies
Investment
The Firm
Outputs
Transformation
based on:
Intellectual capital
Products and
services
Entrepreneurial
competence
Activity
Value!
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Process begins with well-articulated opportunity
Communication with stakeholders
Idea
Purpose, or
Mission
Resource
Analysis
Corporate
Objectives
Opportunity
Ranking
Revenue
Analysis
Cost
Analysis
Investment
Analysis
Profitability
Ranking
Political/Legal
Economic Environ.
Consumer/Market
Analysis
Social/Cultural
Technical Environ.
Competitive
Analysis
Opportunity
Page 3
Know the integrated picture
Strategy map
Page 4
Last strategic points
Top reasons businesses fail
1.
2.
3.
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Last strategic points
So, need to know what investors are looking for

On winning the race:
 First, need the right horse (the concept)
 Then, have to have the jockey to lead
through the rough spots
 Finally, to ensure you are in the right
race (market!)

Leadership serves as the trainer to get the
horse ready to race!

Securing investments is iterative but most
people are not comfortable negotiating
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Let’s go!
Time to craft a strategy
1. How much do you need?
2. What is your risk level?
3. What would you do if you
did not get the funding?
Let’s spend some time on the next page…
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Financial objectives
Do you agree with the following?
Key Financial Objectives
• Earn a profit
Investing in Company X versus putting money in the bank
• Stay solvent
Have sufficient cash to pay debts as they fall due
Other Objectives
• Provide jobs for people
• Creating new products to serve the community
• Protecting the environment
• Providing goods at a lower cost
• Etc…
Is this the right priority? From what perspective?
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What is the color of money you need?
Going to spend some time on this
Balance Sheet
Income Statement
Assets = Liabilities + OE
Cash
+$100
Net Income = Revenue - Expenses
You
+$10
Paid-in capital
+$90
1. Gift?
2. Loan?
3. Equity?
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Tell me about “transactions”
Support for decision-making about investments
Management
Decisions
Investments
Products
Customer
Transactions
Information
Data
Analyze
the
Transaction
Measure
Categorize
& Record
Synthesize
and
Report
Accounting
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Financial statements
Capture data in ways to facilitate decision-making
Statement
Balance sheet
Income statement
Statement of cash flows
Change in Owners’ equity
Purpose
Statement of financial position
Profit and loss
Solvency
Changes in wealth
Dr. Drobek will come back to this point in a few minutes ….
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Financial statements
OK create data to facilitate ‘start-up’ decision-making
Idea
Step 1
Angel, Seed, SBIR-I
Entrepreneurial
Death Valley
Science
Technology
$$ Prototype $$
Step 2
Early Stage, SBIR-II
Field Test
Prototype
Pre-Production
Refinements
Step 3
Equity, VC
Prototype A
Prototype B
Prototype C
Internal Test
Downselect
Solid
Business
Plan
Pilot Runs
Equity Leverage
Production
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Tell me even more
Exactly HOW do you create value?
Overall
Business
Success...
Owner’s
Equity
and
Stock
Price
Is a
result
of ...
After
Tax
Cash
Flow
Which is
measured
by ...
Net Profit
After Tax
Which is the
result of ...
Revenue
Growth
1
Operating Cost
Reduction
2
Tax
Minimization
Return on
Net Assets
Fixed Capital
Efficiency
Working Capital
Efficiency
3
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Developing financial projections
Central to your plan but process is iterative and takes time
1.
2.
3.
4.
5.
6.
Start with basic sales projections
Enough to overcome cost of goods?
Enough to be worthwhile to investors?
What can I control?
What things can’t I predict?
Actually, a lot of things might change
• Scenario analysis becomes central to risk
management
• Is the “idea” really a “greater good” idea?
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Developing financial projections
Life with paradox: Management is a balancing act
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Developing financial projections
Best to “just do it!”
You will work through a simple
financial projection for your
business concept
Sample pro forma readily
available.
Keep “mapping” your ideas
against:
Potential transactions
Business purpose
Scenarios
Page 16
Business Model
A company’s method for making money in the current
business environment
1. How do we make money?
2. Whom do we serve?
3. What do we provide?
4. How do we differentiate and sustain competitive advantage?
5. How do we provide our product or service?
Cash
Is used to purchase
goods (or materials +labor)
resulting in …
Inventory
Held until sold,
often on account
resulting in …
Accounts
Receivable
Which must be
collected to
increase …
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Whew! Let’s get to the “finding” part
Gifts: Spend some time discussing the basis for each
1. Family, friends, and …
2. Foundations …
3.
Government (SBIR, STTR) …
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More on the “finding” part
Loans: more time discussing the basis … note “investors”
1. Family
2. Banks
3.
Investors
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Yet more on the “finding” part
Equity: Yet even more time discussing the basis
1. Family, friends, sweat …
2. Investors
3.
VC
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Revisit “the Plan”
What if I need more than I asked for?
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Revisit “the Plan”
Specifically, what variance occurred?
• General outline for estimating new venture cash flows.
– Start-up, the initial outlay.
– Sales forecast, units and revenues…develop &
document assumptions.
– Cost of sales and expenses.
– Assets—new assets to be acquired, including
working capital.
– Depreciation.
– Taxes and Earnings.
– Summarize and combine—adjust earnings for
depreciation and combine it with the balance sheet
items to arrive at a cash flow estimate.
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Proforma
A view of the future
• Financial statements for a new venture are “pro forma”.
– What financial statements will be if planning assumptions are true.
– Financial projections…..project the firm’s financial statements into
the future.
• Hard to forecast a new operation -– No history on which to base projections.
– Maybe refer to Pro forma Excel Template at this point (or later!)
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Debt and equity finance
Measures the mix of debt and equity within total capital.
An important risk measurement - a high debt level burdens
the income statement with excessive interest making
failure more likely.
Debt to Equity Ratio = Long Term Debt : Equity
Debt to Equity = $6,200 : $3,300 = 1.9 : 1
(Stated as 1.9 to 1, since $6,200/$3,300 = 1.9)
A high debt ratio is viewed as risky by investors.
What is your risk tolerance?
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Debt and equity finance
The color of money dictates where you find it!
• Capitalization / Capital Structure includes both debt
and Equity.
• Firms spend two kinds of money…
– Day-to-day funds – come from normal profits,
support routine activities.
– Large sums needed for major projects and to get
businesses started - comes from selling financial
assets.
– Borrowing money: Debt Financing
– Selling stock: Equity Financing
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Summary
The color of money dictates where you find it!
• Consider the journey
carefully
• Know exactly what you are
looking for and why
• Know what you will do if you
don’t get what you want
• Work on the “elevator pitch”
every day
• The money IS there, it just
has to align with your
proposed business.
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