Transcript Students to Start-Ups Entrepreneurial Skills Workshop Series Presents: Finding Start-Up Capital Who or What is SCORE?

Students to Start-Ups
Entrepreneurial Skills Workshop Series
Presents:
Finding Start-Up
Capital
Who or What is SCORE?
What is “Students to Start-ups”?
Students to Start-Ups
I.
Workshop Series
I.
One-on-One Counseling
II. Future (web and/or pod casts, CD, etc.)
Finding Start-Up Capital
By Jim Chamberlain
Start-Up Costs & Capital Sources
Start-Up Cash Investment
Fixed Capital Investment
 Start-Up
 Growth
 Maintenance
Working Capital Investments
 Start-Up
 Growth
 Maintenance
Cash Outlays Until Breakeven
Start-Up Costs & Capital Sources
Fixed Capital
How do you calculate how much your business needs
at start-up and to maintain growth
Do not confuse the justification with how it will be
financed. Justify first, then determine how to finance
the investments
Sales Forecast - 24 to 36 months
How much “capacity” investment is required?
How fast will you grow?
New products or services?
Start-Up Costs & Capital Sources
Working Capital Investments
The excess of current assets over current
liabilities or the amount of cash required to
fund the business on a day-to-day basis
An indication of short-term financial strength
Don’t be under-capitalized
Working Capital = Current Assets minus Current
Liabilities
Start-Up Costs & Capital Sources
Working Capital Investments
How do you calculate how much your business
needs at start-up and during periods of
growth?
Sales Forecast – 24 to 36 Months
Working Capital increases and decreases with
sales. It is a variable investment.
Example: Figure $.20 increase for every
incremental sales dollar increase.
Start-Up Costs (Investments)
Fixed Capital
Office Furniture
Vehicles
Tenant Improvements
Printing Machines
Total Fixed Capital – Start-Up
$ 2,000
20,000
10,000
20,000
$ 52,000
Vehicles
Printing Machines
Total Fixed Capital – Year Two
$ 20,000
10,000
$ 30,000
Start-Up Costs (Investments)
Working Capital
Operating Cash
Inventories
Prepaid Rent
Prepaid Insurance
Total Working Capital – start-up
$ 10,000
15,000
5,000
8,000
$ 38,000
Cash losses – first six months
Total Working Capital – Year One
$ 25,000
$ 63,000
Required Working Capital – Year Two
(Based on a $50,000 increase in sales)
$ 10,000
Capital Sources
How Businesses Are Really Funded
Seed Cash – Percentage of Inc 500 CEOs
surveyed (2002) who launched their company
with seed capital (including personal assets) of:
 Less than $1,000
 $1,000 - $10,000
 $10,001 - $20,000
 $20,001 - $50,000
 $50,001 - $100,000
 More than $100,000
14%
27%
10%
15%
12%
22%
Capital Sources
Does seed capital effect long-term
profitability or growth rate?
Only 65% of companies that started with
more than $100,000 were in the black after
one year compared with 83% of those
businesses that were launched with $1,000
to $10,000.
Source: Inc Magazine
Capital Sources
Percent of CEO’s who got some capital by
these means:
 Private Equity
 Personal Loans
 Bank Debt
 Venture Capital
 Supplier Financing
82%
19%
19%
9%
5%
Source: Inc Magazine
Capital Sources
Equity Funding
Financing your business by selling a minority
equity interest. This cash is less risky but
more expensive. Valuation issues must be
addressed. Initial and target valuation
calculations must be made.
 43% of founders started the company alone
 The rest had:
 1 partner
 2-3 partners
 4+ partners
12%
36%
9%
Capital Sources
Private Equity and Venture Capital Funding
The average angel investor is:
Between 48 and 59 years old
Has a postgraduate degree
Has experience in management and building a
company
Typically invests between $25,000 and $250,000
per deal in one to four deals per year
Capital Sources
Private Equity and Venture Capital Funding
Angel investors tend to like proprietary products and
non-capital intensive businesses. They anticipate
future rounds of financing.
Capital Sources
Private Equity and Venture Capital Funding
Angel investors look for:
1. Market niches – potential to dominate or be #1 or #2
in the industry
2. Advanced technology and a disruptive model (going to
change things)
3. Compelling and sustainable advantage – not “me too”
4. Planned exit in 4-6 years
5. Reasonable valuation
6. Performance equal to 5 -10 times original investment
7. ROI equal to 30-40% per year
8. Sitting on your board but not having control
9. Higher risk business models
Capital Sources
Bank Loans or Debt Financing
1. Banks will loan 2.5 – 4.0 times Cash Flow – usually
based on EBITDA
2. Banks would like to see a 3-5 year track record or a
history of business experience
3. Debt is less expensive but more risky than equity
4. Banks will not lend on pure projections: You must
have a history of cash flow or a current personal
guarantee.
5. Three sources of repayment
 Cash Flow
 Liquidation value of assets
 Personal Guarantees of each 25% equity owner
Capital Sources
Negatives to a Banker
1.
2.
3.
4.
5.
6.
7.
8.
9.
Getting involved with something outside your normal business model
Absentee management / ownership
Divorce
Burnout
Growing beyond owner’s capacity to operate the business
Parent turns over business to son or daughter
Computer conversions
Relocation and / or expansion of facility
Companies “hit the wall” at:





Manufacturing companies at $2 million in sales
Distribution companies at $4 million in sales
Retailers at 3 stores and distance
Service companies at 12 employees
Contractors at 2 or more big jobs
Capital Sources
Questions a Banks Will Ask You:
1. Do you have a Business Plan?
2. How much experience do you have in this industry?
3. How is your credit and how much personal debt do you
have?
4. How much is your down payment? Is it at least 25%?
5. How much collateral do you have?
6. Who is the competition?
7. Do you have personal and business insurance?
8. Do you have services of an accountant and attorney?
9. Have you ever filed for bankruptcy?
10. Do you have 2-4 years of tax returns available?
Capital Sources
Small Business Administration
The SBA does not loan money. It guarantees (to the
bank) approximately 85% of the loan proceeds to you.
Five to ten year payback terms. Interest rates of prime
plus 2 – 4% depending on the program and terms.
This reduces the banker’s risk, thereby enabling the
loan to be approved. They use basic credit standards:
 Character
 Management ability
 Cash Flow
 Equity
 Feasible Business Plan
 Sufficient collateral
Capital Sources
SBA Eligibility (there are exceptions)
Must be “for profit”
Must be an operating company. SBA does not
allow speculation or investment companies.
Must be a small business:
 Manufacturing
 Wholesaling
 Services
500 -1,000 employees
less than 100 employees
receipts test for each classification
Capital Sources
SBA Eligibility
Cannot be a business in lending, life insurance, real
estate development or rental property.
Gambling, promoting religion, pyramid sales plans,
consumer marketing cooperatives and persons of poor
character are ineligible.
Individuals must be lawfully in the U.S.
Business cannot be located outside the U.S.
Import businesses may be ineligible
Go to www.SBA.gov for a complete list of ineligible
businesses. Also, a good resource for minority and
micro-loan plans.
Exit
Many of the CEO’s plan to cash out
41% of CEO’s started the company with at least
one exit strategy in mind. Some had several:
Those strategies included:
 Going Public:
 Selling to a private buyer:
 Leaving the company to heirs:
47%
80%
7%
Capital Sources
Mistakes Entrepreneurs Make When Raising Capital
Don’t understand share prices or valuations
Confuse broad market with served market
Make unrealistic assumptions about an exit strategy
Don’t understand long term capital needs
Have no clue about competition
Don’t understand that marketing beats technology 9 out of 10 times
Write a poor executive summary
Use “off the wall” numbers or pull numbers from thin air
Lack focus; e.g. many products or niches
Develop too simplistic of a market plan / analysis
Underestimate expenses
Rely on financial plans with major inconsistencies; e.g. numbers
don’t match or tie
13. Speak in “techno-jargon”. No one understands what they are saying
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Capital Sources
Best Ways to Irritate a Private Investor
1.
Lying to investors or not being forthright; omission of material
information
2. Inability to answer direct questions with direct answers
3. Surprises; e.g. problem with credit checks, hidden liabilities or debts
4. Over hype or exaggerate upside
5. Your story always changes
6. Arguing with investors
7. Late for meetings
8. Excessive secrecy or legalese; expect investor to sign NDA
9. Investing capital in fancy facility and furniture
10. Fail to attract top talent
Capital Sources
Lease Financing
Many start-ups may want to consider lease
financing for their fixed capital needs.
Leasing sometimes shifts the risk of ownership,
such as technological obsolescence onto the
lessor thus freeing the lessee to finance
working capital needs.
There also may be possible tax advantages in
certain cases that makes leasing less
expensive on an after-tax basis.
Questions
Jim Chamberlain
[email protected]
Additional Resources
Web
www.SCORE114.org/business_library_3.html
Additional Resources
Web
Venture Funding Blog
http://www.allensblog.typepad.com/
People
UCI Center for Entrepreneurship and Innovation
[email protected]
SCORE Orange County www.score114.org
Students to Start-Ups
Entrepreneurial Skills Workshop Series
UPCOMING WORKSHOPS
March 21st
Driving Growth Through Distribution Channels and Sales Management
April 4th
Nuts & Bolts of Business Structure and Licensing
April 18th
Refine Your Unique Value Proposition
RSVP
[email protected]
Thank You!