Transcript Entrepreneurial Finance Chapter 12 Dowling

Entrepreneurial
Finance
Chapter 12
Dowling
BA 560
Fall Term 2006
Entrepreneurial Finance

The Achilles’ Heel

Three core principles of entrepreneurial finance:

More cash is preferred to less cash
Entrepreneurial Finance

The Achilles’ Heel

Three core principles of entrepreneurial finance:


More cash is preferred to less cash
Cash sooner is preferred to cash later
Entrepreneurial Finance

The Achilles’ Heel

Three core principles of
entrepreneurial finance:



More cash is preferred to
less cash
Cash sooner is preferred to
cash later
Less risky cash is preferred
to more risky cash
Exhibit 12.4
Entrepreneurial Finance

The crux of it is anticipation
What is most likely to happen? When?
 What can go right along the way?
 What can go wrong?
 What has to happen to achieve our business
objectives and to increase or to preserve our
options?

Entrepreneurial Finance

The crux of it is anticipation
What does it mean to grow too fast in our industry?
 How fast can we grow without outside debt or
equity? How much capital is required to increase or
decrease our growth by X percent?
 How much can be financed internally and how much
will have to come from outside sources?
 What about our pricing, our volume, and costs?

Entrepreneurial Finance
Shareholders
Value Creation
Customers
Employees
Entrepreneurial Finance
Allocating Risks
and Returns
Slicing the Value Pie
Cash-Risk-Time
Entrepreneurial Finance
Debt: Take Control
Covering Risk
Equity:
Staged Commitments
Exhibit 12.3
Entrepreneurial Finance

The Owner’s Perspective
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Cash flow and cash

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Time and timing


Cash flow and cash are King and Queen in
entrepreneurial finance
In entrepreneurial finance, time for critical financing
moves often is shorter and more compressed
Capital markets

Capital is one of the least important factors in success of
higher potential ventures. High-potential founders seek
not just capital, but investors who will add value, skills.
Entrepreneurial Finance

The Owner’s Perspective

Conventional financial ratios


Financial ratios are misleading when applied to most
private entrepreneurial companies
Goals

Creating value over the long term, rather than maximizing
quarterly earnings, is a prevalent mind-set and strategy
among successful entrepreneurs
Entrepreneurial Finance

Financial Strategy Framework
The opportunity leads and drives the business
strategy, which in turn drives the financial
requirements, the sources and deal structures, and
the financial strategy.
 Once the core market opportunity and strategy are
defined, the entrepreneur can begin to examine the
financial requirements in terms of operating and
asset needs, and then pursue a fund-raising strategy.

Entrepreneurial Finance

Free Cash Flow: Burn Rate, OOC
and TTC

The core concept in determining the
external financing requirements of the
venture is free cash flow. Three vital
corollaries are the burn rate, time to
OOC (out-of-cash time), and TTC (time
to close financing).
Exhibit 12.5
Entrepreneurial Finance
Raise
Money
When
You
Do
NOT
Need
It.
Entrepreneurial Finance

Crafting financial and fund-raising strategies

Critical Variables affect availability of funds:
Accomplishments/performance to date
 Investor’s perceived risk
 Industry and technology
 Venture upside potential and anticipated exit timing
 Venture anticipated growth rate
 Venture age and stage of development

Entrepreneurial Finance

Crafting financial and fund-raising strategies

Critical Variables affect availability of funds:
Investor’s required rate of return or IRR
 Amount of capital required and prior valuations of
venture
 Founders’ goals regarding growth, control, liquidity and
harvesting
 Relative bargaining positions
 Investor’s required terms and covenants

Exhibit 12.6
Entrepreneurial Finance

Financial life cycles
Ex. 12.6 details the types of capital available over
time for different types of firms at different stages
of development
 Many equity sources are not available until firm
survives early growth stages
 Upside potential of firm is a big part of availability

Entrepreneurial Finance
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Financial Life Cycles

Foundation firms
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High-potential firms
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Will total 8-12% of all new firms; will grow more slowly
but exceed $1 million in sales and may grow to $5 million
to $15 million
Grow rapidly; likely to exceed $20 to $25 million; strong
prospects for IPO and have widest array of funding opts.
Lifestyle firms

Limited to personal resources of founders, and whatever
collateral or net worth they can accumulate.
Entrepreneurial Finance
Class Activity
Entrepreneurial Finance

Team Activity
What are the key entrepreneurial finance issues that
your IBP team will need to anticipate that are:
 Critical to the venture?
 Unique to the venture?
 Your team has 20- 25 minutes to prepare answers to
these questions. Select a spokesperson and prepare
an overhead with your responses to present to the
class.

Additional Ch. 12
Materials
Free Cash Flow

The cash flow generated by a company or
project is defined as follows:
Earnings before interest and taxes (EBIT)
 Less tax exposure (tax rate times EBIT)
 Plus depreciations, amortization, and other non-cash
charges
 Less increase in operating working capital
 Less capital expenditures

Operating Working Capital

Operating working capital can be defined as
follows:
Transactions cash balances
 Plus accounts receivable
 Plus inventory
 Plus other operating current assets
 Less accounts payable
 Less taxes payable
 Less other operating current liabilities
