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Differences from Corporate Finance Diversification and Value Involvement of Investors Harvesting
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 “You’re not an entrepreneur until you’ve written payroll checks on Friday and spent the weekend collecting the cash to cover them.” Keith Streckenbach, founder and CEO of PharmacyOneSouce.com Entrepreneurial Finance vs. Corporate Finance Differences from Corporate Finance – Diversification and Value – Involvement of Investors – Harvesting The Problem - Objectives Minimize Cost Maximize Return Maintain Control Maximize Ownership Minimize Involvement Minimize Risk Entrepren eur 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 - Structure 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 Debt – Represents a fixed cost – Represents more risk – Cheapest type of outside financing Equity – No interest payment – No obligation to repay – Most Expensive type of financing Sources of Debt Financing Friends and Family Banks Leasing Factoring Bank Financing Commercial banks are the largest source of external capital for growing firms. Problems: – Lack of collateral – Lack of earnings history Leasing Often used technique to acquiring assets without having to purchase them. Two types of Leases: – Operating Lease – Capital Lease [...]... Exit Entrepreneur/ Friends/Family Angels/Partner Banks/Lessors Venture Capital IPO *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 investments Establish stages by developing solid business plan and financial projections! Case Study – Ascend Medical Facts: • • • • • Development stage Medical Device... Required funds: $1.5 M Needs immediate funds of $100,000 to expand 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 slow • All debt not an option – unless financials can demonstrate adequate cash flow and plenty of collateral available • Private equity with debt... • Unless founder gets lucky? Example The Big Picture – Business Plan Competitor Analysis Environmental Trends Customer Analysis Functional Plans Business Plan 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 should? –? Business Plans – Make Your Argument Argument contains... for it? How many of “THEM” are there? Business Plans – Make Your Argument Argument contains some consistent themes – – – – Who is MOST likely 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... complete Market need unclear FDA process is three years and $30M in expense No guarantee of approval Case Study – Ascend Medical Analysis – Type? • Debt is not an option • Angels to get the product through prototype development, further market 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:... Einstein Business Plan-The Purpose A Sales Document to Raise Capital A Road Map to Developing a Successful OrganizationDo 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!!!!! ... equity when: • there is no collateral to secure debt • insufficient cash flow to secure debt • required growth capital more than banks can provide Types of Equity Instruments Typically used in small business placements: – Common Stock – Preferred Stock Types of Equity Instruments Common Stock Characteristics: – Most common form of issuance – Last in liquidation = ? – Represents Entire ownership of... –54 years Gender: Male Net Worth: $1,000,000 + Types of Equity Investors: Angels Typical Angel Investor – Education: Bachelors or greater – Average Investment: $59,000 – Preferred Stage: Start-up (56%) and infant or young (24%) Types of Equity Investors: Angels Typical Angel Investor – Required Rate of Return: 15% - 45% – Length of Investment 3 – 10 years – “Patient Money” Types of Equity Investors:... Capital Typical Venture Capital Firms – Average Investment: $1 M to $50 M per investment – Industries: High Growth, early or later stages – Services 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 3 0 2 5 2 0 1 5 Dlla o rs Sa h re 1 0 5 0omuications C m n adNtwrk