course 10 - startup financuals

With the Support of:

www.de-‐pe.com @depeteam

Antofagasta, Chile, July 2011

1

Start-Up Financials Class 10

INDEX •  People •  Intro. •  Seeking Funds •  Funding Strategy •  Funding Process •  Basic Startup Vocab •  Financial Statements & Models •  Corfo Opportunities •  GROUP WORK

PEOPLE Los emprendedores invitados

Basic Start-Up Financials

VENTURE CAPITAL

FORGET

6

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

Start a business not a Startup ��

A business without a path to profit isn't a business, it's a hobby.��

Jason Fried, Rework

Startup Obstacle

Lack of Financial Resources •  Soften this obstacle by encircling it

with action-oriented questions.

Why don't we just call plans what they really are: guesses. Start referring to your…financial plans as financial guesses…Now you can stop worrying about them as much.

Jason Fried, Rework

Real opportunity?

1.  Your money for commercialization; 2.  Your 1st dollar of sales from your 1st customer; 3.  Before reaching Breakeven Sales; 4.  Incoming sales = outflowing costs.

Outside Money is Plan Z

Spending other people's

money may sound great,

but …

Control

“Cashing out" vs. quality

Addictive Bad deal

Customers vs. Investor

Distracting

You need less than you think

Do you really need…

Seeking Funds

Use of Funds

Sources of Funds

Funding Strategy

Seeking Funds

Types of Firms

Stages of Dev.

The Funding Process

Lifestyle Personal Goals & Family Needs

< 1M annual sales

Limited Upside

High Growth < 1 in 20 Businesses

Large Returms

Larger Fiancial Responsibility

Types of Firms

  Operations   Hiring Competent Management   Sales and Distribution   Support and Service   Administration

  Working Capital   Accounts Receivable   Inventory

  Capital Expansion Technology

  Equipment   Leasehold Improvements

Use of Funds

Where can companies get the money?

– Grants/Government –  Internal Cash-Flow – Angels/Friends and

Family – VCs

Sources of Funds

Risk

Time

Founders

Venture Capitalists

Seed Startup Early Growth Expansion Maturity

Friends and Family

Angels

Banks

Acquisitions & Equity Markets

Risk vs. Investment Timeline

Sources of Funds

Risk

Time

Founders


Founders: Highest risk Typically invest up to $100K Use their own savings Ask friends to join them Offer a piece of company as incentive – outlined in Operating Agreement Work without salary (may defer on books) Provide space (garage/basement) Ask for favors (legal advice, accounting) Should all be highly active

Sources of Funds

Risk

Time

Founders


Friends and Family High risk Typically invest up to $200k Can be quick money Personal relationship risk Part of networking for your business Have consistent agreements drawn and approved by a lawyer Keep records Generally passive investors Valuation

Friends and Family

Sources of Funds

Risk

Time

Founders


Friends and Family

Angels

Angels Moderate to high risk Typically invest $50K to $1M Perform due diligence Groups may work as a syndicate Can help with next round of funding 1/3 of deals at the seed stage May take seat on board In 2004: 225,000 Angels invested $22.5B in 48,000 ventures

Sources of Funds

Risk

Time

Founders


Friends and Family

Angels

VCs Moderate risk Typically invest $2.5M to $10M Perform due diligence Can help with next round of funding 6% of deals at the seed or startup stage Generally lead a round Will take seat on board In 2004: $21B in 2,876 ventures $7M average

Venture Capitalists

Sources of Funds

Risk

Time

Founders

Venture Capitalists


Friends and Family

Angels

Banks

Acquisitions & Equity Markets

Banks More likely to loan when cash flow is good and assets on the books Borrow on receivables and other assets Acquisitions/Equity: IPOs are rare Acquisitions are much more common

Sources of Funds

Funding Strategy

Debt, Equity, & Guerrilla Financing

Funding Strategy

Debt

•  Banks & Loan Officers –  Make sure to bring your execu2ve summary and financial statements

with you.

•  Banks lend money based on solid collateral and on your ability to repay the loan. –  Collateral is an asset that can be sold to cover the debt in case you

default on the loan

Funding Strategy

Equity

Equity -‐ term used to describe money that is provided to a business in exchange for ownership in the company

Angel and Venture Capital Investors

Their goal: 5-‐10x in 5-‐7 years

Funding Strategy

Guerrilla Financing

•  A state of mind rather than a discrete funding category.

•  ImaginaZon, creaZvity, out-‐of-‐the-‐box thinking, & invenZveness

Funding Strategy

Guerrilla Financing

5.   Labor: Use contract labor and interns. 6.   Legal services: stock for services 7.   Other people’s credit: interest for loan 8.   Advance payments from customers: Ask for prepayments for future

delivery. 9.   Barter: Trade goods or services

1.   Rent 2.   Equipment: Lease or buy at aucZon or on

eBay. 3.   Salaries: Offer stock or future bonuses for

lower wages. 4.   MarkeIng: Several companies can share

costs in a cooperaZve adverZsing project.

Funding Strategy

Investment Scenario

•  Investor wants in –  Put in 100k ; ValuaZon 400k -‐> Company Value: 500k – He owns 20%

•  Analysis – Hopes company will be sold for 5M –  Return on Investment (ROI) % =

•  ((Future Value (FV) − Present Value (PV)) / Present Value) x 100 –  ROI (%) = ((400k − 100k)/100k) × 100 = 300%

Funding Strategy

The Funding Process

Phase 0: The Format The

Funding Process

– Here is what is done now, here is how much it costs... – Here is what we are offering, here is how much it saves...

– Here is our market... (Clients, Partners, etc.) – Here is what we need from you...

Phase 1: Before the Mee2ng The

Funding Process

– Develop a list of likely funding targets. – Send a compelling cover leker (without hype) along with your execuZve summary. (Do HW)

– 15-‐to 20-‐minute PowerPoint presentaZon, and make invisible slides

– Rehearse & Role-‐play

Phase 2: During the Mee2ng

•  It is not the Zme for discussions on valuaZon or any other negoZaZon points. If it comes up during the meeZng, indicate that your mind is open.

•  Leave all emoZons at the door—except for passion.

•  Approach: 1.) PosiZoned for exciZng growth, 2.) You are stable and not desperate for capital, and 3.) A capital infusion at this Zme would enable the more rapid growth.

•  Avoid exaggeraZon, defensiveness, and salesmanship.

The Funding Process

•  It is important that your expectaZons be reality based. •  Aner one week, it is appropriate to contact the investor to sense his or her level of interest. If there is no interest, ask for advice to improve & Evolve

•  Your odds improve as you: –  Become obsessive-‐compulsive about cash flow. –  Become an expert communicator and win-‐win negoZator. –  Adapt, evolve, never give up.

The Funding Process

Phase 3: AGer the Mee2ng

•  Begin to discuss terms and condiZons of investment (term sheet). – Don’t begin to negoZate. Seek professional legal advice.

•  Due Diligence – It is a two-‐way street.

The Funding Process

Interest from an Investor

Stages of Development

No (Further) Equity Partners

Go this route!

Money

Time

High Growth

Lifestyle


- You have an idea - Writing the business plan - Investigating the market -  Looking for people to join you -  Creating a prototype/demo of product or service -  Investigating patents

Stages of Dev.

Money

Time

High Growth

Lifestyle


- You have a new business - Business plan is solid - Patents, if any, may be in process - Product demo or prototype has traction – interested clients/investors - Maybe some initial sales - Key management, in place or on sidelines

Stages of Dev.

Money

Time

High Growth

Lifestyle


-  Success in marketplace -  Hiring sales and marketing -  Hiring operations -  Office space/warehouse/manufacturing -  Equipment purchases

Stages of Dev.

Money

Time

High Growth

Lifestyle


-  Growing quickly -  More hiring -  Transition from initial admin/operations to full scale

- Move offices to accommodate hires - New production facilities/hardware - Invest in marketing - Invest in product development

-  Competition takes notice -  Fire-fighting, keeping the wheels on

Stages of Dev.

Money

Time

High Growth

Lifestyle


-  Continued growth -  Formalize organization

- Departments are created -  Who is that person? -  National presence in market space -  Focus turning to margins and efficiency

Stages of Dev.

Basic Startup Financial Vocabulary

Valuation – the economic value of a company

•  Stock Types – Common Stock - % of equity

ownership expressed in shares normally held by founders

– Preferred Stock –liquidation preference, which means in a sale (or liquidation) of the company, the preferred stock holders will have the option of taking their cost out or sharing in the proceeds with the founders as common stock holders

Stock Vesting – Member purchases a block of Common Stock and the company retains a repurchase right to buy the stock back. The repurchase right of the company diminishes over time so that the company eventually has no right to repurchase the stock, i.e. the stock becomes fully vested.

Stock vs. Options – Stock: money is earned in proportion to

the value of the company – Options: Not the stocks themselves but

time limited contracts to benefit from the right to buy or sell that stock.

Employee Stock Option •  Opportunity for employees to

purchase stock in the company they work for, often at a discount from market value

Convertible Debt – When a company borrows money from an investor and the intention of both the investors and the company is to convert the debt to equity at some later date.

P/E Debt: ratio market stock price to after-tax earnings

–  The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings.

–  Higher P/E ratios - "risky" investments vs. low P/E ratios,

•  High P/E ratio signifies high expectations.

– Comparing P/E ratios is most valuable for companies within the same industry.

Dividends vs. Reinvestment

Assets vs. Expenses

•  Expenses are deductible against income, so they reduce taxable income.

•  Assets are not deductible against income. •  What a company spends to acquire assets is

not deductible against income. –  e.g., money spent on inventory is not deductible as

expense until the inventory is sold. At that point the money spent becomes a cost of goods sold or cost of sales. And then it reduces income.

Assets vs. Expenses

Example of Start-Up Financing

Financial Statements & Models

Financial Statements

–  Income Statement (Profitability) – Balance Sheet (Investment targets &

source) – Statements of Cash Flow (meeting

obligations)

Key Elements of Financial Statements

Revenues – Product – Services

= Gross Revenue

Cost of Sales –  Infrastructure – Support – Cost of Services

= Gross Income Other costs

– R&D – Sales & Marketing – General & Admin

= EBITDA

After Taxes, Depreciation, & Amortization = Net Income

Basic Financial Models

– Online Software Subscription •  Salesforce.com, 37 Signals

– Software development & licensing •  Microsoft, Oracle, Mobile apps

– Marketplace •  Ebay, Expedia

– User & Demand Aggregation •  Mint.com

Things Not to Do

•  Spend money on party –  1999 Pixelon.com throws $10M party after $23M

VC Raise

•  Wait until the last minute to raise money –  Digital River and ExactTarget layoffs

•  Get more money than you need –  WebVan vs. Simon Delivers/PeaPod Models

•  Spend money on “buzz” –  Beyond.Com “Naked Guy” SuperBowl Ad –  Cyberian Outpost “Wolves” SuperBowl Ad

Things To Do

•  Have skin in the game •  Fail fast, fail small, try again, find a model •  Focus on revenues, margins – this will

make raising money easier and valuations better

•  Don’t be a big business too soon •  Focus on the size of the pie and not the

size of your piece •  Get excited, be confident and think big •  Look for similar business models

Questions?

Corfo Funds

•  For startups Más info: http://www.corfo.cl/lineas_de_apoyo/programas_por_necesidad/emprender_un_negocio_innovador

Corfo para Startups

•  Capital Semilla –  Para emprendedores innovadores en el desarrollo

de sus proyectos de negocios, mediante el cofinanciamiento de actividades para la creación, puesta en marcha y despegue de sus emprendimientos.

–  Cuánto subsidia? Hasta 75% del monto total del proyecto con un tope máximo de $40 millones.

–  Mayor info: http://www.corfo.cl/lineas_de_apoyo/

programas/capital_semilla

Corfo para Startups •  Subsidio Semilla de Asignación Flexible (SSAF)

–  tiene por objetivo la creación de un Fondo de Asignación Flexible (SSAF) que apoye a emprendedores innovadores con proyectos de alto riesgo en el desarrollo de sus empresas en etapas tempranas para la creación, puesta en marcha y ejecución de éstas.

–  Cuánto subsidia? Hasta 75% del monto total del proyecto con un tope máximo de $700 millones anuales.

–  Más info: http://www.corfo.cl/lineas_de_apoyo/programas/subsidio_semilla_de_asignacion_flexible_ssaf

Corfo para Startups •  Empaquetamiento Tecnológico para Nuevos

Negocios –  Apoya el proceso de empaquetamiento de negocios

sofisticados, desde el punto de vista tecnológico, y con alto potencial de crecimiento. Se entiende por empaquetamiento tecnológico, el proceso de desarrollo de productos que presentan una oportunidad comercial demostrable.

–  Cuanto subsidia? Hasta el 80% del presupuesto total de proyecto, con un tope máximo a solicitar a Innova Chile de un subsidio no reembolsable de $20 millones para la primera etapa y de $180 millones para las dos etapas.

–  Más info: http://www.corfo.cl/lineas_de_apoyo/programas/empaquetamiento_tecnologico_para_nuevos_negocios

Corfo para Startups •  Capital de Riesgo para Empresas Innovadoras

–  Financiamiento para la creación o expansión de empresas con proyectos innovadores que tengan un alto potencial de crecimiento. CORFO lo entrega en la forma de un crédito de largo plazo a Fondos de Inversión, para que éstos inviertan en dichas empresas mediante aportes de capital o créditos.

–  Cuánto subsidia? El monto depende de las características y necesidades del proyecto, y según se haya definido en el proceso de negociación entre la empresa y el Fondo. Este aporte se realiza mediante un aumento de capital.

–  -Más info: http://www.corfo.cl/lineas_de_apoyo/programas/capital_de_riesgo_corfo_para_empresas_innovadoras

Corfo para Startups •  Redes de Capitalistas Ángeles

–  Es un subsidio que apoya la organización, formalización y operación de Redes de Capitalistas Ángeles, que aumenten las inversiones en empresas innovadoras de alto potencial de crecimiento.

•  Cuánto subsidia? Hasta 70% del total del proyecto, con un tope máximo a solicitar para el primer año de ejecución del proyecto de $80 millones y de $100 millones anuales para los siguientes años. Los proyectos contemplarán un plazo máximo de ejecución de 6 años.

•  Más info: http://www.corfo.cl/lineas_de_apoyo/programas/redes_de_inversionistas_angeles

GROUP WORK A ensuciarse las manos

course 10 - startup financuals

Business

sources funds of funds

sources of funds

high riskof funds

sources friends

sources highest riskof

familyof funds high

sources risk

seed stagefounders