Download - 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
Seed Startup Early Growth Expansion Maturity
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
Seed Startup Early Growth Expansion Maturity
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
Seed Startup Early Growth Expansion Maturity
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
Seed Startup Early Growth Expansion Maturity
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
Seed Startup Early Growth Expansion Maturity
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
Seed Startup Early Growth Expansion Maturity
- 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
Seed Startup Early Growth Expansion Maturity
- 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
Seed Startup Early Growth Expansion Maturity
- Success in marketplace - Hiring sales and marketing - Hiring operations - Office space/warehouse/manufacturing - Equipment purchases
Stages of Dev.
Money
Time
High Growth
Lifestyle
Seed Startup Early Growth Expansion Maturity
- 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
Seed Startup Early Growth Expansion Maturity
- 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