BelgradeOctober 14, 2011

By Lidia Varbanova, PhD

FEW BASIC TERMS IN FINANCING, FUNDRAISING AND SPONSORSHIP

Subsidy-Grant-Donation-Sponsorship-Mecenat-Patronage

Fund-Foundation-EndowmentInputs-Outputs Resources-ProductsEffective-EfficientBudgeting-Financing-AccountingIncomes-Turnover-Profit-Financial surplusExpenditures-CostsAssets-Liabilities-Cash Flow

NON-PROFIT AND COMMERCIAL CULTURAL ORGANISATIONS

N0N-PROFIT ORGANIZATIONS:

Main aims - social, cultural, educational

The financial result (surplus) is reinvested

Rely on outside funding

Functioning in the third sector or state sector

Primarily non-economic activities

Involves volunteers

BUSINESS/COMMERCIAL ORGANIZATIONS:

Main aim - to generate profit

The profit is shared by the owners

Rely on self-generated incomes

Functioning in the private sector

Primarily economic activities

Works with professionals

I. SOURCES OF INCOMES FOR MUSICAL ORGANISATIONS AND PROJECTS

Self-generated Core activity:

ticket & cd sale online sales subscriptions specific,

focused/targeted projects

Additional activities: catalogues, publications, educational programs

Peripheral activities: shops, restaurants, cafes, other non-music commercial activities

Outside support Corporate/business

support: sponsorship, corporate donations

Bank loans and debt instruments

Angel investors Venture capitalists State support: subsidy,

grants, capital investment

Third sector: foundations

Individual donations: special events

FEW BASIC TERMS IN FINANCING, FUNDRAISING AND SPONSORSHIP

Subsidy-Grant-Donation-Sponsorship-Mecenat-Patronage

Fund-Foundation-EndowmentInputs-Outputs Resources-ProductsEffective-EfficientBudgeting-Financing-AccountingIncomes-Turnover-Profit-Financial surplusExpenditures-CostsAssets-Liabilities-Cash Flow

NON-PROFIT AND COMMERCIAL CULTURAL ORGANISATIONS

NOT-FOR-PROFIT ORGANIZATIONS:

Main aims - social, cultural, educational

The financial result (surplus) is reinvested

Rely on outside funding

Functioning in the third sector or state sector

Primarily non-economic activities

Involves volunteers

BUSINESS/COMMERCIAL ORGANIZATIONS:

Main aim - to generate profit

The profit is shared by the owners

Rely on self-generated incomes

Functioning in the private sector

Primarily economic activities

Works with professionals

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II. The importance of capital and planning: business organisations

Raising $$$$$$ (obtaining financing) has always been a major challenge in the venture creation process.

Key document to raise financing: the Business Plan Issues:

How much do you need during start-up and to cover the “burn cash” phase?

When the money will be spent?How much are you putting in?Any other partners? Their equity?What is the balance to finance?Use of debt or equity (control vs. cash conservation)?What is the timing of this process? This is generally linked to

cash flow challenges / milestones

P.172

Financing sourcesBusiness stages: start-up

Start up business with low growth potential:

Start-up business with high growth potential:

Early stage (seed capital):Used for feasibility study

and business plan, the sources are from personal savings and family/friends, government grants.

Early stage (start-up):Used to get the business

running, again, the sources are personal savings, personal loans and credit cards and family/friends, perhaps some trade credit, government programs.

More likely to use equity financing because an investor sees the medium-long term potential of more return.

Early stage financing:Feasibility and business plan

are often financed by angel investors. The business is not “above the radar” yet, is not seen by VC.

Start up:Usually angel investors

because this phase can be within their capacity. 8

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III. Internal vs. External fundsINTERNAL

Profits (re-invest all, no matter how small).

Sale of assets, or leasing rather than buying at start-up and buying used instead of new.

Deferring salary (also using family who will also defer salary).

Using Just-in-time (JIT) inventory.

Trade credit when possible.

Minimal accounts receivable or, get a down payment that covers your cost portion of the sale.

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Internal vs. External fundsEXTERNAL

Criteria:

1.Length of time funds are available (example: a relative lends the entrepreneur $5,000 but then wants it back, suddenly without notice for personal reasons).

2.Cost of the funds (selling equity cheap or perhaps high interest rates for debt).

3.Amount of control lost (how much equity is the entrepreneur willing to relinquish?).

IV. External funds: overview

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1. Personal FundsInvestors and lenders will want to see that the entrepreneur:

is ready to take risk;is going to succeed, not just “hopes

to succeed”;has “burned the bridges”: must go

forward;invests his own money.

2. Chartered BanksCommon forms of financing:

Accounts Receivable loans

Inventory loans (liquidity matters)Due to factors such as obsolescence and liquidation value banks

will normally only offer 50% of the value.

Equipment (commercial pledge): long-term financing

The equipment immediately depreciates; they will only offer 60% of your cost and require independent assessment.

Real estate loans (also asset-based financing)p.184

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Dealing with banks: lending decisionsCharacter : assesses the consumer’s

willingness and desire to repay a loan on time.  “know your customer” concept. 

Capacity : measures the applicant’s ability to repay the loan when it is due. 

Capital: the net value of a consumer’s assets.  This has a bigger impact with larger loans.

Collateral : an asset pledged by a borrower to a lender to guarantee a loan. 

Conditions : external variables that will affect the risk of the loan, such as the economy, social and political environment, government regulations, or competition, or changes in the bank’s objectives.

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Dealing with Banks (and other lenders)Banks are not risk takers by nature. They want their

interest rate no matter how well (or poorly) the business goes.

Important how and when they will get their money out – be clear on that.

Show that you are taking risk in the venture as well.Don’t over-promise. Be realistic with revenue

projections.Cover expected objections (risk assessments).Talk their language (ratios, returns, margins, etc.).Get enough the first time: consider all costs until

break even and build in a contingency cushion – no one likes to do “rescue financing”.

Establish a personal relationship with the bank.Pay your bills on time (financial history).Be prepared not to get it.

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4. Angel InvestorsWho are Angel Investors?

Informal investors Often a retired entrepreneurs in the same industry. Bring expertise + contacts as a valuable member of

the team. Provide the “know-how”, entrepreneur provides the

energy. Want an equity position. Invest about $25,000 to get the business started then

they have contacts to 2nd round financing. May “cash-out” at second round, or stay. Look for 5-10 times return on their investment over

three years (40-50% internal rate of return).

p.197-204“Flying with angel investors” (Stanford University entrepreneurship corner) – 2min:http://ecorner-beta.stanford.edu/authorMaterialInfo.html?mid=1917

5. Venture Capital By nature, willing to take on more risk. But, VC’s want some control and high returns.

VC’s may place controls on entrepreneurs:

Approval of large capital expenditures; Remuneration of senior management; Approval of long term lease arrangements; Approval of disposal of assets; Payment of dividends; Major borrowing or other financial decisions.

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How to pick a venture partner (4min): http://ecorner-beta.stanford.edu/authorMaterialInfo.html?mid=1832

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Venture Capital Big players. Objective: to generate long-term capital

appreciation through debt & equity investments. Typically in industries like software development, biotech,

environmental (alternative sources of energy, or recycling), etc. These businesses also tend to have government money available dedicated to support R&D type activities.

Invest in chunks of $500,000 and up. Sell a portion of their equity at the “go public” phase, recover their investment and have equity left for large returns.

Bring the $$$ and also may bring in the professional management to run the operation.

Types of VC firms in Canada:-Private VC firms-Government (BDC, EDC)-Institutional (pensions, endowments)-Corporate-Labour-sponsored (LSVCC)-Foreign

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Dealing with VCPrepare a business plan and a short professional

letter.Referral: approach through an intermediary, but

then lead the discussion.Develop trust.Avoid pushing the decision: too much pressure can

cause problems.Avoid “glib statements: “We do not have

competition”, “Our product is the best”, “The technology is super”.

Avoid too high salaries, or even talking too much about compensation.

V. CULTURAL ECONOMICS: A BRIEF HISTORICAL SURVEY Mid 1950s- Ford Foundation-economic program for financing

of symphonic orchestras: Marc Blaug and Allain Peacock – scientific articles on economic aspects of the arts

1966- Baumol and Bowen-Performing arts-The Economic Dillema (the birth of cultural economic as a science)

1970s- William Hendun-establishment of Association of Cultural Economics and the Journal of Cultural Economics

1978-The Subsidized muse-Dick Netzer

1979-David Throshby and Glen Withers-The Economic of the Performing Arts

1989-Bruno Frey and Pommerehne

1993-Helbrun and Gray

W.Baumol and W.Bowen:“Irrespectively of the type of the performing arts

organization, the self-earned incomes from selling tickets are always less than the costs for making the production, and this Income Gap increases in time”:

- The time for production is not related with the effectiveness;

- The supply is limited, as the performance can be repeated limited number of times for a limited time frame;

- Computarization and mechanization of the working processes can not influence the final products.

DILLEMAS IN THE STATE SUPPORT FOR THE ARTS (national and regional)

Balancing direct and indirect supportSupport of state, non-profit or commercial art

formsCenter versus periphery (capital-regions)Contemporary versus traditionalEstablished versus emergingSupport for: products, processes, or maintenanceSupport for institutions or for individual artistsBalancing arts education with the arts labor

marketHow to foster creativity through policy decisions?

Economic Arguments for State support for the Arts

Arguments, related to the economic specificity of arts:

High level of involvement of labor

Limitation of productivity High risk and

unpredictability in the process

Relatively low payment for artists, need for securing working places in the arts

Final results of art are subject of public evaluation

Limiting possible monopoly

Arguments, related to the consumers

Possibility to choose between different art forms

Collective indirect benefits Social and intellectual

development Feeling of national

prestige and proud Cultural diversity and

pluralism Possibility for Innovation Increasing access to arts