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Financial strategies for value creation
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1www.venturebean.com
Entrepreneurial Financial Strategies
Anjana Vivekwww.venturebean.com
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Overview
One..two….four!
Entrepreneurial Financial Strategies
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ONE
Money is only one dimension
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TWO
Valuation in an entrepreneurial venture is often driven by the following two factors:
1) Expected Cash Burn and2) Stake promoters are willing to
give away and acceptable to investors
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FOUR
Four things to watch
• Revenue • Profits• Cash flow• Value
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Financial Forecasts
Entrepreneurial Financial Strategies
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FINANCIAL FORECAST: Overview This is based on and driven by
your business model It helps to spend significant time
thinking of your business strategy and business model
A business model develops and evolves over time – it is not static
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Business model
The following are some key areas to be considered while developing a business model and plan- Business / idea- People behind idea/project- Market size expected- Marketing strategy- Competition- Financials- Other information which makes this complete
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Think – Long term– Medium term– Short term
FINANCIAL FORECAST: Overview
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Balance Sheet Profit and Loss Account Cash Flow
NOTE– If you do not understand the basics of financial
statements you may spend time to learn– Financial statements are communicating tools
for business i.e. business language– You do not need to be an accountant or MBA to
understand the basics
FINANCIAL FORECAST: Overview
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May be – Monthly– Quarterly– Annual
– In the initial years, these may be monthly or quarterly, in the long term, may be annual
FINANCIAL FORECAST: Overview
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Look at Various revenue streams Capital expenditure (land, computers,
vehicles, furniture etc.) Revenue expenditure (Salary, raw
material cost, maintenance and repair costs etc.)
You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW?
FINANCIAL FORECAST: Overview
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Think through Requirements of cash infusions at
different stages of the business Resource constraints Possible valuations at these
stages
FINANCIAL FORECAST: Overview
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FINANCIAL FORECAST: Preparation Use tools available – i.e.
spreadsheets Link and create templates,
suitable to your requirement
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FINANCIAL FORECAST: Preparation
Uncertainties and unknowns can be captured through:
Scenario and sensitivity analysis Templates that allow for different
scenarios – i.e. optimistic, pessimistic, expected,
– i.e. by making the changes in the input, the output financials should show the impact
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Valuation;Negotiations
Entrepreneurial Financial Strategies
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VALUATION
Valuation is based on:- intangibles and - tangibles
Valuation can be computed in multiple ways, the popular methods:- multiples of revenue; profit etc.- multiples of key drivers, eg.user base- cash flow based
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VALUATION
Valuation may be driven by - the stake the entrepreneur is willing to give up at a particular stage of investment in the business and - the amount of money required by the business at that stage
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VALUATION
Different persons can value the same business differently because they may- use different methods of valuation- use variations in the methods - have different inputs in the methods
Thus, valuation perceptions can vary, and we do have situations where there are divergent views on valuation
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VALUATION
Deals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance
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NEGOTIATIONS: PreparationIt is useful to think through: What you want from a proposed
transactions Transaction/deal maker issues Transaction/deal breaker issues The point where you may be need
to walk away
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NEGOTIATIONS: Preparation Put yourself in the shoes of the other
party Prepare for a due diligence Break up the transaction issues into
small sub-issues which could be dealt with separately, rather than as a package
Think through the steps post the transaction
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NEGOTIATIONS: Preparation
Prepare with a list of possible questions that may be asked and how you will answer them
Who will negotiate, will it be based on the area, i.e. business issues, legal issues etc. …would these be handled by the subject matter specialists?
Understand the strengths and gaps of your team members
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Transition;Roles of stakeholders
Entrepreneurial Financial Strategies
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TRANSITION
Look at the stage of your business and plan accordingly
Growing to the next level may lead to issues such as- letting go of control- letting go of leadership
Are you ready for this?
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ROLES
Plan on roles and responsibilities of team members; stakeholders
Plus think through issues of contribution- in money- in kind- in intangibles
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to trigger thinking…
Entrepreneurial Financial Strategies
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Entrepreneurial finance Entrepreneurship has many
definitions, has elements of risk-taking, innovation and pursuit of opportunities relentlessly without regard to resources controlled
One needs to understanding finance in the context of entrepreneurial firms
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Entrepreneurial finance Finance involves
– resource allocation–cost of capital–deciding on funding source–managing working capital needs
and ….most importantly–managing cash
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Entrepreneurial finance Evaluation of business opportunities
– from start-up stage to later stage companies
Understanding the value drivers of the business
Exploring options to create value, – for the business – for the stakeholders
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Entrepreneurial finance
Needs understanding of People Business Environment Deal issues Synergies
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Sources of funding Funding gap can be met from multiple
ways, traditional, new ways of funding and looking at creative options
Can you think of these and list them Each option has its own advantages and
disadvantages; can you think of what these could be?
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Sources of funding - I
Funding gap can be met from Equity investment
– Angel investment– Venture capital investment
Debt financing
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Sources of funding - II
Funding gap can also be met from Strategic investment Increasing revenue by
– changing product mix or – cash flow timing
Innovatively sourcing cash
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Some examples IT product development company being
let down by investor Confectionery/chocolate producer needing
extra funds to meet expected surge in demand during the Christmas Season
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Utilisation of fundsFunds raised are invested in Available opportunity Opportunity that is latent and not obvious Creating opportunity Based on strategy of entrepreneurs, which
may change and evolve over time
The question to be asked: Is value being created or is there an attempt to create value?
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Entrepreneurial finance and financial strategy in Summary Strategic financial planning
– for short term, medium term and long term Preparing and implementing
– business plans, financial forecasts Review of funding options Continuous monitoring and updation
– setting up internal controls, management information systems
Preparing for alliance partnerships– including due diligence review, valuation and
negotiation, deal terms and conditions Value creation
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THANK YOU
Wishing you all success