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Finding funding for your business idea
Topics1. Refresh on objectives of business activity2. Knowing where you are in the value chain3. Crafting a strategy to establish what you need4. Funding is fundamental5. Uses can determine sources6. Reflections on failure7. Appreciate an iterative process requires passion8. Planning for the long haul
Developing and pursuing a strategy
Colin K. [email protected]
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Business activity
What is the role of investment?
Inputs The Firm Outputs
Raw MaterialsComponentsFinancial CapitalPhysical assetsTechnologies
Transformation based on:
Intellectual capital
Entrepreneurial competence
Products and services
Value!Investment Activity
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Process begins with well-articulated opportunity
Communication with stakeholders
RevenueAnalysis
CostAnalysis
InvestmentAnalysis
ProfitabilityRanking
RevenueAnalysis
CostAnalysis
InvestmentAnalysis
ProfitabilityRanking
Political/LegalEconomic Environ.
Consumer/MarketAnalysis
Social/CulturalTechnical Environ.
CompetitiveAnalysis
Political/LegalEconomic Environ.
Consumer/MarketAnalysis
Social/CulturalTechnical Environ.
CompetitiveAnalysis
Purpose, orMission
ResourceAnalysis
CorporateObjectives
OpportunityRanking
Purpose, orMission
ResourceAnalysis
CorporateObjectives
OpportunityRanking
Idea
Opportunity
RevenueAnalysis
CostAnalysis
InvestmentAnalysis
ProfitabilityRanking
RevenueAnalysis
CostAnalysis
InvestmentAnalysis
ProfitabilityRanking
Political/LegalEconomic Environ.
Consumer/MarketAnalysis
Social/CulturalTechnical Environ.
CompetitiveAnalysis
Political/LegalEconomic Environ.
Consumer/MarketAnalysis
Social/CulturalTechnical Environ.
CompetitiveAnalysis
Purpose, orMission
ResourceAnalysis
CorporateObjectives
OpportunityRanking
Purpose, orMission
ResourceAnalysis
CorporateObjectives
OpportunityRanking
Idea
Opportunity
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Know the integrated picture
Strategy map
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Last strategic points
Top reasons businesses fail
1.
2.
3.
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Last strategic points
So, need to know what investors are looking for
On winning the race: First, need the right horse (the concept) Then, have to have the jockey to lead
through the rough spots Finally, to ensure you are in the right
race (market!)
Leadership serves as the trainer to get the horse ready to race!
Securing investments is iterative but most people are not comfortable negotiating
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Let’s go!
Time to craft a strategy
1. How much do you need?2. What is your risk level?3. What would you do if you
did not get the funding?
Let’s spend some time on the next page…
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Financial objectives
Do you agree with the following?
Key Financial Objectives
• Earn a profitInvesting in Company X versus putting money in the bank
• Stay solvent Have sufficient cash to pay debts as they fall due
Other Objectives
• Provide jobs for people• Creating new products to serve the community• Protecting the environment• Providing goods at a lower cost• Etc…
Is this the right priority? From what perspective?
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What is the color of money you need?
Going to spend some time on this
Balance Sheet
Assets = Liabilities + OE
Income Statement
Cash+$100
Net Income = Revenue - Expenses
Paid-in capital+$90
You+$10
1. Gift?2. Loan?3. Equity?
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Tell me about “transactions”
Support for decision-making about investments
ManagementDecisions
Customer Transactions Measure
Categorize& Record
Analyzethe
Transaction
Synthesizeand
Report
Accounting
InformationProducts
Data
Investments
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Financial statements
Capture data in ways to facilitate decision-making
Balance sheet Statement of financial position
Income statement Profit and loss
Statement of cash flows Solvency
Change in Owners’ equity Changes in wealth
Statement Purpose
Dr. Drobek will come back to this point in a few minutes ….
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Financial statements
OK create data to facilitate ‘start-up’ decision-making
Idea
Science
TechnologyPrototype APrototype BPrototype C
Internal TestDownselect
$$ Prototype $$
Field TestPrototype
Pre-ProductionRefinements
Pilot Runs
Production
Equity Leverage
Step 1Angel, Seed, SBIR-I
Step 2Early Stage, SBIR-II
Step 3Equity, VC
Solid BusinessPlan
EntrepreneurialDeath Valley
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Tell me even more
Exactly HOW do you create value?
Fixed CapitalEfficiency
Working CapitalEfficiency
Return on Net Assets
RevenueGrowth
Operating CostReduction
Net ProfitAfter Tax
TaxMinimization
After Tax Cash Flow
Owner’sEquityand
StockPrice
OverallBusinessSuccess...
Is aresultof ...
Which ismeasuredby ...
Which is theresult of ...
1
2
3
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Developing financial projections
Central to your plan but process is iterative and takes time
1. Start with basic sales projections
2. Enough to overcome cost of goods?
3. Enough to be worthwhile to investors?
4. What can I control?
5. What things can’t I predict?
6. Actually, a lot of things might change• Scenario analysis becomes central to risk
management
• Is the “idea” really a “greater good” idea?
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Developing financial projections
Life with paradox: Management is a balancing act
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Developing financial projections
Best to “just do it!”
You will work through a simple financial projection for your business concept
Sample pro forma readily available.
Keep “mapping” your ideas against:
Potential transactionsBusiness purposeScenarios
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Business Model
A company’s method for making money in the current business environment
1. How do we make money?2. Whom do we serve? 3. What do we provide?4. How do we differentiate and sustain competitive advantage?5. How do we provide our product or service?
Cash Is used to purchasegoods (or materials +labor)resulting in …
Inventory Held until sold,often on accountresulting in …
AccountsReceivable
Which must be collected toincrease …
Cash Is used to purchasegoods (or materials +labor)resulting in …
Inventory Held until sold,often on accountresulting in …
AccountsReceivable
Which must be collected toincrease …
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Whew! Let’s get to the “finding” part
Gifts: Spend some time discussing the basis for each
1.
2.
3.
Family, friends, and …
Government (SBIR, STTR) …
Foundations …
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More on the “finding” part
Loans: more time discussing the basis … note “investors”
1.
2.
3.
Family
Investors
Banks
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Yet more on the “finding” part
Equity: Yet even more time discussing the basis
1.
2.
3.
Family, friends, sweat …
VC
Investors
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Revisit “the Plan”
What if I need more than I asked for?
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Revisit “the Plan”
Specifically, what variance occurred?
• General outline for estimating new venture cash flows.– Start-up, the initial outlay. – Sales forecast, units and revenues…develop &
document assumptions. – Cost of sales and expenses.– Assets—new assets to be acquired, including
working capital.– Depreciation.– Taxes and Earnings.– Summarize and combine—adjust earnings for
depreciation and combine it with the balance sheet items to arrive at a cash flow estimate.
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Proforma
A view of the future
• Financial statements for a new venture are “pro forma”.– What financial statements will be if planning assumptions are true.– Financial projections…..project the firm’s financial statements into
the future.
• Hard to forecast a new operation --– No history on which to base projections.– Maybe refer to Pro forma Excel Template at this point (or later!)
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Debt and equity finance
Measures the mix of debt and equity within total capital.
An important risk measurement - a high debt level burdens the income statement with excessive interest making failure more likely.
Debt to Equity Ratio = Long Term Debt : EquityDebt to Equity = $6,200 : $3,300 = 1.9 : 1
(Stated as 1.9 to 1, since $6,200/$3,300 = 1.9)
A high debt ratio is viewed as risky by investors.
What is your risk tolerance?
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Debt and equity finance
The color of money dictates where you find it!
• Capitalization / Capital Structure includes both debt and Equity.
• Firms spend two kinds of money…– Day-to-day funds – come from normal profits,
support routine activities. – Large sums needed for major projects and to get
businesses started - comes from selling financial assets.
– Borrowing money: Debt Financing
– Selling stock: Equity Financing
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Summary
The color of money dictates where you find it!
• Consider the journey carefully
• Know exactly what you are looking for and why
• Know what you will do if you don’t get what you want
• Work on the “elevator pitch” every day
• The money IS there, it just has to align with your proposed business.
