finance Flashcards
different stages of finance
seed
concept
funding research and planning
prototype
start-up
initial sales
developed prototype
early stage
moving to full-scale production
expansion
becoming an established company
financing of start-ups
common sources of equity and debt funding
95% family and friends
5% business angels
0.5% venture capitalists
equity
FFF
personal funds
business angels
venture capital
IPO
debt
credit card/personal loans
FFF
commercial banks
convertible loans
personal investment
may be required to show investment. only invest what you can afford to lose
advantages and disadvantages of personal investment
advantages
maintains equity
no interest rate (ignoring opportunity cost)
no one to pay back
clarity/scope
no one interfering
disadvantages
personal responsibility
pressure
may be more risk adverse
no buffer
rose-tinted glasses
grant money
given for a specific purpose and given under strict conditions
advantages and disadvantages of grant money
advantages
‘free money’
generally doesn’t have to be repaid
multiple sources
sometimes comes with advice as well as money
eg. in april 2012, santander awarded £100000 to 3 social enterprises in london and access to mentoring from the bank
disadvantages
‘there is no such thing as a free lunch’
opportunity cost (cost of raising money is time and focus)
costs of reporting back
matching often required
timing can be slow
fit project to their criteria
equity
share is a right to the ownership of the future profits of the business and can’t be repaid without court sanction. current value is future capital gain and dividends
50% + 1 share
management control. right to appoint directors
75% + 1 share
financial control. right to change the company’s constitution
true cost of equity
give up a portion of the business
give up future value of that share
convince someone of that value (investors want high return - at least 15%)
advantages and disadvantages of equity
advantages
permanent capital. no need to repay
equity holders can’t force winding up unless they own over 75%
more equity you have, the greater the capacity to raise debt
shared risk
disadvantages
dilutes your own share
more equity you give, more control you lose
not tax efficient
difficult
DEFINITION debt
loan from a bank or bankholders of which the original amount must be paid back, carries interest and ranks ahead of equity in bankruptcy
secured - tied to an asset that is considered collateral
unsecured - lenders don’t have rights to any collateral for debts
advantages and disadvantages of debt
advantages
cheap now
temporary whereas equity is permanent
pay regularly and lender has no say in business
interest is tax deductible
lower risk for investors
disadvantages
very hard to get now
must pay back as a priority (interest and capital)
default can cause bankruptcy
banks may insist on personal guarantees
convertible debt
if company fails, gets repaid. if company succeeds, gets converted to equity
lower interest rates
ways of increasing cashflow
borrow against own creditors
borrow from customers
invoice factoring/discounting
assets
can be remortgaged to provide funds
DEFINITION angels
high-net worth individuals, often self-made millionaires, speculating in early-stage ventures. they often share the vision of the company and invest four times as much.
they are increasingly forming networks
raising angel capital
know your field and network
understand motivations
keep message simple
choose one who can add value to your company
venture capital (early stage)
private equity (late stage)
organised as funds
funds are raised from pension funds, rich individuals and stock market
lack of large early stage funds in the UK (VC gap)
offer more than money
- leverage with other companies
- network of valuable contacts
- experience
seeking exceptional returns
assume each investment will fail
- maximise marginal protection
- require performance (eliminate losers before investing)
- look at exit strategy
‘lemons ripen before plums’ got to look into the future
attractive VC opportunity
scalability
potential to be a market leader in high growth industry with few competitors (£50 million+)
committed and competent management team
sustainable competitive advantage (profitable, repeatable, expandable, predictable, defensible)
sound business plan with plausible cashflows
reasonable valuation of existing company
viable exit strategy
reasons for having a viable exit strategy
provides basis for entry value calculations
provides liquidity for the fund
gives track record so fund can be evaluated
mechanism for investor and entrepreneur to get rich
exit strategy options
trade sale
refinancing
raise more debt and repay original equity holders through dividend
management buy in (MBI)
another team with another private equity group
management buy out (MBO)
current management financed by another private equity firm
flotation/initial public offering (IPO)
offers shares on the stock exchange
involuntary exit
crowdfunding
becoming increasingly popular
debt of equity
legally complicated and administratively difficult
startup financial cycle
types of valuation
financial
opportunity cost and risk/reward are critical
strategic
secure additional value over that available to financial
DEFINITION discounted cash flow (DCF)
value a company by looking at how much cash it throws off in the future. time value of money means you can’t just add money from different years. you need a discount rate
DEFINITION discount rate
debt:equity
DEFINITON net present value (NPV)
mathematical concept used to measure viability of an investment project. it’s the difference between the present value of the future revenues of the project and the present value of its future costs
ways to valuate a company
discounted cash flow (DCF)
multiples
identify similar companies for which there is direct measure of market value. determine ratio between company valye and some measure of financial performance
asset valuation
DEFINITION working capital
capital used to support a firm’s normal operations and is defined as current assets minus current liabilities
DEFINITION bootstrapping
launching a start-up with modest funds from the entrepreneurial team and FFF
modest business plan
quick routes to breakeven and positive cashflow
ways to bootstrap
second jobs
sweat equity
mortgage
personal investment
