financing Flashcards
two types of financing?
debt
equity
sources of financing?
you friend/family angels web bank venture capital firms corporation going public incubators
steps for family/friend financing?
- Be selective
- Warn of the financial risk
- Be prepared for long-term negative
consequences if the business fails
examples of web financing?
kickstarter
banks?
- Will generally focus on the financial record of the entrepreneur
- Will want a personal guarantee and collateral
- May be more interested in making larger loans
- You may be eligible for some governmental assistance
Incubators?
- Businesses specifically geared to taking start-ups from inception to early-round financing
- Often a short-term focus – e.g. 3-6 months
- Will take on a group of start-ups each round
- May have a particular industry focus
- Provide office space, training and contacts
- Provides seed funding in exchange for equity
angels?
- Wealthy individuals who invest directly in businesses.
- Often highly knowledgeable about your industry and understand the risk they are taking.
- Expect high returns.
- Often expect to influence operational decisions.
- Can be tough dealmakers.
Venture capital firms?
- Investment businesses that invest in new ventures.
- Source funds from pension funds, large corporations and wealthy individuals
- Invest in relatively few ventures
- Often looking for more established firms
- Require a clear exit strategy
- Often want to control the firms they invest in
Corporations?
- Companies sometimes (but rarely) make direct investment in other companies
- This is usually with a view to buying the company outright
- May be applicable if your product would be a natural extension of their business, or a key component in their supply chain
Going public?
- Sometimes considered the ‘holy grail’ of business objectives
- Involves much higher degrees of business transparency and compliance
- Can result in a loss of control, and focus on short-term targets
Angels vs Venture Capitalists acording to Dutta and Folta?
- VC more specialised and deeper network (greater endorsement effect)
- VC stronger control rights than Angels (may increase management commitment & conflict)
- VCs have shorter investment time horizons
Dutta and FOlta conclusion/finding?
VC preferred:
• Rates of innovation (proxied by patent numbers) were the same for VC backed firms as for Angel backed firms
• Impact of innovation (proxied by patent citations) were greater for VC backed firms
• Possible reasons:
• Portfolio of VC firms may increase citations
• VC firms might be more visible
• VC firms might be encouraged more to ‘swing for the fence’
why are financial plans important?
crucial for you, investors and business partners
• Financial plans need to be honest, clear and credible
• Most new businesses fail because they run out of cash, in turn because projections were too optimistic
Common components of financial plan?
- Start-up costs / capital requirements
- Income statement
- Balance sheet
- Cash flow statement
- Debt management schedule
- Returns analysis / valuation
what are startup costs?
• Acquisition price of an existing business
• Capital investment in land, building, renovations and equipment prior to
starting operations
• Operating losses in the startup phase
Revenue projections?
• Finding initial customers is difficult
• Most projections aren’t grounded in
reality and are over-optimistic
Solution:
- Anchor revenue projections – e.g. by supplying customer lists, using market research and/or using industry averages
- Be conservative in the extreme
Operating costs?
- Key is completeness
- Separate into variable and fixed costs
- Provide justification
- Build in contingencies
Financing costs?
- Consider range of possible financing levels
- Projections need to show repayment of both interest and principal
Equity returns?
Calculate the ROI (return on investment) for your equity investors
Consider whether this return is commensurate with the level of risk
Company valuation?
Provide some indication of company value at the end of your projection period
Common valuation methods are • Asset valuation • Capitalised future earnings • Earnings multiple • Comparable sales
Company valuation
- Capitalised future earnings?
- Idea is that ownership gives a right to future earnings
- Most common small business valuation method
- Dependent on (arbitrary) required rate of return (think of as a risk or growth factor)
Company valuation - Earnings multiple?
Multiply the business’ earnings before interest and tax (EBIT) by your selected multiple
The multiple you choose will depend on the industry and the growth potential of the business
Company valuation - Comparable sales
?
Whatever other valuation method you use, you should also look at prices for recent sales of similar businesses
Research what’s happening in the market you’re interested in
