13 0806 session 1 & 2 webinars

Editor's Notes

• #7: Progressive de-risking of company from concept to a venture that will achieve investment and/or sustainable revenueTraining materials, activities & workshops are integrated with these 10 steps Product-Market Fit helps each company ensure that they have identified the correct market for their product(s)/service(s) and are ready to make appropriate adjustments. 2) Technology Validation ensures that their product(s)/service(s) will credibly meet the requirements of investors and customers. 3) Business Model covers all key aspects of who and how and where money will be made, and how the product will be delivered. 4) Markets and Getting to Them covers the key, crucial steps needed to get a new product into the market (an enhanced version of ‘Go To Market Strategy’). 5) Finances & Funding focuses on producing credible financial projections. 6) Legal provides an introduction to intellectual property protection and the corporate structure required to minimize risk and provide the legal underpinnings for success (important steps often overlooked by entrepreneurs). 7) Execution and Team to Execute introduces the importance of building a strong, relevant team with the specific skills needed to hit the major milestones needed as the startup grows. 8) Sustainability introduces the importance of business practices that will improve the company’s profitability while reducing its environmental impact. 9) Presentation works on the content and skills for excellent investor/customer presentations. 10) Assessment & Review guides each entrepreneur through the importance of careful review, and provides the platform for review and refinement of the programs themselves.Physical and virtual business clinics are one-on-one sessions for each participating startup with experts from sectors such as law, marketing, design, manufacturing and finance.
• #11: Introductory slide, webinar description.
• #12: Our agenda for today’s topics in this webinar focus on the following:- Value Creation in context of Finances and Funding through Financial AnalysisDeveloping Financial Models for Early Stage Enterprises Applying Business Model Innovation to Create Value- Scenario Analysis – Testing your Assumptions- Funding – Sources and EnvironmentAt the conclusion of the webinar, you should have a more solid understanding of how Product and Technology fit into Osterwalder and Pigneur’s (2010) Business Model Canvas.
• #13: We move on to Webinar no 5 from where we left off last week on Product and Technology Validation Webinar. You shared with us what you liked about the Webinars and how we can make them more helpful. Today’s Webinar is on Value Creation through Cash and Cash Flows and Financial Models and testing your assumptions. The goal is to link the Webinar content as much as possible to the Worksheets that you are required to complete and Judging Criteria given that is your shorter term interest.
• #15: Create, Capture and Sustain by assessing and leveraging the three keys to building a business / Industry- Investments - Operational Excellence - FinancingInvestments - One of the ways to create value is by making Investments that result in future cash flows. Example….Tesla2) Operational Excellence – Operational efficiencies and effectiveness by business that can positively result in creation of Industry / Industries. Example…….Rise of Wafer Foundaries and Subcontractor Back End Manufacturing companies in a highly capitalized industry such as semiconductor industry.3) Financing – Instead of selling products / services one can consider financing the products and services over shorter or longer time frame. – Example….Automobile Sales to Consumers, Structure of business and or doing business within a given Industry.
• #16: The Canvas consists of nine building blocks, which are described from Right to Left (Front Stage and Back Stage) and then at the bottom Front Stage……..On the Right are four building blocks that form what can be called a customer view. These blocks include Customer Segments (CS), Value Propositions (VP), Customer Relationships (CR), and Channels (CH).On the Left are three building blocks that form what can be called the operations view. These blocks are Key Activities (KA), Key Resources (KR), and Key Partnerships (KP). At the bottom of the Canvas are two blocks that make up the economics view: Cost Structure (C$) and Revenue Streams (R$).The Canvas should be seen as a visual representation of the flow from suppliers to customers supported by economic elements. The organization of the elements is set up to be developed from right to left and then interpreted left to right. Like a painting it may not make sense until all elements are in place and the whole of the picture is seen through the interaction of the parts. In the following discussion we will look at each in more detail.Companies with Successful Business Models – Apple, Intel, Google and Power Assure (Smart Power Management - Dashboard)
• #30: By now you should be well on your way to establishing your business model. The next step is to transfer this model into a financial one. Therefore, in the next section we will show you an example of mapping the business model canvas into financial statements.During my years of working with early stage companies, I have found that this piece is often the weakest link. As many companies find out in the due diligence phase of a transaction, it is much more than a “check the box” exercise. Investors want to make sure that you have thought through the financial aspects of your strategy. In order to do this, I would like to begin by flipping it on its side.
• #31: I find it easier to think about the elements affecting revenue and costs streams this way, because it mimics the structure of income statements and cash flows statements.Income StatementsRevenue at the topCosts at the bottomCash Flow StatementsIncome at the topCash requirements down below
• #32: Financial statements capture both points in time – the Balance Sheet - as well as what goes on between those points in time - the Income and Cash Flow Statements. In their worksheets the Cleantech Open requires annual projections. In practice you will also need monthly and quarterly projections.Again, you, as an entrepreneur, should focus on the amounts of cash available at various points in time as well as understand the uses of cash during each period.
• #33: I find examples a useful way to understand concepts, so I would like to begin with an example of mapping a business model to financial statements. Unfortunately, we only have time to work through one example on the call today. I recommend that you work with your mentors on mapping your business model into financial statements.While the example financials on the following slides are not taken from a specific company, they are directionally instructive. In this example, we look at the income, cash flow and capital requirements for a vertically integrated company – a very conventional approach.In the lighting sector you can think of this as an early stage company trying to be like Phillips, which has a vertically integrated model.Philips’ lighting business designs and manufactures its products in-house and then sells them through its own sales force.
• #34: In order to produce products in-house, this company will need certain key resources:BuildingProduction EquipmentWhile this approach keeps the Intellectual Property closer to the vest, it is also much more capital intensiveIn other words these key resources will need to be financed. Also, the cash flow requirements from the business will require cash to fund operations, which we will cover on the following pages.In this example, we will assume that it is possible to borrow 200 for the equipment and the rest 1,100 is raised from equity investors.
• #35: Moving on to the Income Statement, we start with the revenue stream in orange, which will come from selling products to customers. The target segments for these products are taken from your Business Model Canvas process. The dynamics of these industry segments need to be well understood in order to forecast revenue growth for the company.In-house production (in beige) will require certain key resources (manufacturing labor and materials) which factor into the calculation of Cost of Goods Sold (or COGS) and determine the gross profit margins for your business. Selling directly to the customer via your own sales force requires Sales and Marketing resources (here highlighted in green).Finally, your general & administrative costs and research and development expenditures (in blue) are key resources that show up on the Income Statement as expense categories.
• #36: From here I would like to take a deeper dive into the income statements and separate out fixed and variable costs.In red we see expenses, like occupancy costs and depreciation and amortization, which are fixed in nature.In blue are costs, like materials, commissions, and bonuses, which go up and down based on the revenue of the business.And finally, in purple we highlight expenses that are sticky or discretionally fixed, meaning that management can change them throughout the year to a point.Before we move on I would like to point out the fact that this company’s gross profit margins reflect excess capacity in the manufacturing process to allow for future growth. As a result, gross profit margins are lower in the early years until this excess capacity is absorbed by higher volumes.
• #37: The Cash Flow Statement reflects the cash earnings of the business, which ultimately enables the business to grow.The target customer segments (here in dark blue) typically have payment norms, which determine how quickly you can expect to be paid by your customers. The shorter the time, the less the cash needs for a growing business.Next, we turn to the beige box, where the efficiency of your production and supply chain will determine your cash requirements for inventory as the business grows. The more times you are able to sell your inventory in a given year, the less cash required to fund your growth. In other words, the better you manage your supply chain and reduce inventory requirements, the better your cash flow will be.Also, since production equipment requires repair and maintenance and equipment will need to be added as the business grows, additional cash is required in the form of Capital expenditures (Capex).Finally, your vendor relationships and industry norms (in brown) will determine how quickly you will need to pay your suppliers. Here the longer time you have to pay them the greater the cash flow benefit.The take away here is that the vertically integrated business model requires a lot of cash flow in the first year - 570.
• #39: In their book, Business Model Generation, Osterwalder and Pigneur layer the blue ocean value creation concept, coined by Kim and Mauborgne in their book by the same name, over their business model canvas.While the intricacies of this are beyond the scope of our webinar today, their exercise aims at lowering costs by reducing or eliminating less valuable features or services and creating high-value features or services that do not significantly increase the cost base.
• #40: Before we return to our example, I would like to highlight some business model innovation that has occurred in the cleantech sector.SunEdison, which you learned about in a previous Webinar, employed a model to sell electricity rather than panels.Solar City has developed a lease-oriented business that aggregates residential leases and seeks tax equity from large institutions instead of simply installing panels on homes.Better Place tried to sell miles instead of cars and batteries.ZipCar simplified short-term car sharing instead of car rental.However, it should be noted that not all business model innovation is successful. Better Place filed for bankruptcy earlier this year after raising $850 million. While innovative, their business model was capital intensive.
• #41: Now we turn to a simple application of business model innovation.Today, we will look at improving the cost side of value creation.Eliminating certain cost factorsReducing Cost For simplicity of comparison, we will look at business model innovation which changes the original vertically integrated model to a more flexible one. Here the early stage company tries to be more like GE by outsourcing certain functions of its business.In the Business Model Canvas context:As illustrated in green, we first change the customer acquisition costs from direct sales to contract sales, or selling through distributors. This may require key partnership agreements.As illustrated in beige, we next change fixed, in-house production costs into variable manufacturing costs through a contract manufacturing agreement.
• #42: By moving from a vertically integrated model to a more flexible one, the company transforms fixed costs into variable ones.Labor costs, equipment and occupancy costs are reduced and materials costs in the form of finished goods are increased.Depending on the contract manufacturing agreement this can lead to higher margins.Commissions become a larger component of customer acquisitions costs, making this cost more variable.The result is more flexible earnings capability and a potential increase in profits.Whatever your business model looks like, you will want to make sure that you understand the fixed and variable nature of your costs. Finding ways to convert fixed costs to variable ones will improve the resilience of your business to downturns.
• #43: Our more flexible model can also lead to improved cash flow, in other words, it is more capital light.By shifting to outsourced production, inventory can be turned over more quickly (think Dell/Toyota).Because there are no equipment upgrades to finance, there is no need for additional capex.The result is improved cash flow, or in this case, less negative cash flow. In our example the vertically integrated model yields a cash need of 570 in the first year versus only 176 for the Flexible one.
• #44: Rolling this model forward for three years, shows that the vertically integrated model requires:1,300 of investmentIs not cash flow breakeven until Year 3If things go as planned, requires 813 of cash to fund operations in the first two yearsNegative cumulative cash flow over the three-year period
• #45: Doing the same for our more flexible, capital light model: Requires of 400 of investmentIs cash flow breakeven in Year 2Requires cash flow of 176 in year 1Produces cumulative cash flows over a three-year period to 174
• #46: Financial modelling is an iterative process, which is designed in part to determine the amount of capital required to fund your business. In our example, because less cash is required for the flexible model to fund the business, you need to raise less money – 400 versus 1,300.
• #48: I see entrepreneurs coming in without have done this and it is often something they trip up on during due diligence. You will want to be prepared, so you can avoid saying, “I’ll have to get back to you on that one.”Scenario analysis is also a way to validate your assumptions, including how resilient your business model is and how much capital you need to raise.To begin this process, start with the most likely case - this is the one you have been working hardest to build and should represent a realistic view of the future.Then, increase or decrease the main model drivers: Revenue, Gross Profit Margin (COGS), Operating Expenses and Working Capital Assumptions.
• #49: In this table we summarize the assumptions from Model 2, which has become our preferred business model, given its flexibility and lower capital intensiveness.Then, we do scenario/sensitivity analysis to this set of assumptions. The best case assumes higher revenue growth and margins, and lower operating expenses as a % of sales. The worst case conversely assumes slower revenue growth, lower margins and higher operating expenses as a % of Sales.In practice, you will actually want to make more detailed changes to your models, changing the elements of operating expenses, such as staffing levels, advertising, marketing, etc. I suggest that you work with your mentors on identifying these areas.
• #50: Next we move on to the working capital assumptions. A typical way to think about accounts receivable and accounts payable is the number of days it takes to collect from customers or pay suppliers. Then a simple formula can be applied to project expected changes in these working capital items and their corresponding cash flow impact.In order to project inventory levels, most financial modelers analyze how many times inventory turns over or is sold in a year. Again a simple formula can be applied to turn this assumption into a projected inventory level. In this example, we begin by assuming that customer collections take an average of 60 days and suppliers are paid in 30 days. Inventory turns over 3x per year. We use these assumptions for all three year of our projection period.Then, we do sensitivity analysis on these assumptions.
• #51: As expected Net Income and Cash Flow are much higher under the Best case.However, with the Worst case we discover that 365 of cash is needed in Year 1 and 163 is needed in Year 2 to fund operations. This total of 528 is higher than the 400 that we originally thought we might need.As a result, the size of the raise should be increased to at least 600 in order to provide enough cushion to absorb unforeseen challenges.
• #54: Your business model does not exist in a vacuum. As Osterwalder and Pigneur, point out in their book, Business Model Generation, your business is affected by:Key TrendsIndustry ForcesMarket ForcesMacroeconomic forcesConditions in capital markets determine from whom and how much money you can raise as an early stage company
• #55: Today VC Funds and Angels are pickier about their investments, particularly in the Cleantech space.There has been a return to businesses with limited capital needs. Everyone wants the next Facebook, Twitter, etc.When they do invest in the cleantech sector, they have moved toward later stage opportunities, where:The technology is provenThere is evidence of market adoption in the form of salesA strong management team is in place with an ability to be resourcefulCapital efficient business models are pursued
• #56: Early stage companies should not look for hot money. As a result of changes in the capital markets, you should seek alternative funding sources in parallel with pursuing traditional paths like VC firms. Whatever funding you obtain, make it stretch.Such equity and convertible debt financing options include:Friends and FamilySmall Business Administration SBICVenture AngelsEarly Stage VCsRevenue Funding options include:plan a lean business model to reach point of validation and revenues as soon as possible – manage cash burn like a hawkSeek grant funding – federal and stateSeek industry partnersSell assetsLicense non-core aspects of your intellectual property