Session 5 financing strategies
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The document outlines essential financing strategies for businesses, including three main approaches: bootstrapping, raising private money, and securing professional funding. It emphasizes the importance of financial planning, assumptions, and the presentation of financial projections to attract investors. Additionally, it details the expectations of different types of investors, such as angels and venture capitalists, regarding returns and the necessary groundwork for successful funding.
Session 5 financing strategies
- 1. © Copyright 2003, Success FormulasSuccess Formulas ® Financing StrategiesFinancing Strategies
- 2. © Copyright 2003, Topics • Three Fundamental Approaches • Financial Planning • Financial Assumptions • Spreadsheet Components • Executive Summary
- 3. © Copyright 2003, Why Have a Financial Strategy? • Provides Structure and Funds to Achieve Overall Objectives. • Examines Implications of Options. • Identifies the Best Financial Course of Action.
- 4. © Copyright 2003, Three Financing Approaches • Bootstrap • Raise Private Money • Raise Professional Money
- 5. © Copyright 2003, Bootstrap Approach • Mortgage Your House • Run Up Credit Cards • Friends and Family Financing • Customer Financing • Vendor Financing • Partner Financing
- 6. © Copyright 2003, Strategies • Factoring • Reduce the Growth Rate • Control Expenses • Control Salaries • Control Inventory Too Much Control = No Room for Innovating
- 7. © Copyright 2003, Raise Private Money (Angels) Sources Who Know People and Invest Themselves… • Attorneys • Accountants • Bankers • Business Colleagues • You
- 8. © Copyright 2003, Investor’s Expectations • 40% Per Year Return. • Expect 5+ Times Their Investment, Within Five Years. • Desire Low Risk. Caution: Watch Out For Security Laws.
- 9. © Copyright 2003, Professional Money • Venture Capital Firms • Banks
- 10. © Copyright 2003, Venture Capitalist’s Goals • 40% Internal Rate of Return on Investment, as minimum yield. • 5-100 Times Their Investment, Within Five Years. • Anticipated Revenues Must Grow to Exceed $50 Million/Year. • Managed Risk
- 11. © Copyright 2003, Bank’s Expectations • You Have Assets (Collateral) -- To Secure Return of Bank’s Money • Income (Earnings) Within The Company • You Personally Guarantee Pay-Back (Personal Assets). • Very Low Risk.
- 12. © Copyright 2003, Which Financial Approach is Right… For You?
- 13. © Copyright 2003, Marketing vs. Finance Marketing: An Aggressive Approach Finance: A Conservative Approach
- 14. © Copyright 2003, About Presenting to Investors • Grab the Investors’ Attention Immediately • Focus on Validity of the Business/Investment Opportunity, Not the Technology or Service • Justify Your Assumptions • Test Your Presentation on each a CPA & a Marketing Person. • Make Presentations Somewhere Between Aggressive and Conservative.
- 15. © Copyright 2003, The Financial Plan • 5-Year Profit and Loss (P&L) Pro Forma • 5-Year Balance Sheet Pro Forma • 5-Year Cash Flow Pro Forma • Underlying Assumptions • Use of Proceeds • Prior Investments Received Know, but don’t present, all of the underlying detailsKnow, but don’t present, all of the underlying details
- 16. © Copyright 2003, 5-Year Profit and Loss (P&L) Pro Forma Determines Value of Business
- 17. © Copyright 2003, 5-Year Balance Sheet Pro Forma Shows Early on, What Is Happening Within The Business
- 18. © Copyright 2003, 5-Year Cash Flow Pro Forma • Identifies Investment Requirements. • Rapid Growth Can Consume All Cash Flow within First 1-3 Years. • Most Investors Expect to See Red Ink from 12-24 Months in The Enterprise. • Usually Have Increasing Cash Flow Demands During Growth.
- 19. © Copyright 2003, Underlying AssumptionsUnderlying Assumptions • Has to Make Sense! • Must Be Error-Free. • Investors Will Do an Independent Study as Part of Their Due Diligence Process. • Venture Capitalists Will Identify and Critique All Key Assumptions. • Do Your Homework!
- 20. © Copyright 2003, Uses of ProceedsUses of Proceeds • Relates to Cash Flow Projection • Do Not Ask for Money That Isn’t Supported By Cash Flow Projections (One of Most Common Problems). • Easier to Convince Investors If There Is Some Operating History. • If You Aren’t Prepared, or Your Enterprise Isn’t Ready, Do Not Waste a Venture Capitalist’s Time.
- 21. © Copyright 2003, Prior InvestmentPrior Investment • How Much Have You Invested in the Business? • Are You Investing More into the Business? • Venture Capitalists Are Increasingly Willing to Invest If You Also Invest.
- 22. © Copyright 2003, The Financial AssumptionsThe Financial Assumptions • Revenues • Cost of Goods • Expenses • Inventory • Accounts Receivable • Headcount/Salaries These can be the most important details!These can be the most important details!
- 23. © Copyright 2003, OrganizationalOrganizational Learning Curve • Experience Leads to Cost Reduction. • Worker Learning Effects Can Occur Quickly. • Total Learning Effect = Competitive Advantage. • Learning Rate Tends to Level Off.
- 25. © Copyright 2003, Spreadsheet ComponentsSpreadsheet Components • Revenue Projection Charts • Cost of Goods Sold • Head Count • Salaries • Expenses 6.4%3.5%1.9%0.9%0.1%OUR SHARE OF TOTAL MARKET 32.0%25.1%19.0%13.8%4.4% 141,650,00063,900,00028,350,00011,250,0001,325,000OUR TOTAL CHANNELS 443,066,912254,218,720148,840,00081,740,00030,000,000TOTAL OT CHANNELS 20.0%14.0%10.0%6.7%3.0%OUR TECHNOLOGY % OF TOTAL 2,215,334,5601,815,848,0001,488,400,0001,220,000,0001,000,000,000TOTAL CHANNELS 20062005200420032002
- 26. © Copyright 2003, InventoryInventory • Raw Materials • Work in Process • Finished Goods • Rework • Sales Samples
- 27. © Copyright 2003, Accounts ReceivableAccounts Receivable • Assume Industry Average Is 45 Days • For Small Businesses It Is 60++ Days • Non-Collectable Receivable Can Be 20% of All Sales.
- 28. © Copyright 2003, Key PointsKey Points • Plan to Spend Money on Marketing and Inventory. • Pay Attention to Accounts Receivable. • Don’t Oversell -- Charge What Market Will Bear. • Don’t Hold Back Any Information From Venture Capitalists. • Begin to Think About What You Will Do With Profits.
- 29. © Copyright 2003, Executive SummaryExecutive Summary In 2-or-3 Pages, Briefly Describe: • Elevator Pitch (2-3 sentonces!!!) • Your Industry/Sector • Company Vision • Company Mission • Corporate Legal Description • Product/Service - What it does, how much it sells for, proprietary position • Market - Who’s going to buy, what is the sales channel. • Operations • Management Team • Investment Required • Financial Proforma • Note: Develop each topic for five years