Start-up process

Course Objective

Able to understand
 Risks in start ups
 How non-financial information is
useful in valuing a firm

What is venture capital?

 Venture capital is equity financing to high risk young
companies (sometimes also a combination of other
financing instruments)
 Venture capitalists are, before everything else, after
extremely high returns on investments (30-60% per
annum depending on the risk)
 High expected return of VCs makes it very expensive
financing method for entrepreneurs
 Risk is considered higher the earlier the development
phase of the venture is

Money risk

1. Burn rate
2. Path to profitability (P2P)
3. Scalability and its costs
4. Exit strategy and market conditions
5. Characteristic of VC fund
6. Capital structure and legal firm
structure

1.1. Burn rate

 The rate at which a new company uses up its venture
capital to finance overhead before generating positive
cash flow from operations. In other words, it's a measure
of negative cash flow.
 Burn rate is usually quoted in terms of cash spent per
month
 For example:
A burn rate of 1 million would mean the company is
spending 1 million per month. When the burn rate begins
to exceed forecasts, or revenue fails to meet
expectations, the usual recourse is to reduce the burn
rate (which, in most companies, means reducing staff).

1.3. Scalability and its costs

1.4. Exit strategy and
market conditions

1.5. Characteristic of
VC fund

1.6. Capital structure and
legal form

2.1. Founder and
the management team

2.2. Building
board of directors

2.3. Strategic alliances

 Act as value lever  leverage
 Key success factors: information
- Added sales channels
- Industry buzz
- Instant credibility
- Access to expertise
- Attractive financing opportunities
- Merger partners and potential acquirers
- Complementary technology

3.2. Market acceptance
issues

 What’s technology trend
 What are your horizontal
you’re riding?
and vertical plan?
 How do you differentiate
 Is there industry
your product or service
awareness of your
from competition?
products/services?
 Does your product/service
 What’s likely quantitative
require buyers to change
benefit of your
their internal process or
product/service?
culture?

4.1. Market analysis

 The goal is to determine the attractiveness
of a market and to stand its evolving
opportunities and threats as they relate to
the strengths and weaknesses of the firm
 Dimension of market analysis :
Market size, market growth rate, market
profitability, industry cost structure,
distribution channel, market trends and key
success factors

4.1. Market analysis:
question to ask
 What is the stage of your industry’s life cycle?
 What is its outlook?
 What new and competing technologies are being
introduced to your market?
How do they compare with yours?
What are barriers to entry in your market?

Search Wall Street Journal, Forbes, Fortune and Business
Week, www.esa.doc.gov, www.fedstats.com, InDag, BPS,
etc.

4.2. Competition

 Be sure to know the competitors; the capability,
size and market share
 Don’t tell VC there is no competition
 To tackle competition:
Business differentiation and business
improvement, present it in business plan in
details, finding out competitors’ value to
determine own business
 Valuation of competitors = adjusted value of our
company

4.2. Competition:
question to ask
 How large are they? What territories do they operate in?
 Are they publicly or privately held?  What distribution channels do they use?
 Where are they in life cycle?  How are they financed?
Young, developing, or mature  What is their management team like?
business?  What patents, trade secrets or other
 How quickly are they growing? competitive advantage do they possess?
 How profitable are they?  What strategic alliances do they have?
 Are they first-movers?  What are their strengths and weakness
 What is their market share and
how quickly is it growing? US Guide: Dun’s Million Dollar Directory;
Hoover’s Guide to Private Companies;
 What key relationships do they and Moody’s Industrial Manual
have with vendors or customers
What is their installed base?
 What segments of the market are
they in?

4.4. Sales and marketing
strategy

Start-up process

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Start-up process