Presentation on theme: "1 START-UP COSTS and CAPITAL SOURCES by Jim Chamberlain Management Counselor"— Presentation transcript:
1 START-UP COSTS and CAPITAL SOURCES by Jim Chamberlain Management Counselor James.Chamberlain@SCORE114.org
2 START UP COSTS IF YOU DONT HAVE ENOUGH CASH TO START YOUR BUSINESS RIGHT, WAIT UNTIL YOU CAN. BUSINESS PLAN WILL HELP Gateway Business Bank
3 START-UP COSTS and CAPITAL SOURCES START-UP CASH INVESTMENT FIXED CAPITAL INVESTMENTS START UP GROWTH MAINTENANCE WORKING CAPITAL INVESTMENTS START UP GROWTH MAINTENANCE CASH OUTLAYS UNTIL BREAKEVEN
4 START-UP COSTS and CAPITAL SOURCES FIXED CAPITAL – How do you calculate how much your business needs at start-up and to maintain growth? Do not confuse the justification with how it will be financed. Justify first, then determine how to finance the investments. SALES FORECAST – 24 to 36 months How much capacity investment is required? How fast will you grow? New products or services?
5 START-UP COSTS and CAPITAL SOURCES WORKING CAPITAL INVESTMENTS – The excess of current assets over current liabilities or the amount of cash required to fund the business on a day-to-day basis. An indication of short-term financial strength. Dont be under-capitalized. No business has ever failed because they had too much working capital. Working Capital = CURRENT ASSETS minus CURRENT LIABILITIES
6 START-UP COSTS (INVESTMENTS) FIXED CAPITAL Office Furniture$ 2,000 Vehicles 20,000 Tenant Improvements 10,000 Printing Machines 20,000 Total Fixed Capital – start-up$52,000 Vehicles$ 20,000 Printing Machines 10,000 Total Fixed Capital – Year Two$ 30,000
7 START-UP COSTS (INVESTMENTS) WORKING CAPITAL Start-up Operating Cash$ 10,000 Inventories 15,000 Prepaid Rent 5,000 Prepaid Insurance 8,000 Total Working Capital – start-up$ 38,000 Cash losses – first six months$ 25,000 Total Working Capital – Year One$ 63,000 Required Working Capital – Year Two$ 10,000 (Based on a $50,000 increase in sales)
8 CAPITAL SOURCES HOW BUSINESS ARE REALLY FUNDED Seed Cash – Percentage of Inc 500 CEOs surveyed (2002) who launched their company with seed capital (including personal assets) of: Less than $1,00014% $1,000 - $10,00027% $10,001 - $20,00010% $20,001 - $50,00015% $50,001 - $100,00012% More than $100,00022%
9 CAPITAL SOURCES EQUITY FUNDING – Financing your business by selling a minority equity interest. This cash is less risky but more expensive. Valuation issues must be addressed. Initial and target valuation calculations must be made. 43% of founders started the company alone. The rest had:1 partner12% 2-3 partners36% 4+ partners 9%
10 CAPITAL SOURCES Private Equity and Venture Capital funding Angel investors tend to like proprietary products and non-capital intensive businesses. They anticipate future rounds of financing. Angel investors look for: 1. Market niches – potential to dominate or be #1 or #2 in the industry 2. Advanced technology and a disruptive model (going to change things) 3. Compelling and sustainable advantage – not me too 4. Planned exit in 4-6 years 5. Reasonable valuation 6. Performance equal to 5 -10 times original investment 7. ROI equal to 20-40% per year 8. Sitting on your board but not having control 9. Higher risk business models 10. Angels spend, on average, 51 hours on due diligence per investment
11 CAPITAL SOURCES BANK LOANS or DEBT FINANCING 1. Banks will loan 2.5 – 4.0 times Cash Flow – usually based on EBITDA 2. Banks would like to see a 3-5 year track record or a history of business experience 3. Debt is less expensive but more risky than equity 4. Banks will not lend on pure projections: You must have a history of cash flow or a current personal guarantee. 5. Three sources of repayment: Cash Flow Liquidation value of assets Personal Guarantees of each 25% equity owner
12 CAPITAL SOURCES NEGATIVES TO A BANKER 1. Getting involved with something outside your normal business model 2. Absentee management / ownership 3. Divorce 4. Burnout 5. Growing beyond owners capacity to operate the business 6. Parent turns over business to son or daughter 7. Computer conversions 8. Relocation and / or expansion of facility 9. Companies hit the wall at: 1. Manufacturing companies at $2 million in sales 2. Distribution companies at $4 million in sales 3. Retailers at 3 stores and distance 4. Service companies at 12 employees 5. Contractors at 2 or more big jobs
13 CAPITAL SOURCES A bank would rather see a 640 FICO score with all payments as agreed (no late payments, foreclosures, repossessions, charge offs or collection accounts) than a 740 FICO score with a past foreclosure, and three previously delinquent accounts now paid. Having a stable source of income to meet personal income requirements can be a significant factor in reducing business risk for a start-up.
14 CAPITAL SOURCES QUESTIONS A BANKER WILL ASK YOU 1. Do you have a Business Plan? 2. How much experience do you have in this industry? 3. How is your credit and how much personal debt do you have? 4. How much is your down payment? Is it at least 25%? 5. How much collateral do you have? 6. Who is the competition? 7. Do you have personal and business insurance? 8. Do you have services of an accountant and attorney? 9. Have you ever filed for bankruptcy? 10. Do you have 2-4 years of tax returns available?
15 CAPITAL SOURCES SBA ELIGIBILITY Cannot be a business in lending, life insurance, real estate development or rental property. Gambling, promoting religion, pyramid sales plans, consumer marketing cooperatives and persons of poor character are ineligible. Individuals must be lawfully in the U.S. Business cannot be located outside the U.S. Import businesses may be ineligible Go to www.SBA.gov for a complete list of ineligible businesses. Also, a good resource for minority and micro-loan plans.
16 CAPITAL SOURCES MISTAKES ENTREPRENEURS MAKE WHEN RAISING CAPITAL 1. Dont understand share prices or valuations 2. Confuse broad market with served market 3. Make unrealistic assumptions about an exit strategy 4. Dont understand long term capital needs 5. Have no clue about competition 6. Dont understand that marketing beats technology 9 out of 10 times 7. Write a poor executive summary 8. Use off the wall numbers or pull numbers from thin air 9. Lack focus; e.g. many products or niches 10. Develop too simplistic of a market plan / analysis 11. Underestimate expenses 12. Rely on financial plans with major inconsistencies; e.g. numbers dont match or tie 13. Speak in techno-jargon. No one understands what they are saying
17 CAPITAL SOURCES BEST WAYS TO IRRITATE AN INVESTOR 1. Lying to investors or not being forthright; omission of material information 2. Inability to answer direct questions with direct answers 3. Surprises; e.g. problem with credit checks, hidden liabilities or debts 4. Over hype or exaggerate upside 5. Your story always changes 6. Arguing with investors 7. Late for meetings 8. Excessive secrecy or legalese; expect investor to sign NDA 9. Investing capital in fancy facility and furniture 10. Fail to attract top talent
18 QUESTIONS ?SCORE JIM CHAMBERLAIN James.Chamberlain@SCORE114.org