2Entrepreneurial Finance The Achilles’ HeelThree core principles of entrepreneurial finance:More cash is preferred to less cash
3Entrepreneurial Finance The Achilles’ HeelThree core principles of entrepreneurial finance:More cash is preferred to less cashCash sooner is preferred to cash later
4Entrepreneurial Finance The Achilles’ HeelThree core principles of entrepreneurial finance:More cash is preferred to less cashCash sooner is preferred to cash laterLess risky cash is preferred to more risky cash
6Entrepreneurial Finance The crux of it is anticipationWhat is most likely to happen? When?What can go right along the way?What can go wrong?What has to happen to achieve our business objectives and to increase or to preserve our options?
7Entrepreneurial Finance The crux of it is anticipationWhat does it mean to grow too fast in our industry?How fast can we grow without outside debt or equity? How much capital is required to increase or decrease our growth by X percent?How much can be financed internally and how much will have to come from outside sources?What about our pricing, our volume, and costs?
12Entrepreneurial Finance The Owner’s PerspectiveCash flow and cashCash flow and cash are King and Queen in entrepreneurial financeTime and timingIn entrepreneurial finance, time for critical financing moves often is shorter and more compressedCapital marketsCapital is one of the least important factors in success of higher potential ventures. High-potential founders seek not just capital, but investors who will add value, skills.
13Entrepreneurial Finance The Owner’s PerspectiveEmphasisNon-economic factors are important in raising capital. Backers should add knowhow, wisdom, counsel and help.Strategies for raising CapitalMaximizing amounts raised also increases risk. Therefore, effectuation and staged commitment. Entrepreneurs may turn down capital if valuation is less attractive and prospects are good.Downside ConsequencesConsequences of failure are much higher for entrepreneur than CEO of a larger business.
14Entrepreneurial Finance The Owner’s PerspectiveRisk-Reward RelationshipsCapital markets are idiosyncratic and less efficient with these sorts of transactions.Valuation MethodsEstablished valuation models tend to favor sellers.Conventional financial ratiosFinancial ratios are misleading when applied to most private entrepreneurial companies
15Entrepreneurial Finance The Owner’s PerspectiveGoalsCreating value over the long term, rather than maximizing quarterly earnings, is a prevalent mind-set and strategy among successful entrepreneurs
16Entrepreneurial Finance Financial Strategy FrameworkThe opportunity leads and drives the business strategy, which in turn drives the financial requirements, the sources and deal structures, and the financial strategy.Once the core market opportunity and strategy are defined, the entrepreneur can begin to examine the financial requirements in terms of operating and asset needs, and then pursue a fund-raising strategy.
17Entrepreneurial Finance Free Cash Flow: Burn Rate, OOC and TTCThe core concept in determining the external financing requirements of the venture is free cash flow. Three vital corollaries are the burn rate, time to OOC (out-of-cash time), and TTC (time to close financing).
18Free Cash FlowThe cash flow generated by a company or project is defined as follows:Earnings before interest and taxes (EBIT)Less tax exposure (tax rate times EBIT)Plus depreciations, amortization, and other non-cash chargesLess increase in operating working capitalLess capital expenditures
19Operating Working Capital Operating working capital can be defined as follows:Transactions cash balancesPlus accounts receivablePlus inventoryPlus other operating current assetsLess accounts payableLess taxes payableLess other operating current liabilities
20Operating Working Capital Operating working capital can be defined as follows:Earnings before interest but after taxes (EBIAT)Less: Increase in net total operating capital (FA+WC)Where increase in net total operating capital isIncrease in operating working capitalPlus Increase in net fixed investments
23Entrepreneurial Finance Crafting financial and fund-raising strategiesCritical Variables affect availability of funds:Accomplishments/performance to dateInvestor’s perceived riskIndustry and technologyVenture upside potential and anticipated exit timingVenture anticipated growth rateVenture age and stage of development
24Entrepreneurial Finance Crafting financial and fund-raising strategiesCritical Variables affect availability of funds:Investor’s required rate of return or IRRAmount of capital required and prior valuations of ventureFounders’ goals regarding growth, control, liquidity and harvestingRelative bargaining positionsInvestor’s required terms and covenants
26Entrepreneurial Finance Financial life cyclesEx details the types of capital available over time for different types of firms at different stages of developmentMany equity sources are not available until firm survives early growth stagesUpside potential of firm is a big part of availability
27Entrepreneurial Finance Financial Life CyclesFoundation firmsWill total 8-12% of all new firms; will grow more slowly but exceed $1 million in sales and may grow to $5 million to $15 millionHigh-potential firmsGrow rapidly; likely to exceed $20 to $25 million; strong prospects for IPO and have widest array of funding opts.Lifestyle firmsLimited to personal resources of founders, and whatever collateral or net worth they can accumulate.
28Entrepreneurial Finance Team ActivityWhat are the key entrepreneurial finance issues that your IBP team will need to anticipate that are:Critical to the venture?Unique to the venture?Your team has minutes to prepare answers to these questions. Select a spokesperson and prepare an overhead with your responses to present to the class.