1. Page 1 Finding funding for your business idea Topics 1.Refresh on objectives of business activity 2.Knowing where you are in the value chain 3.Crafting a strategy to establish what you need 4.Funding is fundamental 5.Uses can determine sources 6.Reflections on failure 7.Appreciate an iterative process requires passion 8.Planning for the long haul Developing and pursuing a strategy Colin K. Drummond colin.drummond@case.edu

2. Page 2 Business activity What is the role of investment? InputsThe FirmOutputs Raw Materials Components Financial Capital Physical assets Technologies Transformation based on: Intellectual capital Entrepreneurial competence Products and services Value! InvestmentActivity

3. Page 3 Process begins with well-articulated opportunity Communication with stakeholders

4. Page 4 Know the integrated picture Strategy map

5. Page 5 Last strategic points Top reasons businesses fail 1. 2. 3.

6. Page 6 Last strategic points So, need to know what investors are looking for  On winning the race:  First, need the right horse (the concept)  Then, have to have the jockey to lead through the rough spots  Finally, to ensure you are in the right race (market!)  Leadership serves as the trainer to get the horse ready to race!  Securing investments is iterative but most people are not comfortable negotiating

7. Page 7 Let’s go! Time to craft a strategy 1.How much do you need? 2.What is your risk level? 3.What would you do if you did not get the funding? Let’s spend some time on the next page…

8. Page 8 Financial objectives Do you agree with the following? Key Financial Objectives Earn a profit Investing in Company X versus putting money in the bank Stay solvent Have sufficient cash to pay debts as they fall due Other Objectives Provide jobs for people Creating new products to serve the community Protecting the environment Providing goods at a lower cost Etc… Is this the right priority? From what perspective?

9. Page 9 What is the color of money you need? Going to spend some time on this Balance Sheet Assets = Liabilities + OE Income Statement Cash +$100 Net Income = Revenue - Expenses Paid-in capital +$90 You +$10 1.Gift? 2.Loan? 3.Equity?

10. Page 10 Tell me about “transactions” Support for decision-making about investments Management Decisions Customer Transactions Measure Categorize & Record Analyze the Transaction Synthesize and Report Accounting InformationProducts Data Investments

11. Page 11 Financial statements Capture data in ways to facilitate decision-making Balance sheetStatement of financial position Income statementProfit and loss Statement of cash flowsSolvency Change in Owners’ equityChanges in wealth Statement Purpose Dr. Drobek will come back to this point in a few minutes ….

12. Page 12 Financial statements OK create data to facilitate ‘start-up’ decision-making

13. Page 13 Tell me even more Exactly HOW do you create value? Fixed Capital Efficiency Working Capital Efficiency Return on Net Assets Revenue Growth Operating Cost Reduction Net Profit After Tax Tax Minimization After Tax Cash Flow Owner’s Equity and Stock Price Overall Business Success... Is a result of... Which is measured by... Which is the result of... 123

14. Page 14 Developing financial projections Central to your plan but process is iterative and takes time 1.Start with basic sales projections 2.Enough to overcome cost of goods? 3.Enough to be worthwhile to investors? 4.What can I control? 5.What things can’t I predict? 6.Actually, a lot of things might change Scenario analysis becomes central to risk management Is the “idea” really a “greater good” idea?

15. Page 15 Developing financial projections Life with paradox: Management is a balancing act

16. Page 16 Developing financial projections Best to “just do it!” You will work through a simple financial projection for your business concept Sample pro forma readily available. Keep “mapping” your ideas against: Potential transactions Business purpose Scenarios

17. Page 17 Business Model A company’s method for making money in the current business environment 1.How do we make money? 2.Whom do we serve? 3.What do we provide? 4.How do we differentiate and sustain competitive advantage? 5.How do we provide our product or service?

18. Page 18 Whew! Let’s get to the “finding” part Gifts: Spend some time discussing the basis for each 1. 2. 3. Family, friends, and … Government (SBIR, STTR) … Foundations …

19. Page 19 More on the “finding” part Loans: more time discussing the basis … note “investors” 1. 2. 3. Family Investors Banks

20. Page 20 Yet more on the “finding” part Equity: Yet even more time discussing the basis 1. 2. 3. Family, friends, sweat … VC Investors

21. Page 21 Revisit “the Plan” What if I need more than I asked for?

22. Page 22 Revisit “the Plan” Specifically, what variance occurred? General outline for estimating new venture cash flows. –Start-up, the initial outlay. –Sales forecast, units and revenues…develop & document assumptions. –Cost of sales and expenses. –Assets—new assets to be acquired, including working capital. –Depreciation. –Taxes and Earnings. –Summarize and combine—adjust earnings for depreciation and combine it with the balance sheet items to arrive at a cash flow estimate.

23. Page 23 Proforma A view of the future Financial statements for a new venture are “ pro forma ”. –What financial statements will be if planning assumptions are true. –Financial projections …..project the firm ’ s financial statements into the future. Hard to forecast a new operation -- –No history on which to base projections. –Maybe refer to Pro forma Excel Template at this point (or later!)

24. Page 24 Debt and equity finance Measures the mix of debt and equity within total capital. An important risk measurement - a high debt level burdens the income statement with excessive interest making failure more likely. Debt to Equity Ratio = Long Term Debt : Equity Debt to Equity = $6,200 : $3,300 = 1.9 : 1 (Stated as 1.9 to 1, since $6,200/$3,300 = 1.9) A high debt ratio is viewed as risky by investors. What is your risk tolerance?

25. Page 25 Debt and equity finance The color of money dictates where you find it! Capitalization / Capital Structure includes both debt and Equity. Firms spend two kinds of money… –Day-to-day funds – come from normal profits, support routine activities. –Large sums needed for major projects and to get businesses started - comes from selling financial assets. –Borrowing money: Debt Financing –Selling stock: Equity Financing

26. Page 26 Summary The color of money dictates where you find it! Consider the journey carefully Know exactly what you are looking for and why Know what you will do if you don’t get what you want Work on the “elevator pitch” every day The money IS there, it just has to align with your proposed business.