1. Lecture 6 Timmons Chapter 12

2. Entrepreneurial Finance
The Achilles’ Heel
Three core principles of entrepreneurial finance:
More cash is preferred to less cash

3. Entrepreneurial Finance
The Achilles’ Heel
Three core principles of entrepreneurial finance:
More cash is preferred to less cash
Cash sooner is preferred to cash later

4. Entrepreneurial Finance
The Achilles’ Heel
Three core principles of entrepreneurial finance:
More cash is preferred to less cash
Cash sooner is preferred to cash later
Less risky cash is preferred to more risky cash

5. Exhibit 12.4

6. Entrepreneurial Finance
The crux of it is anticipation
What 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?

7. Entrepreneurial Finance
The crux of it is anticipation
What 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?

8. Entrepreneurial Finance
Shareholders
Value Creation
Customers
Employees

9. Entrepreneurial Finance
Allocating Risks
and Returns
Slicing the Value Pie
Cash-Risk-Time

10. Entrepreneurial Finance
Debt: Take Control
Covering Risk
Equity:
Staged Commitments

11. Exhibit 12.3

12. Entrepreneurial Finance
The Owner’s Perspective
Cash flow and cash
Cash flow and cash are King and Queen in entrepreneurial finance
Time and timing
In entrepreneurial finance, time for critical financing moves often is shorter and more compressed
Capital markets
Capital 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.

13. Entrepreneurial Finance
The Owner’s Perspective
Emphasis
Non-economic factors are important in raising capital. Backers should add knowhow, wisdom, counsel and help.
Strategies for raising Capital
Maximizing 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 Consequences
Consequences of failure are much higher for entrepreneur than CEO of a larger business.

14. Entrepreneurial Finance
The Owner’s Perspective
Risk-Reward Relationships
Capital markets are idiosyncratic and less efficient with these sorts of transactions.
Valuation Methods
Established valuation models tend to favor sellers.
Conventional financial ratios
Financial ratios are misleading when applied to most private entrepreneurial companies

15. Entrepreneurial Finance
The Owner’s Perspective
Goals
Creating value over the long term, rather than maximizing quarterly earnings, is a prevalent mind-set and strategy among successful entrepreneurs

16. Entrepreneurial Finance
Financial Strategy Framework
The 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.

17. Entrepreneurial Finance
Free Cash Flow: Burn Rate, OOC and TTC
The 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).

18. Free Cash Flow
The 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 charges
Less increase in operating working capital
Less capital expenditures

19. Operating Working Capital
Operating working capital can be defined as follows:
Transactions cash balances
Plus accounts receivable
Plus inventory
Plus other operating current assets
Less accounts payable
Less taxes payable
Less other operating current liabilities

20. Operating 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 is
Increase in operating working capital
Plus Increase in net fixed investments

21. Exhibit 12.5

22. Entrepreneurial Finance
Raise
Money
When
You Do
NOT
Need
It.

23. Entrepreneurial Finance
Crafting financial and fund-raising strategies
Critical Variables affect availability of funds:
Accomplishments/performance to date
Investor’s perceived risk
Industry and technology
Venture upside potential and anticipated exit timing
Venture anticipated growth rate
Venture age and stage of development

24. Entrepreneurial Finance
Crafting financial and fund-raising strategies
Critical Variables affect availability of funds:
Investor’s required rate of return or IRR
Amount of capital required and prior valuations of venture
Founders’ goals regarding growth, control, liquidity and harvesting
Relative bargaining positions
Investor’s required terms and covenants

25. Exhibit 12.6

26. Entrepreneurial Finance
Financial life cycles
Ex details the types of capital available over time for different types of firms at different stages of development
Many equity sources are not available until firm survives early growth stages
Upside potential of firm is a big part of availability

27. Entrepreneurial Finance
Financial Life Cycles
Foundation firms
Will 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 million
High-potential firms
Grow rapidly; likely to exceed $20 to $25 million; strong prospects for IPO and have widest array of funding opts.
Lifestyle firms
Limited to personal resources of founders, and whatever collateral or net worth they can accumulate.

28. Entrepreneurial Finance
Team Activity
What 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.