1. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CALCULATING STARTUP CAPITAL REQUIREMENTS 8

2. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives  Demonstrate an understanding of entrepreneurial resource gathering.  Explain the rationale for a business process map.  Discuss the process for calculating startup requirements.  Explain the role of pricing in forecasting sales.  Identify typical startup financial metrics.  Discuss the role of risk in the entrepreneur’s assessment of financial needs.

3. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Identifying Startup Resource Requirements  Startup resources include: People (founding team, employees, advisors, independent contractors) Physical assets (equipment, inventory, office or plant space) Financial resources (cash, equity, debt)  Bootstraping Minimizing resources to keep low overhead Creating innovative combinations of resources to generate competitive advantage and wealth

4. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Steps in Calculating Startup Capital Requirements Figure 8.1

5. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Constructing a Business Process Map  Questions to answer: Who does the work in this business? Where do these people work? What do they need to do the work? What information is being generated? Where does that information go?

6. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Positioning the Venture in the Value Chain  Position in the value chain defines the business the entrepreneur is in.  Position determines margins, customer, and pricing.

7. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. First Year Timeline, Milestones, and Triggers Figure 8.3

8. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing Strategies  Product pricing is a part of marketing strategy and financial strategy.  How a product or service is priced is a function of a company’s goals.  Customer goals also influence entrepreneurs’ pricing strategies.

9. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Common Pricing Strategies at Startup Table 8.1

10. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Converging on a Price: Triangulation Costs Customer / Value Chain Feedback Competitor Pricing Venture Numbers

11. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Startup Financial Metrics  Customer acquisition costs (CAC)  Average order size, time to reorder, lifetime value per customer  Revenues per salesperson and time to revenue for direct sales  For Web 2.0 Ventures: acquisition, retention, revenue, viral coefficient  Contribution margin  Monthly burn rate

12. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Develop Financial Assumptions  Estimate new product/service demand: Use historical analogy or substitute products Talk to customers Interview prospective end-users and intermediaries Use the entrepreneur’s knowledge and experience Go into limited production

13. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Estimating Revenues, Expenses, and Startup Costs  Manufacturing businesses should develop physical prototype early to understand all that is needed to produce product.  Physical prototypes take time and more money than ultimate production costs.  Service companies should prototyped under a variety of the most common scenarios.  Experience in industry is valuable for tapping best industry intelligence.

14. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales Forecast  Increases in sales are influenced by: Growth rates in the market segment New innovations offered to make the product/service more attractive Technological innovations to enable production at a lower cost

15. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expenses  Items to consider: Cost of goods sold (COGS) Sales, general, and administrative expenses (SG&A)

16. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculating a Startup’s Cash Requirements  Step 1: Develop cash flow statement Clearly depicts cash inflows and outflows Add contingency factor for safety Identify types of capital resources required: capital expenditures, startup expenses, working capital, safety margin

17. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Assessing Risk  Analyze financial risks and benefits. Is the business financially feasible? Is there enough money to make the effort worthwhile?

18. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Looking Ahead  Part One: Entrepreneurial Opportunity (Ch 1-4)  Part Two: Feasibility Analysis (Ch 5-8)  Part Three: Business Design Chapter 9: Proof of Concept: A New Approach to Business Plans Chapter 10: Choosing the Legal Form of Organization Chapter 11: Incorporating Ethics and Social Responsibility Chapter 12: Designing an Entrepreneurial Organization Chapter 13: Planning Startup Operations Chapter 14: Developing a Startup Marketing Plan Chapter 15: Funding a Startup Venture  Part Four: Planning for Growth and Change (Ch 16-18)

19. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. New Venture Action Plan Determine the startup metrics for your company. Gather the numbers you need for performing your financial analysis. Gather sales forecast data through triangulation. Create a cash flow statement from startup until a positive cash flow is achieved. Perform a cash requirements assessment to determine how much capital you will need to start the business. Determine whether this venture is financially feasible.