lecture from venture cap to ipo _ateneo de davao

Capital “The fuel for your

operations.”

Capital “The fuel for your

operations.”

Find Long-Term Capital, and get access to Working Capital.

Summary of the talk• Access to Working Capital allows you to

undertake high-margin projects that improve the profits and cash flows of your company.

• Your company can only be born, if long-term risk capital is made available. The venture should be worth the risk.

• The funder makes a gamble, on you, the entrepreneur.

1.Finance at the birth

and growth of a firm.

1.Finance at the birth

and growth of a firm.

2. Actually, investors need You

more, than you need Them.

2. Actually, investors need You

more, than you need Them.

3.Find “Working

Capital” from coops

3.Find “Working

Capital” from coops

4.Ideas for an

“Industry bank” or guarantee fund.

4.Ideas for an

“Industry bank” or guarantee fund.

Hope for Healthy Returns, Good Payback

In the RED Break even

Positive cash flowSTARTSTART

How about a newly-born firm:

Sequoia Capital, Kleiner Perkins

Angel Investor

Sales Breakeven

“ADS”

2001:Profits

Own fundsOwn funds

Google started 1998 with $100,000

$25m check

2010: 8 / 292010: 8 / 29

Progress:

Start-up the

business

Growth & expansion

Mergers & acquisitions

Major player

Marketing Operations

Finance

Strategy

Somebody dares…

Normal company starts humbly

Owner’s Equity

Your own money.Your own money.

You tap other people’s money.

Liabilities

Owner’s Equity

Current Liabilities

Personal Loans, Promissory NotesAngel investors

Cisco Systems75 visits

You acquire productive assets

Current Assets

Fixed Assets

Machinery & Factory…HR… + Cash for raw materials, payroll, working capital

Liabilities

Current Liabilities

Owner’s Equity

Working CapitalWorking Capital

This must be the hardest part

Current Assets

Current Liabilities

Project expenses

PayrollSales…

Collections…

A working-capital Source

owned by a group of

businessmen

A working-capital Source

owned by a group of

businessmenJustify the Borrowing

Pay it Back.

If something goes wrong,

someone should FIX it.

SimplifiedSimplified

Sources of funding:“Easy to Access”

(Let us review)

“Difficult to Access”

Personal savingsYour personal loansYour personal assetsMoney from relativesMoney from friendsA “Family Office”

Venture capitalPrivate EquityBank loan. Issue Bond.

A Bank for the Industry AssociationA Bank for the Industry Association

How about …How about …

PROGRESS

Life cycle of a company

Daring Investment

Struggle to Survive

Aggressive Expansion

Strong Hands

Tremendous increase in VALUE

You’ve come a long

way…

ReviewReview

Sources of Capital

Seed Capital

Angel Investors

Venture Capital

Private Equity

They capture the growth stage.

If you are a progressive firm,

…then, you can attract long-term

investment money.

Additional rounds of Private-equity

funding..

Find a Path

Investment banker finds the capital.

After size & stability are achieved

… more private-equity

money17

Banks start to lend, when the cash flows are stable & sure.

STOCK MARKET

Investment bankers

Investment banker finds the capital. But

there may be a “price to pay.”

Your Company

Good PartsGood Parts

BAD PartsBAD Parts

Reformatted Co.

Good PartsGood Parts

Equity Capital: public & private.

Private Equity (usually: late-stage). They monitor & evaluate progress.

Venture Capital (early stage): They coach & mentor investee.

Angel Investors: Individuals in very early-stage. (Motives.)

To review:To review:

Do you have a good project

Are you asking for a reasonable

amount?

You can find funding

Questionable project?

Overinflated request.

Numbers are “padded.”

No deal.

Last yearLast year

Current Year

Predict- able

Unknown

Pattern of SalesPattern of Sales

“Long-term, loyal, REPEAT clients”

Unknown

No Engine of Growth?No Engine of Growth?

Can your CFO forecast the Revenues? Can your CFO forecast the Revenues?

Can your CFO forecast the Cashflows? Can your CFO forecast the Cashflows?

Last yearLast year

Current Year

ForecastForecast

Forecast

Forecast Company Earnings = Net ProfitsForecast Company

Earnings = Net Profits

IT would be nice if you had reliable expectations, even

if there is some cyclical pattern…

Forecast

Engine of Growth Engine of Growth

Ideal SituationIdeal Situation

Last yearLast year

Current Year

Strong Forecast

ReliableForecast

ConfidentForecast

Company Earnings = Forecast Net ProfitsCompany Earnings = Forecast Net Profits

There is an “Engine of Growth.”

IF Money is abundant

Proposals get funded

A simple business plan can persuade

IF Money is scarce

Proposals get ignored

Only safest plans can

secure funding

IF investors are optimistic

Proposals get funded

Even a “long shot”

can get funding

IF Investors are pessimistic

Proposals get ignored

Only a “sure thing”

can get funding

Money flows towards GROWTHunique selling

proposition. Sure Buyer. Good contract.

What makes it low risk: experience, expertise. Track record.

• If you promise …

…High Returns at Low Risk, money will become abundant.

• Even “invisible” money will appear.

Money is flowing in

Tourism $

Direct Investment

Portfolio Investment

Gifts & Grants

Remarkably, HOT money

is NOT moving out.

Remarkably, HOT money

is NOT moving out.

The Philippines

EconomyEconomy

Stock market

BOND market

New Business

Is money flowing to

New Business

Ventures?

Review the processReview the process

Start-up capitalStart-up capitalWorking

capitalWorking

capital

ExpansionExpansion

Money is flowing to

New Business Ventures

Except to Mine !

One FILIPINO start-up got seed capital from here:

• Springs Seed Capital Initiative in Singapore, committed Sing $10 million to 15 companies. Total sum invested so far: $63 million.

• an investment fund that “matches,” the sum invested by a third party in an approved start-up.

• 185 start-ups have benefited from the fund: 30 of them have earned more than $1 million revenue in 2009-2011.

Search in SingaporeSearch in Singapore

The Small BusinessThe Small Business

InvestorsInvestors The usual “seed capital” initiativeThe usual “seed capital” initiative

US$1 mUS$1 m US$1 mUS$1 m

Decides to fund the start-up

Invests the same amount“Concept”“Concept”

“Springs Seeds”• Start-up Enterprise Development Scheme (SPR

ING SEEDS) – Two dollars to every dollar to be matched against investments of third-party investor(s). So far, $63 million invested.

• The third-party investment ranges from …. S$75,000 TO S$1million.

ADB seed capital funds US$480 million For “Asia”

InvestorsInvestors SPRINGS “seed capital” initiativeSPRINGS “seed capital” initiative

US$1 mUS$1 mUS$2 mUS$2 m

Decides to fund the start-up

Invests DOUBLE the amount provided by investors

Better than the usual “Concept”Better than the usual “Concept”

Form a companyForm a company

Biz plan ContestBiz plan Contest

Technology Enterprise Commercialization

Winning PlanWinning PlanFundsFunds

Board of Judges Invests funds in a complete START-UP

Let’s set up one, like this:Let’s set up one, like this:

Focus on Technology • Technology Enterprise Commercialisation Sche

me (TECS) – a competitive grant to convert breakthrough technology ideas and proprietary IP into a promising business.

• competitive grant • proposals are evaluated on technical and

commercial merits by a team of reviewers.

This is a task for a “noble statesman.”This is a task for a “noble statesman.”

The Invention, itselfThe Invention, itself

Idea for an Invention

“Proof of CONCEPT” FUND

PrototypePrototypeS$250KS$250K

Board of Judges Invests funds

The Invention finds a BUYERThe Invention finds a BUYER

InventionWho wants to buy it?

“Proof of VALUE” FUND

Purchase order

S$500KS$500K

Marketing WhizInvests funds to help you find

a buyer for one million widgets

Bright kid with an ideaBright kid with an idea

Owner’s money

Young Entrepreneurs FUND, aged 18 - 26Young Entrepreneurs FUND, aged 18 - 26

What he can raise

Amount x 4

Plus FRIENDS’ money

TIMES FOUR, of what money you can raise from friends, relatives…

YES! Start-ups …. MAX S$50,000

Working capital

Down payment on a purchase

Bank Loan against purchase

order.

BANKBANK

From CustomerFrom Customer

Credit Lines from a Bank

Borrow, over the course of the year

Track Record: Repayments. Many years.

FINANCE is not usually the concern of supervisors, unless …Head of a Subsidiary.

…even if no collateral.

BANK lends…

Just the BACKING of

PARENT COMPANY

Short-termShort-term

Credit from Parent Company

Track Record is obvious, to Owner. Owner supports his

Vision/Mission.

What is an Acquaintance: Someone you know ..well enough, to borrow from. BUT not well enough, to lend to.

…but at 15%

Parent lends…

To motivate you to pay on time, or pay ahead of

Borrow, over the course of the year

What if you need more than just CAPITAL

• You may need specialty managers…

• You may need synergies…

• TO Control costs, or raise revenues

• TO ensure and/or stabilize the forecast cash flows.

Special Case:Special Case:

Sales Sales

- CostsRaw materials

Cost of CapitalCost of Labor

Cost of LandTaxes

= Healthy Profits, Cash Flows = Healthy Profits, Cash Flows

If your capital provider…If your capital provider… can start up your “Engine of Growth.”

Need: Managers & Capital

Ready for Next Step ?

Capital is being offered, together with management

experience & assured sales.

Growth will require additional capital & human

resources

Different sort of ProblemDifferent sort of Problem

Why is that: Prospects are FLATWhy is that: Prospects are FLAT

A lot has been achieved, so

far. BUT:

…Need a strategy for Growth…

Prospects…

Seek beneficial DEAL

Don’t let it, go to

waste… You need CAPITAL & STRATEGY

to get it.

Find a BRIDGE

This is YOUR

potential.

DEALDEAL

DEAL partners

FINANCIAL PARTNERS

OrSTRATEGIC PARTNERS

Access new

MARKETS

People with

experience &

contacts

CapitalFINANCIAL PARTNER:

infuses SMALL capital

STRATEGIC PARTNER:Infuses BIG

capital + know-how

He receives 20% or 40% of

company shares.

He receives 60% or 80% of

company shares.

SAME manage-

ment team

TEAM of outside

managers

Working Capital LOANS

NEW VENTURE: steady sales

FIRST PROFITS: PRIVATE EQUITY

Engine of Growth is running

Angel Investors

Venture Capital

Private Equity

INVENTION: first buyer

Review of this section:Review of this section:

Engine of Growth is running, already…

QUALIFY FOR BANK LOANS

QUALIFY FOR STOCK MARKET

Expansion, diversification

Investors

Review of this section:Review of this section:

In the next section:• We will learn that “Investors need you more

than you need them.”

• If you can promise a reward and manage the risk, money will “run” to you.

• Find out what investors are looking for, so that you be on the same “wavelength”

• What are the techniques for minimizing business risk? Pool the funds. Invest in many.

What do investors look for?

Small Savers Wholesale Savings Loans or Equity Investment Funds Subcontracted to Banks, Funds, etc

Growth …atacceptable levels

of Risk

Small Savers

Managed Funds

“Retail customers”

“Wholesale dealers”

Institutional Investors

Individual Investors

Subcontract to:

Specialist Funds

Private-Equity Funds

Venture Capital Funds

FUND ManagerFUND Manager

1. Stocks 2. Bonds3. Cash 4. Etc

Bonds ExpertBonds Expert

Cash ExpertCash Expert

Stocks ExpertStocks Expert

Target: 20%

“Managed Funds”

Beat INFLATION. Meet growing RETIREMENT

PAYMENTS.

18% x 0.5 6% x 0.4 2% x 0.1

---------------12% for the

18% x 0.5 6% x 0.4 2% x 0.1

---------------12% for the

Bonds: 6%Bonds: 6%

Cash: 2%Cash: 2%

Stocks: 18%Stocks: 18%

Target: 20%

*Not good enough

39% x 0.218% x 0.7 6% x 0.1

---------------21% for the

39% x 0.218% x 0.7 6% x 0.1

---------------21% for the

Target: 20%

Stocks: 18%Stocks: 18%

Bonds: 6%Bonds: 6%

Special Funds: 39%

“Venture Capital TRUST” or Hedge Funds or “Absolute

Alpha” funds: various names

Somebody should search

• For fast-growing companies• Put them all together • And then, they will be able

to attract funders.

Small companies grow fastAverage 39% / year,For example

60% 40%20%

There has to be an acceptable level of RISK; RISK, that is managed.

Thoughts

Like the fingers of one handAverage 39% / year,For example

60% 40%20%

Thoughts

From Very Good, To Good, To Bad.

That’s Life

Careful monitoring and coaching to manage the Risk

Range of investment outcomes

Net Losses

High Returns

0%Cash

BondsStocks

Risky new ventures

Losing ventures: still have hope?

“Best of Breed” are on the frontier

High Risk

High Returns

Net Losses

Low Risk

Business Failures

The Big Enemy: inflation

* Investment Firms are compelled to seek GROWTH

Risky new venturesStocks

Risk management Guarantee Fund

Back-up… Contingency Plan

To achieve more of the POSITIVE

returns, we need:

0%Cash

BondsStocks

Risky new ventures

High Risk

High Returns

Net Losses

Low Risk

Conservative

Aggressive

Business Failures

IF CONSERVATIVE:IF CONSERVATIVE:

Aggressive

0%Cash

BondsStocks

Risky new ventures

High Risk

High Returns

Net Losses

Low Risk

Conservative +++

Business Failures

IF aggressive:IF aggressive:

Risky new ventures

High Risk

Sunrise Industry

Venture capital’s interest

To attract venture capital• Companies can band together, establish

a credit cooperative, or working capital fund.

• They take turns borrowing from the credit cooperative.

• IF the fund grows 39% a year, big funders will want to join in. s

WORKING CAPITAL FUND

20 people contribute

5million each

Hire a FORMER

BANKER, who knows how to process Loan

Decisions.

Hire a FORMER

BANKER, who knows how to process Loan

Decisions.

Promises 25% per year Interest

A BOARD checks BUSINESS PLANS

IF NO COLLATERAL: HIGHER THAN 30% IF NO COLLATERAL: HIGHER THAN 30%

“Industry Association”

Defaults carry penalty. Payable next year.

Lend at 30%Lend at 30%

To Projects that RETURN > 30%

2million each

Target 25% returns per

year on capital invested

Target 25% returns per

year on capital invested

Outside Investors make

placements. (After 3 years track record)

Outside Investors make

placements. (After 3 years track record)

The BOARD selects who is deserving

They Coach & Mentor the fund recipients, to

assure success.

They Coach & Mentor the fund recipients, to

assure success.

“Industry Association”

A GODFATHER Fund supplies ANY deficit.

MAKES EMERGENCY

A GODFATHER Fund supplies ANY deficit.

MAKES EMERGENCY

LOANS “default insurance”

To Projects that RETURN > 30%

A buddy pays in his behalf?

Fails to pay interest or principal?

Failed to pay 30% this year… Therefore pay 66% by next year.

A CO-MAKER takes on the burden, in case the borrower fails to pay.

Co-guarantor : someone who

“vouches” for his Buddy.

Style of Grameen Bank: each borrower

has 5 Buddies, for back-up.

Co-guarantor : someone who

“vouches” for his Buddy.

Style of Grameen Bank: each borrower

has 5 Buddies, for back-up.

“Buddy Guard”

The Fund grants an extension?

Failed to pay 30% this year... Therefore pay 66% by next year.

If the rest of the FUND is doing OK, then the board can COLLECT NEXT YEAR.

Fails to pay interest or principal?

Just like PREFERRED SHARES have cash dividends, payable

in arrears. (LATE PAYMENTS

ACCEPTED.)

Just like PREFERRED SHARES have cash dividends, payable

in arrears. (LATE PAYMENTS

ACCEPTED.)

Sunrise Industry

++ ++++

----== ==

Development. Progress. Growth.

Working Capital.

Project Loans.

Approved on the basis of BUSINESS

Sunrise Industry

++ ++ ++

----==

High-Margin Projectsthat need much Working Capital

Working Capital FUND

Emergency lender

(ANGEL) just in case

BACK-UP system

OPTION 1: “pooled funds” tend to minimize overall risk

Sunrise Industry

++ ++ ++

----==

Working Capital FUND

Small Business

Corp’s Back-up Fund

Credit Default insurance

High-Margin Projectsthat need much Working Capital

OPTION 2 with insurance premiums paid: even better!

Sunrise Industry

++ ++ ++

----==

Mega ProjectsMega Projects

Infra-structure

Contin-gency

Guarantee Funds

Insurance

They grew, and became self-financing.

They grew, and became self-financing.VIPs to vouch

for the project

Example of OPTION 1

Sunrise Industry

++ ++ ++

----==

They get paid backThey get paid back

Student Loans

Contin-gency

Obligation (stand-by)

Loan Guaranty

Smaller than the WorkCap requirement

of operating companies

of operating companiesGOVT

vouches for the project

Example of OPTION 1

Sunrise Industry

++ ++ ++

----==

Most get paid backMost get paid back

Credit Card Receiv- ables

Securitized mini-Loan packages

Back-up plans

of operating companies

of operating companiesSomeone vouches for the whole.

Example of OPTION 1

Business LoansANYBODY can

contribute capital: INDIVIDUALS or

companies

ANYBODY can contribute capital: INDIVIDUALS or

companies

WORKING CAPITAL “FUND”

WORKING CAPITAL “FUND” Lends to any

QUALIFIED company. Projects > 30% IRR

Pays cash dividends

Personal Loans

Nearly always should pay cash dividends

Business Loans

Companies make contributions, for

membership

Companies make contributions, for

membershipCREDIT

COOPER-ATIVE

CREDIT COOPER-

ATIVE Lends only to member companies

> Co-Makers… > Jointly & Several

Personal Loans

Sometimes pays cash dividends; usually: REINVEST

Livelihood projects

++ ++ ++

----==

Grew to P220m by 1980s. Return on Equity 40% per year

Working Capital

P1201 in 1960

Perpetual Help

Credit Coop, in Leyte

System of microlending

Reached P1bn by 2011.Loanable funds.

33 incorporators in 1969. Raised P1,201.94

Livelihood projects

++ ++ ++

----==

Assets 1m in 1988, 1.6m in 1998Assets 1m in 1988, 1.6m in 1998

Working Capital

P5300 in 1972

Barangka Credit Coop, in Marikina

System of microlending

431m by 2011.431m by 2011.In 2008, Most Outstanding Cooperative in the Philippines

REPEATS every yearREPEATS

every year

15 million15 million

100 million100 million

2 million2 million

3 million3 million

“Nice project”

“Weak”

5 millioncosts

5 millioncosts 2 million

revenues2 millionrevenues

“Bad project”

-Costs, taxes

= Net Profit

“TOP LINE”

“BOTTOM LINE”

Good contracts = lead to steady sales

Make the sales grow fast. Then you attract capital.

80% of TOTAL INDUSTRYREVENUES

Small Size LARGE SIZE

THE LARGEST FIRMS

THE SMALL FIRMS

THE SMALL FIRMS20% of TOTAL

INDUSTRYREVENUES

Hoping for

growth

Small Business Investment Company are privately-owned, privately-managed

investment funds, licensed and regulated by SBA, that use their own capital to LEND to

Small Firms.

Small Business Investment Company is backed by an SBA guarantee to make equity and debt investments into small businesses. They

supply equity capital, long-term loans, and management assistance.

InvestorsInvestors USA: Small Business Investment Corp.

USA: Small Business Investment Corp.

Since 1994

US$10mUS$10m

US$20m

(Matching funds)

US$20m

(Matching funds)

Debt or EQUITYDebt or EQUITY

Small Business Investment Corp.Small Business Investment Corp.

Equity investments in

another

Equity investments in

another

Loans to one company

Loans to one company Max 7 yrsMax 7 yrs

Investment CommitteeInvestment Committee

Equivalent to your “WORKING CAPITAL FUND”

Small Business Investment Corp.Small Business Investment Corp.Equivalent to your industry’s “WORKING CAPITAL FUND”

Small Business Investment Corp.Small Business Investment Corp.

The Philippines

Investor MONEY

Matching FUNDS from

a bank, guaranteed

by SBC.

Matching FUNDS from

a bank, guaranteed

by SBC.

BorrowerBorrower

GuarantorGuarantor

Guarantee Certificate

The Individual Guarantee (per company)The Individual Guarantee (per company)

BANKBANK

BorrowerBorrower

GuarantorGuarantor

Portfolio Guarantee Contract

The PORTFOLIO Guarantee (per bank)The PORTFOLIO Guarantee (per bank)

Whoever passes the loan criteria, can borrow from

* can INSURE 80% of the loan.

BorrowerBorrower

GuarantorGuarantor

LOAN for some big project

Portfolio Guarantee Contract

The PORTFOLIO Guarantee (per industry)The PORTFOLIO Guarantee (per industry)

Whoever passes the loan criteria

of the PSIA FUND, can borrow.

Small Business Corp. CAN INSURE up to 80% of the loan. The insured lender

recovers cash today, while still trying to collect from the delinquent borrower.

PSIA FUNDPSIA

Working Capital LOAN

P 70m salesP 70m sales

P 10 million project costP 10 million project cost

MONITORING & EVALUATIONCan you really manage the project that wellHow are you implementing Marketing Plan?How are you supervising Production Team?

How are your Project Management skillsDo you need coaching on strategy

Are you able to target high-margin projects?

COACHING & MENTORINGWill the project produce 70m in sales?Is the market ready for this product?

Are the industry trends in Favor?May I see the design of marketing plan?

LENDS 100m Only 1

becomes a problem

Only 1 becomes a

problem

THE REST: HEALTHYTHE REST: HEALTHYWorking Capital Fund:100m

ONE COMPANY:Loan Default 3mONE COMPANY:Loan Default 3m

The problem company promises to pay up by the second year. Meanwhile, the fund can lend up to 700m worth!

Less than 1 / 7 ever default.

The problem company promises to pay up by the second year. Meanwhile, the fund can lend up to 700m worth!

Less than 1 / 7 ever default.

If default rate is 3% only:

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