lecture 6 timmons chapter 12

Lecture 6Lecture 6

Timmons Timmons Chapter 12Chapter 12

Entrepreneurial FinanceEntrepreneurial Finance

The Achilles’ HeelThe Achilles’ Heel Three core principles of entrepreneurial Three core principles of entrepreneurial

finance:finance: More cash is preferred to less cashMore cash is preferred to less cash

Entrepreneurial FinanceEntrepreneurial Finance The Achilles’ HeelThe Achilles’ Heel

Three core principles of entrepreneurial Three core principles of entrepreneurial finance:finance:

More cash is preferred to less cashMore cash is preferred to less cash Cash sooner is preferred to cash laterCash sooner is preferred to cash later


The Achilles’ HeelThe Achilles’ Heel Three core principles Three core principles

of entrepreneurial of entrepreneurial finance:finance:

More cash is More cash is preferred to less cashpreferred to less cash

Cash sooner is Cash sooner is preferred to cash preferred to cash laterlater

Less risky cash is Less risky cash is preferred to more preferred to more risky cashrisky cash

Exhibit 12.4Exhibit 12.4


The crux of it is anticipationThe crux of it is anticipation What is most likely to happen? When?What is most likely to happen? When? What can go right along the way?What can go right along the way? What can go wrong?What can go wrong? What has to happen to achieve our What has to happen to achieve our

business objectives and to increase or business objectives and to increase or to preserve our options?to preserve our options?


The crux of it is anticipationThe crux of it is anticipation What does it mean to grow too fast in our What does it mean to grow too fast in our

industry?industry? How fast can we grow without outside debt or How fast can we grow without outside debt or

equity? How much capital is required to equity? How much capital is required to increase or decrease our growth by X percent?increase or decrease our growth by X percent?

How much can be financed internally and how How much can be financed internally and how much will have to come from outside sources?much will have to come from outside sources?

What about our pricing, our volume, and What about our pricing, our volume, and costs? costs?


Value CreationValue Creation

ShareholdersShareholders

CustomersCustomers

EmployeesEmployees


Slicing the Value PieSlicing the Value Pie

Allocating Risks and Returns

Allocating Risks and Returns

Cash-Risk-TimeCash-Risk-Time


Covering RiskCovering Risk

Debt: Take ControlDebt: Take Control

Equity: Staged Commitments

Equity: Staged Commitments


The Owner’s PerspectiveThe Owner’s Perspective Cash flow and cashCash flow and cash

Cash flow and cash are King and Queen in Cash flow and cash are King and Queen in entrepreneurial financeentrepreneurial finance

Time and timingTime and timing In entrepreneurial finance, time for critical In entrepreneurial finance, time for critical

financing moves often is shorter and more financing moves often is shorter and more compressedcompressed

Capital marketsCapital markets Capital is one of the least important factors in Capital is one of the least important factors in

success of higher potential ventures. High-success of higher potential ventures. High-potential founders seek not just capital, but potential founders seek not just capital, but investors who will add value, skills.investors who will add value, skills.


The Owner’s PerspectiveThe Owner’s Perspective EmphasisEmphasis

Non-economic factors are important in raising Non-economic factors are important in raising capital. Backers should add knowhow, wisdom, capital. Backers should add knowhow, wisdom, counsel and help.counsel and help.

Strategies for raising CapitalStrategies for raising Capital Maximizing amounts raised also increases risk. Maximizing amounts raised also increases risk.

Therefore, effectuation and staged commitment. Therefore, effectuation and staged commitment. Entrepreneurs may turn down capital if valuation is Entrepreneurs may turn down capital if valuation is less attractive and prospects are good.less attractive and prospects are good.

Downside ConsequencesDownside Consequences Consequences of failure are much higher for Consequences of failure are much higher for

entrepreneur than CEO of a larger business.entrepreneur than CEO of a larger business.


The Owner’s PerspectiveThe Owner’s Perspective Risk-Reward RelationshipsRisk-Reward Relationships

Capital markets are idiosyncratic and less Capital markets are idiosyncratic and less efficient with these sorts of transactions.efficient with these sorts of transactions.

Valuation MethodsValuation Methods Established valuation models tend to favor Established valuation models tend to favor

sellers. sellers. Conventional financial ratiosConventional financial ratios

Financial ratios are misleading when Financial ratios are misleading when applied to most private entrepreneurial applied to most private entrepreneurial companiescompanies


The Owner’s PerspectiveThe Owner’s Perspective GoalsGoals

Creating value over the long term, rather Creating value over the long term, rather than maximizing quarterly earnings, is a than maximizing quarterly earnings, is a prevalent mind-set and strategy among prevalent mind-set and strategy among successful entrepreneurssuccessful entrepreneurs


Financial Strategy FrameworkFinancial Strategy Framework The opportunity leads and drives the The opportunity leads and drives the

business strategy, which in turn drives the business strategy, which in turn drives the financial requirements, the sources and financial requirements, the sources and deal structures, and the financial strategy.deal structures, and the financial strategy.

Once the core market opportunity and Once the core market opportunity and strategy are defined, the entrepreneur can strategy are defined, the entrepreneur can begin to examine the financial begin to examine the financial requirements in terms of operating and requirements in terms of operating and asset needs, and then pursue a fund-raising asset needs, and then pursue a fund-raising strategy.strategy.


Free Cash Flow: Burn Rate, Free Cash Flow: Burn Rate, OOC and TTCOOC and TTC The core concept in The core concept in

determining the external determining the external financing requirements of the financing requirements of the venture is free cash flow. venture is free cash flow. Three vital corollaries are the Three vital corollaries are the burn rate, time to OOC (out-burn rate, time to OOC (out-of-cash time), and TTC (time of-cash time), and TTC (time to close financing). to close financing).

Free Cash FlowFree Cash Flow

The cash flow generated by a company The cash flow generated by a company or project is defined as follows:or project is defined as follows: Earnings before interest and taxes (EBIT)Earnings before interest and taxes (EBIT) Less tax exposure (tax rate times EBIT)Less tax exposure (tax rate times EBIT) Plus depreciations, amortization, and other Plus depreciations, amortization, and other

non-cash chargesnon-cash charges Less increase in operating working capitalLess increase in operating working capital Less capital expendituresLess capital expenditures

Operating Working Operating Working CapitalCapital

Operating working capital can be defined as Operating working capital can be defined as follows:follows: Transactions cash balancesTransactions cash balances PlusPlus accounts receivable accounts receivable PlusPlus inventory inventory PlusPlus other operating current assets other operating current assets Less Less accounts payableaccounts payable Less Less taxes payabletaxes payable LessLess other operating current liabilities other operating current liabilities

Operating Working Operating Working CapitalCapital

Operating working capital can be defined as Operating working capital can be defined as follows:follows: Earnings before interest but after taxes (EBIAT)Earnings before interest but after taxes (EBIAT) Less: Increase in net total operating capital Less: Increase in net total operating capital

(FA+WC)(FA+WC) Where increase in net total operating capital is Where increase in net total operating capital is

Increase in operating working capitalIncrease in operating working capital Plus Increase in net fixed investmentsPlus Increase in net fixed investments


RaiseRaise

MoneyMoney

When When

You You

Do Do

NOTNOT

NeedNeed

It.It.


Crafting financial and fund-raising Crafting financial and fund-raising strategiesstrategies Critical Variables affect availability of Critical Variables affect availability of

funds:funds: Accomplishments/performance to dateAccomplishments/performance to date Investor’s perceived riskInvestor’s perceived risk Industry and technologyIndustry and technology Venture upside potential and anticipated exit Venture upside potential and anticipated exit

timingtiming Venture anticipated growth rateVenture anticipated growth rate Venture age and stage of developmentVenture age and stage of development


Crafting financial and fund-raising Crafting financial and fund-raising strategiesstrategies Critical Variables affect availability of Critical Variables affect availability of

funds:funds: Investor’s required rate of return or IRRInvestor’s required rate of return or IRR Amount of capital required and prior valuations Amount of capital required and prior valuations

of ventureof venture Founders’ goals regarding growth, control, Founders’ goals regarding growth, control,

liquidity and harvestingliquidity and harvesting Relative bargaining positionsRelative bargaining positions Investor’s required terms and covenantsInvestor’s required terms and covenants


Financial life cyclesFinancial life cycles Ex. 12.6 details the types of capital Ex. 12.6 details the types of capital

available over time for different types of available over time for different types of firms at different stages of developmentfirms at different stages of development

Many equity sources are not available Many equity sources are not available until firm survives early growth stagesuntil firm survives early growth stages

Upside potential of firm is a big part of Upside potential of firm is a big part of availabilityavailability

Entrepreneurial FinanceEntrepreneurial Finance Financial Life CyclesFinancial Life Cycles

Foundation firmsFoundation firms Will total 8-12% of all new firms; will grow more Will total 8-12% of all new firms; will grow more

slowly but exceed $1 million in sales and may slowly but exceed $1 million in sales and may grow to $5 million to $15 milliongrow to $5 million to $15 million

High-potential firmsHigh-potential firms Grow rapidly; likely to exceed $20 to $25 million; Grow rapidly; likely to exceed $20 to $25 million;

strong prospects for IPO and have widest array strong prospects for IPO and have widest array of funding opts.of funding opts.

Lifestyle firmsLifestyle firms Limited to personal resources of founders, and Limited to personal resources of founders, and

whatever collateral or net worth they can whatever collateral or net worth they can accumulate.accumulate.


Team ActivityTeam Activity What are the key entrepreneurial finance What are the key entrepreneurial finance

issues that your IBP team will need to issues that your IBP team will need to anticipate that are:anticipate that are:

Critical to the venture?Critical to the venture? Unique to the venture?Unique to the venture?

Your team has 20- 25 minutes to prepare Your team has 20- 25 minutes to prepare answers to these questions. Select a answers to these questions. Select a spokesperson and prepare an overhead spokesperson and prepare an overhead with your responses to present to the class. with your responses to present to the class.

lecture 6 timmons chapter 12

Documents

entrepreneurial financetime

cash laterless risky

business strategy

financial requirements

cashcash flow

core market opportunity

important factors

larger business