session 5 financing strategies

© Copyright 2003, California Capital Partners, LLC

Success FormulasSuccess Formulas®

Financing StrategiesFinancing Strategies


Topics

• Three Fundamental Approaches • Financial Planning• Financial Assumptions• Spreadsheet Components• Executive Summary


Why Have a Financial Strategy?

• Provides Structure and Funds to Achieve Overall Objectives.

• Examines Implications of Options.• Identifies the Best Financial Course of Action.


Three Financing Approaches

• Bootstrap• Raise Private Money• Raise Professional Money


Bootstrap Approach

• Mortgage Your House• Run Up Credit Cards• Friends and Family Financing• Customer Financing• Vendor Financing• Partner Financing


Strategies

• Factoring• Reduce the Growth Rate• Control Expenses• Control Salaries• Control Inventory

Too Much Control = No Room for Innovating


Raise Private Money (Angels)

Sources Who Know People and Invest Themselves…• Attorneys• Accountants• Bankers• Business Colleagues• You


Investor’s Expectations

• 40% Per Year Return.• Expect 5+ Times Their Investment, Within Five Years.• Desire Low Risk.

Caution: Watch Out For Security Laws.


Professional Money

• Venture Capital Firms • Banks


Venture Capitalist’s Goals

• 40% Internal Rate of Return on Investment, as minimum yield.

• 5-100 Times Their Investment, Within Five Years.

• Anticipated Revenues Must Grow to Exceed $50 Million/Year.

• Managed Risk


Bank’s Expectations

• You Have Assets (Collateral) -- To Secure Return of Bank’s Money

• Income (Earnings) Within The Company• You Personally Guarantee Pay-Back (Personal

Assets).• Very Low Risk.


Which Financial Approach is Right… For You?


Marketing vs. Finance

Marketing:

An

Aggressive

Approach

Finance:

A

Conservative

Approach


About Presenting to Investors

• Grab the Investors’ Attention Immediately• Focus on Validity of the Business/Investment

Opportunity, Not the Technology or Service• Justify Your Assumptions• Test Your Presentation on each a CPA & a Marketing

Person.• Make Presentations Somewhere Between Aggressive

and Conservative.


The Financial Plan

• 5-Year Profit and Loss (P&L) Pro Forma• 5-Year Balance Sheet Pro Forma• 5-Year Cash Flow Pro Forma• Underlying Assumptions

• Use of Proceeds• Prior Investments Received

Know, but don’t present, all of the underlying detailsKnow, but don’t present, all of the underlying details


5-Year Profit and Loss (P&L)Pro Forma

Determines Value of Business


5-Year Balance Sheet Pro Forma

Shows Early on, What Is Happening Within The Business


5-Year Cash Flow Pro Forma

• Identifies Investment Requirements.• Rapid Growth Can Consume All Cash Flow

within First 1-3 Years.

• Most Investors Expect to See Red Ink from 12-24 Months in The Enterprise.

• Usually Have Increasing Cash Flow Demands During Growth.


Underlying AssumptionsUnderlying Assumptions

• Has to Make Sense!• Must Be Error-Free.

• Investors Will Do an Independent Study as Part of Their Due Diligence Process.

• Venture Capitalists Will Identify and Critique All Key Assumptions.

• Do Your Homework!


Uses of ProceedsUses of Proceeds

• Relates to Cash Flow Projection• Do Not Ask for Money That Isn’t Supported By

Cash Flow Projections (One of Most Common Problems).

• Easier to Convince Investors If There Is Some Operating History.

• If You Aren’t Prepared, or Your Enterprise Isn’t Ready, Do Not Waste a Venture Capitalist’s Time.


Prior InvestmentPrior Investment

• How Much Have You Invested in the Business?• Are You Investing More into the Business?

• Venture Capitalists Are Increasingly Willing to Invest If You Also Invest.


The Financial AssumptionsThe Financial Assumptions

• Revenues• Cost of Goods• Expenses• Inventory• Accounts Receivable• Headcount/Salaries

These can be the most important details!These can be the most important details!


OrganizationalOrganizational Learning Curve

• Experience Leads to Cost Reduction.• Worker Learning Effects Can Occur Quickly.• Total Learning Effect = Competitive Advantage.• Learning Rate Tends to Level Off.


Spreadsheet ComponentsSpreadsheet Components

• Revenue Projection Charts• Cost of Goods Sold

• Head Count• Salaries• Expenses

6.4%3.5%1.9%0.9%0.1%OUR SHARE OF TOTAL MARKET

32.0%25.1%19.0%13.8%4.4%

141,650,00063,900,00028,350,00011,250,0001,325,000OUR TOTAL CHANNELS

443,066,912254,218,720148,840,00081,740,00030,000,000TOTAL OT CHANNELS

20.0%14.0%10.0%6.7%3.0%OUR TECHNOLOGY % OF TOTAL

2,215,334,5601,815,848,0001,488,400,0001,220,000,0001,000,000,000TOTAL CHANNELS

20062005200420032002


InventoryInventory

• Raw Materials• Work in Process

• Finished Goods• Rework• Sales Samples


Accounts ReceivableAccounts Receivable

• Assume Industry Average Is 45 Days• For Small Businesses It Is 60++ Days

• Non-Collectable Receivable Can Be 20% of All Sales.


Key PointsKey Points

• Plan to Spend Money on Marketing and Inventory.• Pay Attention to Accounts Receivable.• Don’t Oversell -- Charge What Market Will Bear.• Don’t Hold Back Any Information From Venture

Capitalists.

• Begin to Think About What You Will Do With Profits.


Executive SummaryExecutive Summary

In 2-or-3 Pages, Briefly Describe: • Elevator Pitch (2-3 sentonces!!!)• Your Industry/Sector• Company Vision• Company Mission• Corporate Legal Description• Product/Service - What it does, how much it sells for, proprietary

position• Market - Who’s going to buy, what is the sales channel.• Operations• Management Team• Investment Required• Financial Proforma• Note: Develop each topic for five years

session 5 financing strategies

Small Business & Entrepreneurship

year return

cash flow projections

cash flow projectiondo

financial plan5year

financial strategy

financial approach

venture capitalists

rapid growth