1. MG 298 Entrepreneurship Shivram V. MG 298 Entrepreneurship September 2 Shivram Venkatasubramaniam

2. MG 298 Entrepreneurship Shivram V. Today Introduction to: –Entrepreneurial Finance –Obtaining Venture and Growth Capital Assignment submissions Guest Lecture update Project-1 update Anything else

3. MG 298 Entrepreneurship Shivram V. Entrepreneurial Finance “Happiness to an Entrepreneur is a positive cash flow” - Fred Adler (Venture Capitalist)

4. MG 298 Entrepreneurship Shivram V. Core principles Three simple principles that are often ignored by most entrepreneurs (and executives): More cash is preferred to less cash Cash sooner is preferred to cash later Less risky cash is preferred to more risky cash

5. MG 298 Entrepreneurship Shivram V. Anticipation and Vigilance Financial Vigilance on an ongoing basis –Impact of pricing, volume and policy changes –Growing too fast or too slow – impact on capital structure; impact on cash flow, profitability, return on assets –Impact of increase or decrease in profitability –Cash flow and net-income break-even points for various product lines –Industry benchmarrks –Cash flow, net income sensitivity to pricing, volume, variable costs

6. MG 298 Entrepreneurship Shivram V. Central Issues Value Creation –Shareholders –Customers –Employees Slicing the value pie –Deal structure and value –Tax and legal consequences

7. MG 298 Entrepreneurship Shivram V. Central Issues Covering Risk –How much money is needed? –Where, when and how can it be obtained on acceptable terms? –What sources of risk/ financing are available? –Who are the contacts to be developed? –Can a staged approach to resource acquisition mitigate risk and increase return?

8. MG 298 Entrepreneurship Shivram V. Remember.. New ventures are gluttons for cash The faster they grow the more gluttonous they are

9. MG 298 Entrepreneurship Shivram V. Determining Capital Requirements Key questions for any entrepreneur at any stage in the development of a venture: –How much money does my venture need? –When is it needed? –How long will it last? –Where and from whom can it be raised? –How should this process be managed?

10. MG 298 Entrepreneurship Shivram V. High Level Framework Define Opportunity Opportunity will drive the Business Strategy (Marketing, Finance, Operations) Business Strategy will drive Financial Requirements (Burn rate, Working Capital, Assets, Sales) Financial Requirements will drive Funding Sources and Deal Structure

11. MG 298 Entrepreneurship Shivram V. Core Financial Concept Its all about Free Cash Flow Three determinants of the entrepreneur’s choices and relative bargaining power with funding sources: –Burn rate –Time to OOC (Out of cash) –TTCF (Time to close out financing)

12. MG 298 Entrepreneurship Shivram V. Cash Flow If you have a year or more to OOC, then the options, terms, price and covenants that are negotiable will improve dramatically If you are <= 6 months to OOC, then you are severely disadvantaged in negotiation “Raise money when you do not need it”

13. MG 298 Entrepreneurship Shivram V. Free Cash Flow Free Cash Flow = EBIT less[tax rate times EBIT] plus[Depreciation, amortization, other non-cash charges] lessIncrease in operating WC lesscapital expenditure

14. MG 298 Entrepreneurship Shivram V. Fund Raising Variables Venture’s accomplishments to date Investor’s perceived risk Industry and technology Upside potential and anticipated exit time Anticipated growth rate Age and stage of development Investor’s required ROR or IRR Capital required and prior valuation Founders’ goals Relative bargaining positions Terms and covenants

15. MG 298 Entrepreneurship Shivram V. Financing Generally speaking, a company is financed through debt and equity Both are generally required to avoid excessive dilution of the entrepreneur’s equity Debt can be short-term or long-term

16. MG 298 Entrepreneurship Shivram V. Financing Short-term debt is generally used for working capital and repaid out of proceeds of sales Longer-term debt is used for working capital and/or to finance fixed assets that serve as collateral for the loan Equity fills the gaps, preserves ownerships and lowers risk of loan defaults

17. MG 298 Entrepreneurship Shivram V. Typically.. A new venture will find it difficult to obtain debt financing without substantial equity funding in place already or long-term debt that is subordinated Even the availability of fixed assets as collateral may be insufficient in the absence of adequate equity capital and good management An existing business may find it easier

18. MG 298 Entrepreneurship Shivram V. Capital Vs Ownership One of the toughest trade-offs for any young company is balancing the need for startup and growth capital with preservation of equity Generally speaking, “Hold on to as much as you can for as long as you can”

19. MG 298 Entrepreneurship Shivram V. Capital Vs Ownership Principal questions: –Does the venture need outside equity capital? –Do the founders want outside equity capital? –Who should invest? Tied to cash requirements Creative bootstrapping strategies can be great preservers of equity as long as parsimony does not slow the growth

20. MG 298 Entrepreneurship Shivram V. VC Investing Process 1.Fund conception and target investment opportunities 2.Raise capital for investment 3.Generate deal flow (new and young ventures); Screen and evaluate deals 4.Valuation and negotiation; structure deals 5.Add value via involvement 6.Craft and execute strategies

21. MG 298 Entrepreneurship Shivram V. Obtaining Venture and Growth Capital Sources –Founders –High Net Worth Individuals –FFF –Angel Funds/Seed Funds/Venture Fund –IPOs –Private Equity –Strategic Acquirers –IPOs