Entrepreneurial Finance: Planning my Financial Strategy Itxaso del-Palacio i.delpalacio@ucl.ac.uk smartinterns.co.uk

What do we know… What are the financial statements in the BP? Accounting vs Entrepreneurial Finance “Actual” vs “Pro Forma” Cash vs Profit Acquisition vs IPO Burn Rate “I’m looking for two-fifths of the post-, and for that I’ll put up to the two” Cash is King but both are needed: Cash – is recorded when money gets in and out Profit – is recorded in the Profit & Loss (or income statement) and it is recorded when the product is delivered (but maybe not paid). With no profit a company will eventually run out of cash Cash and Profit will be identical if we pay and charge right when we buy and sell, and there is no depreciation

Entrepreneurial Finance is not Accounting Entrepreneurial Finance is about projections - forecasting is a forward-looking view, starting today and going forward into the future It is also called “Pro Forma”

Entrepreneurial Finance Income Statement (P&L) Cash-Flow Statement Balance Sheet

Income Statement or Profit & Loss (P&L) Year 1 Year 2 Year 3….. Revenue/Income £100 Cost of Goods Sold (CGS) 50 Gross Profit £50 Expenses 30 Taxes 5 NET PROFIT £15 Variable costs Operating Exp. HR Training Outsourcing Marketing Infrastructure (Depreciation) Non-cash Expense Revenue or income Cost of Goods – usually variable Expenses include “operating expenses” – human resources, training, services rendered by 3rd parties, infrastructure, marketing Accumulated Net Profit goes to Balance Sheet

Balance Sheet: Assets and Liabilities Tangible Intangible = Assets - Liabilities (dividends) P/L While the Income Statement is quite “intuitive” the Balance is not that much Retained Earnings – which come from P/L – Usually not dividends (Accumulated Depreciation)

Cash-Flow Statement Cash From/Used in Operating Activities Paying customers Salaries Vendors Landlord … From Profit & Loss Statement Cash From/Used in Investing Activities Purchase or sale of assets …. Cash From/Used in Financing Activities Borrowing and paying loans Equity transactions with investors Dividends …. Accumulated Cash-Flow goes to Balance Sheet (liquidity)

Break-Even Point… and the Valley of Death Number of units sold in which Total Costs = Total Revenues

Then – What are our financial hypotheses? Define your assumptions (4)

Workout your Financial Plan Start from Assumptions: Revenue Operating Costs Investment Assets Timing of Events Preliminary Financial Statement: Income Statement Balance Sheet Cash-Flow Statement Net Working Capital Need External Financing needed? Risk and Sensitivity Analysis

Investment Milestones Sources Stages of Capital Complete the team, Customer development, formalize the plan. Angels, grants, 3 F’s (love $) Accelerators Seed or start-up Development (Series A) Growth (Series B, C, D…) Competitive or maturity Product development, prototype, ready for launch. VCs Launch and growth phase. VCs Corporate VC Mature firm in a competitive context. Banks, Public equity market

Dealing with Investors How would you approach investors? Develop a relationship with the investors Investment is a marriage It’s a very small world Show them your milestones Learn a new language NDA – run away!

Dealing with Investors Keep expectations low Keep working on your start-up Don’t believe it until… Rejection is not personal Avoid inexperienced investors – go for smart money! How much money? – not too much, not too little Rule of valuation: £x=25%

Remember to… Keep your “burn rate” low Make realistic assumptions Do you really need external money? “Get married” only if you are “in love” 

Thanks! Q&A Itxaso del Palacio