BUSI 701 Artistic Entrepreneurship Intro to Financials

Agenda 3 Steps to Financials Sources of Funding

Goal of Financials 1.Is venture viable? 2.How much $$ will it take to get there? 3.How will we monetize and distribute the value we create?

Goal of Financials 1.Viability 2.Start-up cost 3.Return

3 Steps for Financials 1.Business model / back-of-the-napkin snapshot 2.Startup costs and projections 3.Financial statements

Step 1: Business Model Revenue model Pricing Implementation/roll-out strategy Marketing Small changes in strategy can profoundly effect financials

Example Revenue Models Retail store E-store B-to-B products or services Consulting Recurring fees –Membership –Software as a service –Razor/blade or printer/cartridge Transaction fees

Step 1: Business Model Refine your businesss model and revenue model while doing research Start with simple spreadsheets and get more complex as you get more comfortable with your strategies Slight changes in strategy can totally change your financials dramatically

Step 1: Napkin Snapshot Very simple viability test: income - revenue Assume that you are in full production, things are going great Create sub-spreadsheets for “unit economics” and “key drivers” This gives you a snapshot to see how profitable it could be CCBackofNapkinFeasibility.xls

Revenue “Drivers” “Driver” means a variable that is important to your way of thinking about your business # new customers a week # products sold # add-on services per customer Average price/sale per customer/product % sold through various distribution channels % repeat customers

Cost Drivers Salaries Rent COGS Fixed vs. variable costs Equipment Insurance, legal, etc. Make sure you are in line with industry

Step 2: Start-up Costs and Projections Add start-up and projections This gets very complex very quickly Better to build your own rather than use template, but they are available Must factor in loans and/or other financing CC Simple Projections.xls TIP: rent all the big items (buying is complicated)

Step 3: Financial Statements Don’t attempt these until your business model is finished! You will likely need a template or a CFO to get these. –Income Statement –Balance Sheet –Cashflow Statement

Recap: 3 Steps for Financials Business model / back-of-the-napkin snapshot Startup costs and projections Financial statements

Agenda 3 Steps to Financials Sources of Funding

You and everyone you know “Skin in the game” “Family, friends and fools” Doctors

Other Sources Revenue Loans Grants Angels Venture Capital (VC) Private Equity IPO

Revenue “Retained Earnings” Means $$ that you earn is used to grow business Generally implies slow, steady growth slow, steady growth

Loans/Debt Generally from banks Must have or be purchasing assets as collateral with low LTV ratio –Real estate –Machinery/equipment –Accounts receivable SBA (Small Business Administration)

Debt (con’t) Don’t be overly debt averse Debt is great tool for creating value Bankruptcy is also a great tool (compared to debtors prison) “Convertible debt” converts to equity

Grants “Free” money Do not undervalue the cost of time and reporting Students: akin to researching and applying for scholarships

Angels Overused and misleading term Don’t underestimate time in searching Most angels these days are VC focused (implies super-fast growth, high tech)

Venture Capital (VC) Equity = you are selling % of your company Price is negotiable, but VCs tend to hold the cards “Institutional” money Must be superfast growth Most expensive way to create value Don’t underestimate risk of losing control

Private Equity “Later stage” than VC –PE are money guys, VCs are startup guys Back in the ’80s this was called LBO Akin to house flippers

IPO Initial public offering = “going public” Like venture capital, selling % of company Once public, the market decides the price