1. AVB II 2006 Jay A. Smith 1 Classes 10-11 Venture Business Finance (continued) Raising Capital and Bootstrapping

2. AVB II 2006 Jay A. Smith 2 Revised Class Schedule as of 1/19 1/12( ) 14:30-17:40 More Finance & Accounting/Business Plans & Assignment 1/19( ) 14:30-17:40 Capital, Financing & Bootstrapping/Business Plan Overview 1/26( ) 14:30-17:40 Special Topics In Venture Business (Joya) /Business Plan Workshop 2/2( ) 14:30-17:40 Final Student Business Plan Presentations jay@eng.kagoshima-u.ac.jp www.venturesmith.us

3. AVB II 2006 Jay A. Smith 3 Today s Topics Business Plan Presentations Finance Forecasting Review Financial Management & Bootstrapping Investors and Investments Nobel Peace Prize

4. AVB II 2006 Jay A. Smith 4 Final Assignment ? PowerPoint (15 minute +Q&A) (J/E) Springboard format www.connect.org/programs/springboard/documents/SpringboardPresentationTemplate.ppt www.connect.org/programs/springboard/documents/SpringboardPresentationTemplate.ppt Demo/prototype Package for soap … Mock-up HP … Marketing Poster/Advertisement, etc … Short (3-5p) Business Plan (J/E) Picture Perfect +

5. AVB II 2006 Jay A. Smith 5 A Good Plan Concisely Explains … Why this is a great idea How it will be executed How return will be maximized How risk will be minimized What is the sustainable competitive advantage / barriers to entry (being copied)

6. AVB II 2006 Jay A. Smith 6 10 Characteristics for Success 1. Provides value/solves problem 2. Large Market Opportunity 3. Growth 4. Repeat sales/recurring revenue 5. Brand Strength 6. Special know-how 7. Sustainable & Defensible 8. Creates many supporters 9. Unique, Something Different 10. Interesting & fun (Passion) 1. __________ ________ ___________ 2. __________ ________ ___________ 3. __________ ________ ___________ 4. __________ ________ ___________ 5. __________ ________ ___________ 6. __________ ________ ___________ 7. __________ ________ ___________ 8. __________ ________ ___________ 9. __________ ________ ___________ 10. __________ ________ ___________ Your Company

7. AVB II 2006 Jay A. Smith 7 Business Plan Questions What is the opportunity? What is happening? Why? How big can it be? When? What is the business strategy? Does it fit? Is it sustainable? What is the business model? How do they make money? Are these the right people? What is missing? No. 1 merit No. 1 risk How much funding is needed, really? Sales/Profit/Investment Years 1-3 Confidence of it working When will you know if it is working? How/Why?

8. AVB II 2006 Jay A. Smith 8 Sample Plan Presentation Outline: Company Name, Team Members (positions CEO, CFO … ) Company Mission, Vision Opportunity (what problem/opportunity are you addressing, how big, growth) Product/solution (diagram and/or prototype) Business Model & Business Strategy Marketing Strategy Customer/market size, customer segmentation, Product line, pricing, promotion, Distribution channel(s) Operations Organization and personnel Production (purchasing, logistics) R&D, Product/Service Development Finance Revenue Forecast How much investment needed & uses Breakeven Assumptions and Risks FOCUS ON KEY ISSUES And Highlights For YOUR Particular Business

9. AVB II 2006 Jay A. Smith 9 Business Model Profit Engine Revenue Sources Key Expenses Size (how big?, volume, scale) Profit Sales - Product Costs Units Overhead = x - Year Unit Year Year )( (Margin x Volume) - Overhead

10. AVB II 2006 Jay A. Smith 10 Model Driven Pro-Forma P&L Strategy Implication: Get More Members Sooner

11. AVB II 2006 Jay A. Smith 11 Revenue Sources What are the revenue streams (sources)? Sales Service fees Advertising Subscription Single-stream, multiple-stream? How big? How Important? Growth Rate? Interdependence of streams? Loss leaders?

12. AVB II 2006 Jay A. Smith 12 Revenue Models Subscription/Membership Sports club, magazine, YahooBB, cable, NHK Volume/Unit-based Restaurant, hair salon, clothing shop, taxi Advertising-based (user doesn t pay or pays less) Google, Broadcast TV, Newspapers Transaction Fee Payment to conduct a transaction (Yahoo Auction, Ebay) Licensing/Syndication/Royalty Fee to use (or resell) product, service, or mark Snoopy, Hello Kitty, AP, Star Wars, The Beatles, Incredibles Software, Copyrights, Patents, Trademarks, Franchises

13. AVB II 2006 Jay A. Smith 13 New York Yankees Revenues Ticket Sales Food & Drinks Sales/Attendee Price/ticket # of Attendees Attendees # of Tickets Merchandise Total Revenue Television Other Cable Contract Broadcast Stadium Lease MLB Sharing Licenses

14. AVB II 2006 Jay A. Smith 14 Key Expenses Cost drivers Types: Variable (changes directly to volume) Semi-variable (increases in step-wise fashion) Fixed (do not change with volume of sales) Non-recurring (unusual or infrequent expenses) Relative size? Importance? How will they change over time

15. AVB II 2006 Jay A. Smith 15 New York Yankees Expenses Player salaries Management salaries Stadium operations Insurance Advertising Franchise Fee Taxes Lawyers Mostly Fixed Costs

16. AVB II 2006 Jay A. Smith 16 Forecast Income Statement

17. AVB II 2006 Jay A. Smith 17 Breakeven Examples

18. AVB II 2006 Jay A. Smith 18 Guy Kawasaki Build Bottom-up Forecast Under-staff and outsource Start as Service Business Focus (pick your battles) Position against the leader/standard way Direct to customer Ship, then test (except medical) Forget Proven team Function over Form Build a board of director, advisors Get some supervision Face reality Concentrate on the Big stuff Execute …

19. AVB II 2006 Jay A. Smith 19 Guy s Guide to Bootstrapping Manage For Cash Flow Low capital requirements Short sales cycle (<1 month) Short payment cycle (<1 month) Recurring revenue Word of mouth advertising

20. AVB II 2006 Jay A. Smith 20 Stocks & Bonds

21. AVB II 2006 Jay A. Smith 21 Major Types of Securities Debt – (Notes, bonds) Promise to repay fixed amount Plus fixed interest payments No ownership no share in upside of company Not common for venture companies Unpredictable cash flow = risk due to payment commitment Equity – share of ownership Common Stock Preferred Stock Higher ranking than common stock Anti-dilution clause, redemption rights, liquidity preferences, director appointments, dividend preference,

22. AVB II 2006 Jay A. Smith 22 Balance Sheet Assets Debt & Equity Short Term Assets Cash Receivables Inventory Long Term Assets land buildings equipment Short Term Debt Payables Short term loans Long Term Debt bonds mortgages Equity stock retained earnings ASSETS = DEBT + EQUITY EQUITY = ASSETS – DEBT DEBT = ASSETS – EQUITY LEVERAGE = DEBT / EQUITY Assets: things the company owns Equity: ownership of the company (stock) Debt: what the company owes (loans, bonds) Internally generated from Profits. Sustainable source to fund growth

23. AVB II 2006 Jay A. Smith 23 Park24 Comparative Balance Sheet Current Assets PP&E Long-Term Assets Intangible Assets Total Assets Investments Current Liabilities Long-Term Liabilities Shareholder Equity Retained Earnings Common Stock Add l Paid In Cap. Revaluation AS OF DATE

24. AVB II 2006 Jay A. Smith 24 Different Investments & Risks Perceived Risk Potential Return The higher the perceived risk the higher the potential return required Treasury Notes (1%-2% per year) Corporate Bonds Fortune 500 Stocks Small Cap Stocks Venture Companies (20%-30%/year)

25. AVB II 2006 Jay A. Smith 25 Types of Investors Founders, employees Friends & Family Angels Venture Capital Firms (VCs) Corporations (financial / strategic investors) Other Investment Funds & Partnerships Public Investors Individuals Mutual Funds, Pension Funds, Insurance Companies, Etc. Institutional Investors Lower Higher RISK Not all money is equal - not all investors are equal

26. AVB II 2006 Jay A. Smith 26 Venture Investments & Investors Seed1 st Round 2 nd Round 3 rd + Round IPO Follow-on Seed/early stage Late-stage Mid-stage Public PrivateCompanyInvestments Attempt to stage each investment round after a business milestone that reduces a significant risk Key staff Product Done Key Partner Signed Strong Sales [capital market ready] Development Stage Execution Stage Expansion Stage Higher Risk/Lower Price Lower Risk/Higher Price Investor Profit = Stock Sale Price – Stock Purchase Price

27. AVB II 2006 Jay A. Smith 27 Venture Capital Firm Partnership created to manage investments in venture businesses Act as general partner – actively manage the fund Manage one or more venture funds ($5mil - $1billion) Biz. Model: sharing return on fund & management fees Investors in VC funds Limited partners May be individuals or organizations Focus on certain technologies, investment stages Major VC firms may receive 1000+ b-plans / year

28. AVB II 2006 Jay A. Smith 28 One Mid-Stage VC s Investment Rules Must have real customers Must have defensible technology Must have clear path to market Bet on proven markets (e.g. software) Doesn t require huge amounts of capital to reach profitability/breakeven (software vs. telecom) Excellent management 20x opportunity (Michael Halloran, Esq.)

29. AVB II 2006 Jay A. Smith 29 Exit Strategy – How to Get Return Investor profit = sales price – purchase price IPO - Initial Public Offering Private Stock is now publicly tradable Can be sold in regular trading or secondary Merger & Acquisition Cash Flow – dividends & interest Liquidation (Bankruptcy ) -- NOT A GOOD OUTCOME Employees Suppliers Debt holders Preferred shareholders Common shareholders

30. AVB II 2006 Jay A. Smith 30 Valuation Valuation = price of the whole company Market Capitalization = Stock Price x #Shares Enterprise Value = Market Cap + Debt - Cash Valuation depends on both company and market for stocks Public stocks are priced in an open market Private company stocks are usually negotiated in a deal between company and lead venture capital investor

31. AVB II 2006 Jay A. Smith 31 Many Factors Affect Valuation Opportunity-Related Is this a good business opportunity? How big a business can this be, when? Company-Related Is it a good business strategy? Is this a good team? What are the business strengths/weaknesses? What are the biggest risks, challenges? Is there a sustainable competitive advantage? What else is needed to make this work? What questions are unanswered? How badly does the company need financing? Capital Market-Related What are prices for companies that are similar? How much VC competition is there for the investment? What are the public stock markets doing? (up, down, sideways)

32. AVB II 2006 Jay A. Smith 32 Valuation Valuation of company = price for the whole company Valuation = current stock price x total shares Example 1: $30.00/share x 5,000,000 total shares = $150,000,000 Determined by what investor will pay to own piece of company Example 2: VC buys 25% of company for $2 mil. = $8,000,000 valuation $8,000,000 post-money valuation … $6,000,000 pre-money valuation (pre-money = post-money – investment : $8 - $2 = $6million) $2 million $6 million

33. AVB II 2006 Jay A. Smith 33 Investment Valuation Calculation

34. AVB II 2006 Jay A. Smith 34 The Deal Simple, fair deals are best Valuation – supply & demand Terms – typically preferred securities Good deal does not hinder future investments Process Presentation Due Diligence Negotiation Lots of Documents: Term Sheets, Purchase Agreements, Shareholder Agreements, Stock Certificates

35. AVB II 2006 Jay A. Smith 35 2006 Nobel Peace Prize Muhammad Yunus & Grameen Bank Dr. Muhammad Yunus Founder, Grameen Bank http://www.grameen-info.org/ 2006 Nobel Peace Prize Ceremony http://nobelprize.org/award_ceremonies/ceremony_oslo/video/2006/index.html

36. AVB II 2006 Jay A. Smith 36 Cox Bazar Bangladesh Dhaka (Capital City) Bengal Tiger

37. AVB II 2006 Jay A. Smith 37 Bangladesh Surrounded by India and Bengal Sea Size: 144,000 km 2 (Japan= 377,000 km 2 ) Population 147 million Population growth was among the highest in the world in the 1960s and 1970s, when the count grew from 50 to 90 million Ffertility rate is now 3.1 children per woman, compared with 6.2 three decades ago.fertility rate Population is young, 0 – 25 age group comprising 60%, while 3% are 65 or older. 4,000 year old culture 88% Islam, 11% Hindu 1971 Declared independence from Pakistan 2004 Per capita income: US$440 (~ \50,000/year) Google Map

38. AVB II 2006 Jay A. Smith 38 2004 Flood Recent Major Floods: 1988, 1989, 1998, 2000, 2004 2004 Flood Photos

39. AVB II 2006 Jay A. Smith 39 Political, Economic, Natural Challenges Two-thirds of Bangladeshis are farmers, more than three quarters of Bangladesh s export earnings come from the garment industry, which began attracting foreign investors in the 1980s due to cheap labour and low conversion cost. In 2002, the industry exported US$5 billion worth of products. The industry now employs more than 3 million workers, 90% of whom are women. A large part of foreign currency earnings also comes from the remittances sent by expatriates living in other countries. Since 1990, the country has achieved an average annual growth rate of 5% according to the World Bank, despite the hurdles. The middle class and the consumer industry have seen some growth. In December 2005, four years after its report on the emerging "BRIC" economies (Brazil, Russia, India, and China), Goldman Sachs named Bangladesh one of the "Next Eleven,"[30] along with Egypt, Indonesia, Pakistan and several other countries. Bangladesh has seen a sharp increase in foreign direct investment. A number of multinational corporations, including Unocal Corporation and Tata, have made major investments, the natural gas sector being a priority. According to the World Bank's July 2005 Country Brief: "Among Bangladesh s most significant obstacles to growth are poor governance and weak public institutions."[29] Obstacles to growth include frequent cyclones and floods, inefficient state-owned enterprises, mismanaged port facilities, a growth in the labour force that has outpaced jobs, inefficient use of energy resources (such as natural gas), insufficient power supplies, slow implementation of economic reforms, political infighting and corruption.

40. AVB II 2006 Jay A. Smith 40 Grameen Bank Microcredit Process Voluntary formation of small groups of five people to provide mutual, morally binding group guarantees in lieu of the collateral required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well. No Collateral, No Legal Instrument, No Group-Guarantee or Joint Liability. the group is not required to give any guarantee for a loan to its member. Average loan size about $100 - $140, Four interest rates for loans : 20% (declining basis) for income generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for Struggling Members (beggars). The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities Telephone-Ladies Grameen Bank has provided loans to 268,298 borrowers to buy mobile phones and offer telecommunication services in nearly half of the villages of Bangladesh where this service never existed before. Telephone-ladies run a very profitable business. Intensive discipline, supervision, and servicing characterize the operations of the Grameen Bank, which are carried out by "Bicycle bankers" in branches

41. AVB II 2006 Jay A. Smith 41 Grameen Bank Success Story Total number of borrowers is 6.83 million, 97 per cent of them are women Recovery Rate 99 per cent (?) 58% of borrowers have crossed the poverty line Impacts 1-2% of Bangladesh GDP

42. AVB II 2006 Jay A. Smith 42 Local Solution to Local Problem Grameen Bank model is highly culture-sensitive and works only in the hands of the local bankers. Presence of foreigners is found to have dis-empowering and dis-franchising effects. North-South "cooperation" is found to be particularly damaging (as one can imagine). The Management-Expense-Ratio (MER) required of a typical Grameen Bank replication can not sustain the cost of involving Western aid-workers, either directly or indirectly. The MER of a Grameen Bank replication is based on the expectation that the workers salaries will be in line with the average national income of the country where the replication is being attempted (that is $20 - $100 a month!). http://www.gdrc.org/icm/grameen-supportgrp.html