1. DEAS Seminar Series Michael J. Roberts Sources of Financing

3. Restaurant Business Model What do you think it looks like?

4. From the Business Model…build a set of financial statements P&L Balance Sheet Cash Flow

5. Balance Sheet - The company’s financial position at one moment in time. - Basic equation: Assets = Liabilities + Owners’ Equity Assets: provide benefit to the firm in the future, valued at lower of cost or present market value. Liabilities: amounts or obligations owed to third parties. Owners’ Equity: what’s left. Also = to original paid-in capital and retained earnings, less dividends.

6. Income Statement (Profit & Loss Statement) - Operations over a period of time (quarter, year). - Basic equation: Revenue earned-expenses incurred = net income - dividends = retained earnings Four main categories of expenses: - cost of goods sold - selling, general, and administrative costs - interest cost - provision for income taxes

7. Statement of Cash Flow Beginning Balance +/- Operating Activities: Money generated by and spent in doing business, and Interest & Taxes +/- Investing Activities: Money used in things that support operations or in financial assets. Primarily used for purchasing assets that increase productive capacity. +/- Financing Activities: Money used for issuing or retiring debt or equity, or paying dividends. = Ending Balance Beginning cash+cash inflow-cash outflow=ending cash

8. The Cash Flow Cycle for a Venture Cumulative Cash Flow in $ Time BurnRate Burn Rate Date of First Cash Flow Positive Maximum Financing Needs Da te of Cumulative Cash Breakeven

9. Remember People who are giving you money want to get it back, plus a return Required Return is a function of perceived risk –Core risk of project –Capabilities/track record of entrepreneur –“Security”

10. Investor Background also Influences Perception Functional /Industry Experience Investing Experience Potential involvement in venture

11. Risk & Reward Reward Risk

12. Risk/Reward Management Probability of Occurrence Expected Value -100%+25%+100% Return on Investment Probability of Losing 100% Goal # 1 Goal # 2 Goal # 3

13. The horse race…….. Time Risk Valuation

14. Sources of Financing Own Money/Customers/Suppliers Friends and Family “Angels” and Sophisticated Angels Early Stage / Seed VC Traditional VC Banks Corporate Partners or Strategic Investors Public Capital Markets

15. No External Financing is the Best Option Keep control and equity upside Minimize pressure for exit / liquidity event Creative use of contracting, collect-in- advance, pay later strategies Not possible when large absolute amounts of capital are required

16. F&F & Angels Individual investors often invest for some reason other than pure cash return What are their reasons: a + or – for you Managing info flows is key

17. Venture Capital Require Probability of exceptional returns – swinging for the fences Need to put large amounts of capital to work High stakes – majority of founders do not make it

18. Banks Will always look to cash flow first Then to corp assets Then to personal assets, guarantees You can reach a point where it is in their interests to pull the plug – their last chance to get out whole - will not be in the equity holders’ best interests

19. Questions to Ask What are the venture’s MONTHLY cash flows? How much cash is required in total – how deep is the trough? What size bites do we want it in? What are the particular risks and rewards and who has an appetite for them? How can the Reward / Risk ratio be managed? What returns will investors expect?

20. More ?s What terms matter other than price, and am I willing to live with these terms ? Do the deal terms align our interests, or not? What alternatives do I have? What do I need other than $$, and What do they bring other than $$? Likely exit routes / liquidity path? What will the returns look like for me after I give up what will be required?

21. Pluses and Minuses 21

22. CEO’s average equity holdings by round of financing Source: Noam Wasserman, “Inside the Black Box of Entrepreneurial Incentives.” Based on survey conducted in July/August 2000 of 211 private Internet/software firms. Founder CEO ProfessionalCEO

23. When do you need to consult a lawyer? Early There are lots of legal risks –forgotten founders –danger of unprotected intellectual property –employment/stock agreements You often can’t fix them later, even if you have more time and money

24. Valuation Implied or Implicit or Imputed Valuation is Different than “Calculated (NPV) Valuation” Have you ever bought a share of stock? do the math: $/% = Implicit Valuation

25. Investors generally Back into a valuation, don’t start there What is my best guess about terminal value and exit time What is my best guess about future funding requirements and resultant dilution What is the most I can afford to pay now i.e., what is the smallest % ownership I can walk away w/ and still get my required return

26. The Math

27. The Lesson : Good decisions come from having good alternatives from among which to choose

28. Source: Amar Bhide (1994), “How entrepreneurs craft strategies that work,” Harvard Business Review (March-April). Where 100 of the 1989 Inc. 500 founders got their ideas 7 casual job into business 6 wanted as consumer 4 happened to read about industry

29. Career Implications If you are interested in finding an opportunity (or being involved in someone else’s), then the following matter a lot: –Industry you work in –Whether you are known in your industry –Where you live –Your network of personal and professional contacts –Your reputation –Planned serendipity