Entrepreneurial Finance Chapter 12

1
Entrepreneurial FinanceChapter 12

• Dowling
• BA 560
• Fall Term 2006

2
Entrepreneurial Finance

• The Achilles Heel
• Three core principles of entrepreneurial finance
• More cash is preferred to less cash

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Entrepreneurial Finance

• The Achilles Heel
• Three core principles of entrepreneurial finance
• More cash is preferred to less cash
• Cash sooner is preferred to cash later

4
Entrepreneurial Finance

• The Achilles Heel
• Three core principles of entrepreneurial finance
• More cash is preferred to less cash
• Cash sooner is preferred to cash later
• Less risky cash is preferred to more risky cash

5
Exhibit 12.4
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Entrepreneurial Finance

• The crux of it is anticipation
• What is most likely to happen? When?
• What can go right along the way?
• What can go wrong?
• What has to happen to achieve our business
  objectives and to increase or to preserve our
  options?

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Entrepreneurial Finance

• The crux of it is anticipation
• What does it mean to grow too fast in our
  industry?
• How fast can we grow without outside debt or
  equity? How much capital is required to increase
  or decrease our growth by X percent?
• How much can be financed internally and how much
  will have to come from outside sources?
• What about our pricing, our volume, and costs?

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Entrepreneurial Finance
Shareholders
Value Creation
Customers
Employees
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Entrepreneurial Finance
Allocating Risks and Returns
Slicing the Value Pie
Cash-Risk-Time
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Entrepreneurial Finance
Debt Take Control
Covering Risk
Equity Staged Commitments
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Exhibit 12.3
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Entrepreneurial Finance

• The Owners Perspective
• Cash flow and cash
• Cash flow and cash are King and Queen in
  entrepreneurial finance
• Time and timing
• In entrepreneurial finance, time for critical
  financing moves often is shorter and more
  compressed
• Capital markets
• Capital is one of the least important factors in
  success of higher potential ventures.
  High-potential founders seek not just capital,
  but investors who will add value, skills.

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Entrepreneurial Finance

• The Owners Perspective
• Conventional financial ratios
• Financial ratios are misleading when applied to
  most private entrepreneurial companies
• Goals
• Creating value over the long term, rather than
  maximizing quarterly earnings, is a prevalent
  mind-set and strategy among successful
  entrepreneurs

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Entrepreneurial Finance

• Financial Strategy Framework
• The opportunity leads and drives the business
  strategy, which in turn drives the financial
  requirements, the sources and deal structures,
  and the financial strategy.
• Once the core market opportunity and strategy are
  defined, the entrepreneur can begin to examine
  the financial requirements in terms of operating
  and asset needs, and then pursue a fund-raising
  strategy.

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Entrepreneurial Finance

• Free Cash Flow Burn Rate, OOC and TTC
• The core concept in determining the external
  financing requirements of the venture is free
  cash flow. Three vital corollaries are the burn
  rate, time to OOC (out-of-cash time), and TTC
  (time to close financing).

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Exhibit 12.5
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Entrepreneurial Finance

• Raise
• Money
• When
• You
• Do
• NOT
• Need
• It.

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Entrepreneurial Finance

• Crafting financial and fund-raising strategies
• Critical Variables affect availability of funds
• Accomplishments/performance to date
• Investors perceived risk
• Industry and technology
• Venture upside potential and anticipated exit
  timing
• Venture anticipated growth rate
• Venture age and stage of development

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Entrepreneurial Finance

• Crafting financial and fund-raising strategies
• Critical Variables affect availability of funds
• Investors required rate of return or IRR
• Amount of capital required and prior valuations
  of venture
• Founders goals regarding growth, control,
  liquidity and harvesting
• Relative bargaining positions
• Investors required terms and covenants

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Exhibit 12.6
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Entrepreneurial Finance

• Financial life cycles
• Ex. 12.6 details the types of capital available
  over time for different types of firms at
  different stages of development
• Many equity sources are not available until firm
  survives early growth stages
• Upside potential of firm is a big part of
  availability

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Entrepreneurial Finance

• Financial Life Cycles
• Foundation firms
• Will total 8-12 of all new firms will grow more
  slowly but exceed 1 million in sales and may
  grow to 5 million to 15 million
• High-potential firms
• Grow rapidly likely to exceed 20 to 25
  million strong prospects for IPO and have widest
  array of funding opts.
• Lifestyle firms
• Limited to personal resources of founders, and
  whatever collateral or net worth they can
  accumulate.

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Entrepreneurial FinanceClass Activity
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Entrepreneurial Finance

• Team Activity
• What are the key entrepreneurial finance issues
  that your IBP team will need to anticipate that
  are
• Critical to the venture?
• Unique to the venture?
• Your team has 20- 25 minutes to prepare answers
  to these questions. Select a spokesperson and
  prepare an overhead with your responses to
  present to the class.

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Additional Ch. 12 Materials
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Free Cash Flow

• The cash flow generated by a company or project
  is defined as follows
• Earnings before interest and taxes (EBIT)
• Less tax exposure (tax rate times EBIT)
• Plus depreciations, amortization, and other
  non-cash charges
• Less increase in operating working capital
• Less capital expenditures

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Operating Working Capital

• Operating working capital can be defined as
  follows
• Transactions cash balances
• Plus accounts receivable
• Plus inventory
• Plus other operating current assets
• Less accounts payable
• Less taxes payable
• Less other operating current liabilities