University of Ottawa School of Management Honours Baccalaureate in Commerce

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University of OttawaSchool of Management
Honours Baccalaureate in Commerce

• ADM4312Strategic Management II
• Session 10 March 20, 21, 2003

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Agenda

• Five year income statement
• Consideration of financing
• Love money
• Angel investors
• Venture capitalists
• Corporate investors (corporate ventures)
• Exit strategies (IPO and acquisition)
• Break
• GetConnected Case
• Questions
• Hand in interviews

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Income Statement

• Revenues
• Cost of sales
• Gross profit
• Selling and administrative expenses
• Income from operations
• Other income (expense)
• Investments in startup (property, plant,
  equipment)
• Investments in product development
• Income before provision for income taxes
• Provision for income taxes
• Net income

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Revenues

• Slow steady growth?
• Revenue financed?
• Multiple years in pre-revenue stage, followed by
  strong growth?
• Necessarily equity financed
• Revenues must reach at least 2 million by Year 5

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Costs

• Property, plant, equipment
• Product development
• Labour
• Web presence
• Website design
• Ecommerce functionality and security
• Hosting (IBM charges 4K/month and up)

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Labour Costs

• 1996, Full-time, Ottawa-Hull, with university
  degree, average salary 40K (Statistics Canada)
• 1996, Full-time, Ottawa-Hull, without university
  degree, average salary 28K (Statistics Canada)
• Highly qualified technical person, 80K, very
  highly qualified person, 120K

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A few words aboutCorporate Income Taxes

• No net income, no taxes
• To keep things simple, assume 35 total corporate
  income tax rate
• Details
• General rate of federal corporate income tax is
  28, going to 21
• To promote small business, firms pay 12 federal
  tax on first 225K of net income
• Provincial corporate income taxes vary by province

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Financing your Venture

• Love money
• Angel investors
• Venture capitalists
• Corporate investors (corporate ventures)
• Exit strategies (IPO and acquisition)

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Order of Repaymentin the Event of
Liquidation(Source Ottawa Capital Network)
Safest

• Debt
• Secured liabilities (term loans, credit
  facilities)
• Unsecured
• Quasi-Equity
• Structure and return is based on a mix between
  debt and equity attributes
• Equity
• Preferred shares
• Common shares

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Participants in Capital Formation Processin
Typical Order of Involvement(Source Nesheim
1997, High Tech Startup)
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Angel Investors

• Invest in seed round, typically 25K to 500K
• Typically invest within 500 km radius (Rider,
  Carleton University)
• In Ottawa, typically like to invest in companies
  related to networking equipment, semiconductor
  design, etc.
• http//www.ottawacapitalnetwork.com/resources/pres
  entations/28

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Venture Capital in Canada (Source MacDonald
Associates)

• 2002 commitments totaled 2.5 billion
• Communications and networking sector attracted
  27 of funds, with 673 million disbursed among
  59 firms
• Ontario attracts 52 of capital invested in
  Canada Ottawa 57 of capital invested in Ontario

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VC Investment Activity in Canada (Source
MacDonald Associates)
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Canadas Top 10 VC Deals, 2002(Source
MacDonald Associates)
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Amounts Raised by Ottawa Companies 2002(Source
LaBarge Weinstein LLP)
Percentages based on number of deals
1 USD 1.65 CAD
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Corporate Venturing(Source Chesbrough, 2002)
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Corporate Venturing Waves(Source Gompers and
Lerner, 1999)
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IPOs

• Initial Public Offerings
• In Canada, in 2002, there were 69 IPOs on the
  Toronto Stock Exchange (TSX) and the TSX Venture
  Exchange combined
• More than 86 of the total market value of 2002
  IPOs were Income Trusts
• Last TSX IPO for an Ottawa-based high-tech firm
  was Tundra Semiconductor in 1999

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Mergers and Acquisitions(Bower, 2001)

• Five types of mergers and acquisitions
• The overcapacity MA
• The geographic roll-up MA
• The product or market extension MA
• The MA as research and development
• The industry convergence MA

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Acquisitions and Market CapCisco Lucent
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Nortel 3Com
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GetConnected Case

• What is the business idea?
• http//www.getconnected.com/
• How much capital do the founders need over the
  first two years of the company?
• Venture capitalists
• When will the founders seek venture capital?
• How much will they be looking for from the VCs?
• What will they offer the VCs?
• What are their concerns with respect to the VCs?
• Angel investors
• When will the founders approach angel investors?
• How much will they be looking for from the
  angels?
• What will they offer the angels?
• What are their concerns with respect to the angel
  investors?

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Convertible Debenture

• Debenture which can be converted into stock at
  the option of the holder and/or the issuer at a
  specified date in the future
• Because the buyer has the ability to convert the
  debenture into stock under certain circumstances,
  the seller is able to borrow at a lower cost than
  if the convertibility feature was not present.

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Requirements for Strategic Plan

• Strategy Map Financial Perspective
• Five year projected income statement
• Round figures to nearest 1K
• Year 1 financial objectives
• Revenues/Capital
• Cash Flow
• Year 5 financial objectives
• Revenues (sources)
• Net income (profit)
• Financing strategy
• Debt
• Equity
• Government grants and loans