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Entrepreneurial Finance

Entrepreneurial Finance. Venture Planning Chapter 13 Dowling Fall 2005. Entrepreneurial Finance. The Achilles’ Heel Three core principles of entrepreneurial finance: More cash is preferred to less cash. Entrepreneurial Finance. The Achilles’ Heel

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Entrepreneurial Finance

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  1. EntrepreneurialFinance Venture Planning Chapter 13 Dowling Fall 2005

  2. Entrepreneurial Finance • The Achilles’ Heel • Three core principles of entrepreneurial finance: • More cash is preferred to less cash

  3. 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. 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?

  6. 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?

  7. Entrepreneurial Finance Shareholders Value Creation Customers Employees

  8. Entrepreneurial Finance Allocating Risks and Returns Slicing the Value Pie Cash-Risk-Time

  9. Entrepreneurial Finance Debt: Take Control Covering Risk Equity: Staged Commitments

  10. Entrepreneurial Finance • The Owner’s 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.

  11. Entrepreneurial Finance • The Owner’s 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

  12. 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.

  13. 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).

  14. Entrepreneurial Finance Raise Money When You Do NOT Need It.

  15. Entrepreneurial Finance • Crafting financial and fund-raising strategies • Critical Variables affect availability of funds: • Accomplishments/performance to date • Investor’s perceived risk • Industry and technology • Venture upside potential and anticipated exit timing • Venture anticipated growth rate • Venture age and stage of development

  16. Entrepreneurial Finance • Crafting financial and fund-raising strategies • Critical Variables affect availability of funds: • Investor’s required rate of return • Amount of capital required and prior valuations of venture • Founders’ goals regarding growth, control, liquidity and harvesting • Relative bargaining positions • Investor’s required terms and covenants

  17. Entrepreneurial Finance • Financial life cycles • Ex. 13.6 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

  18. 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.

  19. 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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