8 CALCULATING STARTUP CAPITAL REQUIREMENTS
Learning Objectives • Demonstrate an understanding of entrepreneurial resource gathering. • Explain the rationale for a business process map. • Discuss the process for calculating startup requirements. • Explain the role of pricing in forecasting sales. • Identify typical startup financial metrics. • Discuss the role of risk in the entrepreneur’s assessment of financial needs.
Identifying Startup Resource Requirements • Startup resources include: • People (founding team, employees, advisors, independent contractors) • Physical assets (equipment, inventory, office or plant space) • Financial resources (cash, equity, debt) • Bootstraping • Minimizing resources to keep low overhead • Creating innovative combinations of resources to generate competitive advantage and wealth
Constructing a Business Process Map • Questions to answer: • Who does the work in this business? • Where do these people work? • What do they need to do the work? • What information is being generated? • Where does that information go?
Positioning the Venture in the Value Chain • Position in the value chain defines the business the entrepreneur is in. • Position determines margins, customer, and pricing.
Pricing Strategies • Product pricing is a part of marketing strategy and financial strategy. • How a product or service is priced is a function of a company’s goals. • Customer goals also influence entrepreneurs’ pricing strategies.
Common Pricing Strategies at Startup Table 8.1
Converging on a Price: Triangulation Competitor Pricing Costs Venture Numbers Customer / Value Chain Feedback
Startup Financial Metrics • Customer acquisition costs (CAC) • Average order size, time to reorder, lifetime value per customer • Revenues per salesperson and time to revenue for direct sales • For Web 2.0 Ventures: acquisition, retention, revenue, viral coefficient • Contribution margin • Monthly burn rate
Develop Financial Assumptions • Estimate new product/service demand: • Use historical analogy or substitute products • Talk to customers • Interview prospective end-users and intermediaries • Use the entrepreneur’s knowledge and experience • Go into limited production
Estimating Revenues, Expenses, and Startup Costs • Manufacturing businesses should develop physical prototype early to understand all that is needed to produce product. • Physical prototypes take time and more money than ultimate production costs. • Service companies should prototyped under a variety of the most common scenarios. • Experience in industry is valuable for tapping best industry intelligence.
Sales Forecast • Increases in sales are influenced by: • Growth rates in the market segment • New innovations offered to make the product/service more attractive • Technological innovations to enable production at a lower cost
Expenses • Items to consider: • Cost of goods sold (COGS) • Sales, general, and administrative expenses (SG&A)
Calculating a Startup’s Cash Requirements • Step 1: Develop cash flow statement • Clearly depicts cash inflows and outflows • Add contingency factor for safety • Identify types of capital resources required: capital expenditures, startup expenses, working capital, safety margin
Assessing Risk • Analyze financial risks and benefits. • Is the business financially feasible? • Is there enough money to make the effort worthwhile?
Looking Ahead • Part One: Entrepreneurial Opportunity (Ch 1-4) • Part Two: Feasibility Analysis (Ch 5-8) • Part Three: Business Design • Chapter 9: Proof of Concept: A New Approach to Business Plans • Chapter 10: Choosing the Legal Form of Organization • Chapter 11: Incorporating Ethics and Social Responsibility • Chapter 12: Designing an Entrepreneurial Organization • Chapter 13: Planning Startup Operations • Chapter 14: Developing a Startup Marketing Plan • Chapter 15: Funding a Startup Venture • Part Four: Planning for Growth and Change (Ch 16-18)
New Venture Action Plan • Determine the startup metrics for your company. • Gather the numbers you need for performing your financial analysis. • Gather sales forecast data through triangulation. • Create a cash flow statement from startup until a positive cash flow is achieved. • Perform a cash requirements assessment to determine how much capital you will need to start the business. • Determine whether this venture is financially feasible.