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

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

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

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

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

Entrepreneurial Finance
Shareholders
Value Creation Customers
Employees

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

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

Entrepreneurial Finance

The Owner’s Perspective


Cash flow and cash
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Cash flow and cash are King and Queen in entrepreneurial finance
Time and timing
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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.

Entrepreneurial Finance

The Owner’s Perspective
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Emphasis

Non-economic factors are important in raising capital.
Backers should add knowhow, wisdom, counsel and help.
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Strategies for raising Capital
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Maximizing amounts raised also increases risk. Therefore, effectuation and staged commitment. Entrepreneurs may turn down capital if valuation is less attractive and prospects are good.

Downside Consequences

Consequences of failure are much higher for entrepreneur than CEO of a larger business.

Entrepreneurial Finance

The Owner’s Perspective
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Risk-Reward Relationships
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Capital markets are idiosyncratic and less efficient with these sorts of transactions.
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Valuation Methods
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Established valuation models tend to favor sellers.
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Conventional financial ratios
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Financial ratios are misleading when applied to most private entrepreneurial companies

Entrepreneurial Finance

The Owner’s Perspective
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Goals
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Creating value over the long term, rather than maximizing quarterly earnings, is a prevalent mind-set and strategy among successful entrepreneurs

Entrepreneurial Finance

Financial Strategy Framework
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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.

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).

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

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

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Operating working capital can be defined as follows:

Earnings before interest but after taxes (EBIAT)
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Less: Increase in net total operating capital
(FA+WC)
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Where increase in net total operating capital is


Increase in operating working capital
Plus Increase in net fixed investments

Entrepreneurial Finance
Raise
Money
When
You
Do
NOT
Need
It.

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

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

Entrepreneurial Finance

Financial life cycles
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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
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Upside potential of firm is a big part of availability

Entrepreneurial Finance

Financial Life Cycles
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Foundation firms
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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
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Grow rapidly; likely to exceed $20 to $25 million; strong prospects for IPO and have widest array of funding opts.
Lifestyle firms
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Limited to personal resources of founders, and whatever collateral or net worth they can accumulate.

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?
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Unique to the venture?
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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.