SMU Training Track #7: How to Finance Your Business

Raising Capital

Agenda1) Background

2) Define Capital

3) New Venture Cyclei. Stages in Cycle

ii. Cash Flow Forecast

iii. Business Opportunity

4) Capital Ladder Puzzle

5) Top 10 traps to avoid

1) Backgroundi. Finance / Capital Markets

ii. Intrapreneur 25 Years

iii. B.S. Finance / MBA Rotman

iv. Argentari Groupa) Buy Side advisor opportunity assessment

b) Manage investment early stage ventures

c) Independent financial valuations

d) Angel Investor

e) Chairperson Ryerson Angel Network

NOT SELLING OR BUYING

2) What is Capital?

What is Capital

The Value of Contractual Financial and Human Assets Invested by the Founder(s) and Others in a business.

FUNCTIONAL DEFINITION

Capital AssetsFinancial Human

VALUATION

PAYMENT

AssetsFinancial

VALUATION

PAYMENTCashHard Assets

External Market

Capital Assets

Expertise

Idea

Financial Human

External Market

VALUATION

CashHard Assets

PAYMENT

Internal Assessment

Contractual Capital

Debt Equity• I borrowed $50,000 from my Dad and promised to re pay

him.

• My Uncle Jim let me use his basement he usually rents for $2,000 a year for free.

• I have an equal partner who I work with.

• I promised to compensate Joe, a programmer who wrote the software. It usually costs $10,000.

• I have a grant from the government for $8,000.

• Sally contributed a tractor a worth $23,000 that we use in the business.

• The lawyer gave me 6 months to pay my bills.

Capital InvestingDebt Capital Business Plan

Profit0

Time

DEBT

DEBT

Capital InvestingEquity Capital Business Plan

Profit

Time

EQUITY

EQUITY

Profit0

Equity Value as seen by FounderCapital

Business Plan

Time

Profit0

Equity Value as seen by Others

Capital Business Plan

Time

Profit0

What is Capital

The Value of Contractual Financial and Human Assets Invested by the Founder(s) and Others in a business.

FUNCTIONAL DEFINITION

3i) New Venture Business Cycle

Tried to copy a Graph

3i) StagesStage 1: Mind to Money

A. The first Aha moment

B. Research

C. Business Plan

D. The Real Aha Moment

E. Real Business Plan

F. In Depth Research

G. Detailed Plan / Budget

3i) Business CycleStage2: Proof of Concept

A. Detailed Budget

B. Prototype Specs

C. Prototype Built

D. External Hurdles Overcome

E. Start of First Cycle

F. One Cycle Completed

3i) Business CycleStage3: Sell, Adapt

A. Detailed Marketing Plan

B. Sales Tracking

C. CMO

D. Stumble

E. Fall

F. Get up

3i) Business CycleStage 4: Sell, Profit, EXIT

A. CFO

B. Cost control

C. Leadership

D. Business acumen

E. Management ability

F. Shareholder relations

3ii) Cash Flow

Stage 1:

Mind to MoneyStage2:

Proof of Concept

Stage3:

Sell, AdaptCASH

FLOW

Stage 4:

Profit, EXIT

3iii) Classify Opportunity

A. Also ran

B. New and Improved

C. Marriage Play

D. Medium Change

E. Industry Transplant

F. Category / Segment Killer

G. Technology leap

H. Model Disruption

R&D, Proof of Concept, Sales

4) Capital Ladder

Raising External Capital boils down to

THE ASK

3ii) Cost of Capital

Stage 1:


Proof of Concept

Stage3:

Sell, AdaptCASH

FLOW

Stage 4:

Profit, EXIT

VENTURE

RISK

Hi Cost Capital

Lo Cost Capital

3ii) Cost of Capital

Stage 1:


Proof of Concept

Stage3:

Sell, AdaptCASH

FLOW

Stage 4:

Profit, EXIT

Hi Cost Capital

Lo Cost Capital

VENTURE

RISK

Capital Puzzle

Grants

V.C.

Angels

3 F’s

I.P.O.

Investor SegmentsSize of

Investment

Sweat to Hard

Equity

Dilution Concern

Expected Return

Founder Autonom

y

Three F’sGrants

Accelerator

Angels

CPC

Venture

IPO

Buyout

N / A

Perceived Value:

Support

Validation

Idea Generation

True Value:

First Round Real Money

NEGATIVE NET RETURN

Segment Breakdown:

Comfort: 35%

Cynics: 55%

Cash: 5%

Critics: 5%

3 F’s Overview

Tips• Use debt not equity

• Silent Partners

• Financial s of F = your risk

• The third F is Fools

http://i261.photobucket.com/albums/ii62/amybeck1111/funny%20comments/friendship.jpg

Perceived Value:

Free Money

Validation of Business

Public Credibility

True Value:

Program Funded

Best kind of Capital

Segment Breakdown:

Ineligible: 85%

Resources: 10%

Cash: 5%

Grants

Tips• Knowledge of the system

• Time is not a factor

• Avoid Agents / Never pay for the service

• Read fine print

Holder of I.P.

Equity Stake

Debt

•SR& ED, IRAP, MaRS, EDC, = Grant

• A loan is a loan

Perceived Value:

Like Equity

Leverage

Doesn’t Effect Equity

True Value:

NOT EQUITY

Great place for 3 F’s

Drains Cashflow / Equity

Shareholders Prefer

Segment Breakdown: Personal Gty: 95% Collateral: 4.8% Company: .2%

LoansTips

• Convertible debt is at the option of the Lender, not the founder

• Personal Guarantee usually required

• Partners joint and severed

• Collateral haircut required on all Assets

• Signing for a loan is a loan

• Lenders want to be all equal

• Commitment for life

• Vendor financing = Payment Terms

• Community based loans are available

• Schedule A’s not interested

• Red Light Syndrome

Perceived Value:

Quasi Equity Investment

Chosen Few

Quick step to Cash

True Value:

Group Environment

Mentorship / Reputation

Facilities / Rolodex

Segment Breakdown: Real: ?% Bogus: ?% Advisory Boards ?% Landlords ?% Govt ?%

AcceleratorsTips

• Read Agreement carefully

• Facilities have market value (REGUS)

• Number of successes

• Industry Expertise (Tech)

• Agent for Capital

• People are the asset

• # of ventures per cycle

• Credibility / Term

• Conversion Terms / Timing / Cost

Only Cash is as good as Cash

Perceived Value:

Real Equity Investors

Unlimited Cash

War Hero’s

True Value:

Financial Oversight

Real World Mentorship

Operating Cash

Primer: Investor Relations

Segment Breakdown: Cynics: 30% Critics: 40% Consualtants:20% Capitalists: 10%

AngelsTips

• Dragons Den is a TV Show

• Due Diligence / Legal Agreement

• Number of groups / organisations

• Idea + Business Acumen+ Showman

• Jockeys not horses (execute fair idea)

• Plenty of ponies

• Know your #’s

• Max 15 % of individual portfolio

• High Risk Return and Involvement

• Exit Key with limited dilution

• Limited Funding Capability (80’s dead)

VALUATION

Perceived Value:

Big Time Equity

Source all future capital

Advisors

True Value:

Validation

Capital

Driver to an Exit

Segment Breakdown: Small : $250 - $2Mil Medium: $ 2 - $5 Large: $5 - $15

Private Equity/CPC/Venture CapitalTips

• Investment bankers / Advisors / Brokers

• Detailed Due Diligence

• Extensive Legal Agreement

• Source of Capital / Return Criteria

• Many Industry Specific

• Canada = California

• Last sector to recover

• # of investments

• Exit / Exit / Exit

Value today Discounted Cash Flow

Risk Premium 50% Comparatives

U.S. Vs Canada Other Investors

Real Money Credibility of Lead

Valuation Agents Questionable Value

External Factors Speed Terms

Value founder time/money/effort Expected return Operating vs. financial control

Assets Salaries Collateral

Valuation 101Stage 1:

Stage2: Stage3:

Value Cash Flow

Stage 4:

Investor SegmentsSize of

Investment

Sweat to Hard

Equity

Dilution Concern

Expected Return

Founder Autonom

y

Three F’sGrants

Accelerator

Angels

CPC

Venture

IPO

Buyout

EXIT

Golden Rule: The one with the gold, makes all the

rules

5) Top TEN Traps to Avoid1. Unrealistic Valuation

Require $500,000

Want to keep 80% equity

Pre money Valuation = $2Mil

Top TEN Traps to Avoid1. Unrealistic Valuation

2. Confuse Market Potential with Sales potential: 2% of $2 Billion market U.S. Cousin

Top TEN Traps to Avoid1. Unrealistic Valuation

2. Overstate Market Potential

3. Assume a Quick Linear Progression

Reality is Curved

Demonstrates Inexperience

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon

3 F’s will love you no matter what Fairly value start-up services

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long

80% of nothing vs. 15% of something

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital

Evil preventing my dream from coming true Shareholders share my vision and passion

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game

Level of commitment Value of Personal Capital

1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping

1. Largest source of Capital2. Normal course of business

Top TEN Traps to Avoid

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a quick Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities

Overvalues Equity

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities

10.Gain all education through Experience vs. Academics

Top TEN Traps to Avoid1. Unrealistic Valuation2. Overstate Market Potential3. Assume a Linear Progression4. Allocate Equity too soon5. Hold on to Equity too long6. Misunderstand the role of Capital7. No serious skin in the game8. Discount Bootstrapping9. Miss Grant / SRED / forgivable loan opportunities10.Gain all education through Experience vs. Academics

SMU Training Track #7: How to Finance Your Business

Business

Transcript of SMU Training Track #7: How to Finance Your Business