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Entrepreneurial Finance 2019-2020
De cursusdienst van de faculteit Toegepaste Economische
Wetenschappen aan de Universiteit Antwerpen.
Op het Weduc forum vind je een groot aanbod van samenvattingen, examenvragen, voorbeeldexamens en veel meer, bijgehouden door je medestudenten.
Session 1: session overview
1. Setting the stage2. Entrepreneurial Finance versus Corporate Finance 3. Stages of venture development
What type of funding? 4. Sources of financing
1.Setting the stage
Some examples to give a better understand of this course. Zalando was an entrepreneurial company in the beginning.
Collibra is a unicorn in Belgium. Unicorn is a company with a value of more than 1 billion dollars, it has a high valuation added. Last year in January there was an investment company, capital G, that invested in Collibra more than 100 million euros.
Air bnb is a unicorn but it is not a Belgian company. The company has a valuation of more than 38 billion dollars.
Facebook is now on the stock market but before that it got funding as a private firm. Team leader is a scale up. It grew because of private funding. Focusing on digitalization of
customer experience.
Show pad is also a scale up. Private company but with a high valuation due to several investment.
Go pro: investment of several private equities. Investment firms on the rights
GV is a fund of fund. It will not invest directly in investment firms.
UK business angels has as goals to stimulate the ecosystem between business angels and potential entrepreneurs.
Gimv: invests in starts up and scale ups.
BNP has a private equity department that invested in studio 100.
PMV has as a goal to stimulate the Flemish economy. They also invested in team leader. A lot of entrepreneurial companies and different types of investment firms
Entrepreneurial finance
Valuing and financing unquoted entrepreneurial companies Making deals
Corporate finance: financial decision making by managers of public companies
Corporate finance is talking about the managers in quoted firms whilst here we are talking about private firms and the managers are the entrepreneurs of the company.
EU facts and figures
23 million existing companies 2 million companies created a year 200.000 of the start-ups (Bannock): are growth oriented
might offer a sufficient, but not extra-ordinary return 20.000 high-growth start-ups
Some 3.000 get Venture Capital
Less than 2 out of 1.000 start-ups get VC in the EU! Most of entrepreneurial firms get only debt financing.
As 90% of “financing for business” is debt …
Why does most of this course focus on equity and valuation?
To answer, we must go back to first principles and define an entrepreneur(ship): What is an entrepreneur?
What is an entrepreneur
“An entrepreneur is someone who exercises business judgement in the face of uncertainty” (Cantillon, 1755)
“Entrepreneurship is characterized by the existence of new combinations causing discontinuity… The process of creative destruction…” (Schumpeter, 1936)
“The ability to discover new ways of dealing with known problems or new combinations of given knowledge” (Penrose, 1959)
Howard Stevenson (HBS):
“Someone who pursues opportunities with no regard to resources currently controlled”
Impossible to provide a profile, but leading psychoanalysts suggest many entrepreneurs do share characteristics.
When you look at the definition, what can you see? We are pursuing opportunities and there is sense of urgency because there is only a short window for this opportunity.
Opportunities: finding new ideas and you can find opportunities in several ways. You can for example find a new product/service or develop a new business model. Change your existing
products to make them better/cheaper or you can also go with existing products and present it to a new set of customers. Creating different opportunities as an entrepreneur.
Most of the entrepreneurs are working on a resource constraint. They have limited resources or they don’t know where to find them.
Three defining characteristics
Opportunity recognition / creation Uncertainty“Good ideas and good products are a dime a dozen. Good execution and good management−in a word, good people−are rare.”
Quote by Arthur Rock, an early investor in companies like Apple and Intel
As an entrepreneur you can have a great idea but with a great idea you cannot develop a business. What do you need to develop a business? People and money when you have money then you are talking about entrepreneurial finance.
There are a lot of good ideas and products but without people and money you cannot develop your idea.
The language of early-stage finance
A lot of missteps that an entrepreneur can make. Try to help you to better understand the language of the investors. If as an entrepreneur, you don’t understand the jargon than you can fail. And you can lose money.
Entrepreneurs make it happen through business
Starting Building Buying Selling
All the above are points of change that necessitate a valuation process followed by a refinancing process
Valuation is a key skill as it is necessary to
Raise equity Raise debt Satisfy vendor Satisfy purchaser Get deal done Get rich Go bust
Structuring the deal – The toolkit
You as an investor/ entrepreneur have to get better knowledge of this. How do we deal with all of that?
Goal of this course
To expose you to the different financing options
To expose you to the valuation and structuring issues that entrepreneurs and investors must consider when assessing, entering and exiting deals
To enable you to identify the critical factors when doing it for real – a ‘nose’ for deals Some of the firms can be very big but still privately held. Think about studio
Output of this course
I can’t promise to turn you into entrepreneurs or investors, but I can provide you the tools to deal with them.
2.Entrepreneurial finance versus corporate finance
2.1 Differences
Corporate Finance Investing Assets
Financing Liabilities and equity Entrepreneurial Finance
“The art and science of investing and financing entrepreneurial ventures”
Investing in assets for example new products or new operations. How will we finance these investments? We will use liabilities and equities.
Corporate: pubic firm.
Entrepreneurial: privately held firms.
WHY IS ENTREPRENEURIAL FINANCE DIFFERENT FROM “TRADITIONAL” CORPORATE FINANCE?
Assumptions of traditional models don’t hold
AGENCY problems Investor = Principal Entrepreneur = Agent
A lot of models for corporate finance will not hold in entrepreneurial finance. Because investors and entrepreneurs have different gaols.
Goals of an investor is to maximize their value. Return is the most important. Entrepreneurial have other goals.
For example: tech entrepreneur and developing the technology. Investor will say technology is 70% oke, let’s start selling it. But entrepreneur will say no, let’s not do that. = different goals
For example: entrepreneurial can maybe have some social goals like paying out higher salaries. Information asymmetries.
Adverse selection problem
o Will the best entrepreneurs seek outside finance? Or is external finance considered as “last resort”?
It can be that buyers have other information than sellers. You as an entrepreneur when you are looking for an investor, you don't know what the purpose is of this investor.
Also, entrepreneurs when they start looking for outside financing, you as an investor don’t know if you are the last resort or not. You don’t know the history of the entrepreneur.
Moral hazard problem post-investment
o Will entrepreneurs work in the best interest of investors?
You have a contract, but you don’t know if the partiers (investors, entrepreneurs) if they make it up, do they do it with good faith? Maybe entrepreneur is not working for the same goals as investor.
Information problems
Information on the opportunity is incomplete and uncertain to Es and OIs
Outside investors lack information on
o Value of idea: Risk of appropriation of intellectual property & ideas by OIs o Skills and efforts of entrepreneur
Even with the same information, Es and OIs may interpret information differently; different views of the future
o Driven by huge uncertainty
There is huge uncertainty in entrepreneurial companies. As an entrepreneur you don’t have to be naïve when you are negotiating with investors, but you have to show some faith in them.
It takes years for investors to build up a good reputation.
Uncertainty leads to different views of the future
Uncertain whether technology would work Uncertainty with respect to demand Uncertainty with respect to price Uncertainty with respect to patent application
From phone to skype calling over the internet. We need some uncertainty. As entrepreneur and investor, you will have to deal with this uncertainty
Suppose, as the entrepreneur of a prospective new venture, that you find you are much more optimistic about the future prospects for the venture than is the outside investor whom you are trying to convince to invest in the project. Can you think of any ways to structure the financing that would make the outside investor more comfortable?
You as an entrepreneur are convinced about your business and you want to take an investor on board. Investor is still hesitating, what can you do to convince this investor?
Find out what the preferred situation is from the investor. Maybe you can work with preferred shares. Investor first gets all the money back and then you as an entrepreneur can get something Something to convince your investor.
Reducing your financing needs, just ask the money you really need.
E.g. focus on product development but also do a lot of consulting because then they have a lot of cash inflows that they can use for developing the product.
Working with milestones. Here are 10 milestone and when I reach these milestones, I get my shares.
set this things in a contract. Really important in entrepreneurial finance to deal with this uncertainty and convince the investor.
Assumptions of traditional models don’t hold
CAPM cost of equity, e.g. K e= rF+ β(rM–rF)
In entrepreneurial companies CAPM does not work! K e= rF+ β(rM–rF)
+ No diversification + Illiquidity
+ Transaction costs
Diversification: in entrepreneurial firms there is no diversification. If you as an entrepreneur invest in your company, you will invest most of the money you have. But when you are investing in a corporate firm you will also buy some shares from several companies so you will diversify. Diversification in entrepreneurial firms is much less than in quoted firms.
Illiquidity: on the stock market it is easy to buy and sell shares. When you are investing in entrepreneurial firms it’s not easy to sell your shares again because there is a lot of illiquidity. Transaction cost: some interest in investing in a company, look for financial figures but not easy for entrepreneurial firms. Most of the investment companies hire companies to do check-ups. For quoted firms there is already a lot of information available that they can analyse. Not for entrepreneurial firms.
If the company grows, price per share will become bigger for you and you can get value back. In board of directors at the end when you quit as an investor you can get money for it because you put a lot of effort in the company.
Addressing agency problems
Reduce information asymmetryo Pre-investment screening and due diligence: hire consultants to do research for you. o Post-investment monitoring: monitor the firms.
Align goals of E’s and OI’s
o E’s are expected to show real commitment Invest their own savings o E’s are shareholders: bear risk and upside potential
2.2 Conclusion
1. Investment and financing decisions are interrelated
You as an entrepreneur when you start your business, you need to ask the question: am I willing to invest my own money? Sign to external investors that you really believe in this company.
Independent chief financial investor puts a lot of time in the company because they want to go a higher pie of the valuation at the end.
2. Value of entrepreneurial company is different for different types of investors
Difference between entrepreneur and investors. Entrepreneur does not only have a financial benefit from putting money in the company but also joy.
3. Complex contracts
Reduce optimism of the entrepreneur but also the scepticism of the investors.
In entrepreneurial finance you cannot pay out dividends. When there are sales, they will reinvest the money in the company, the last thing they will think about is paying out dividends.
3.stages of venture development
You need some time to get for example like fakebook.What sources of financing do I need? When you just start your business it is difficult to get a private equity on board.
Start up: yes, we have some sales and break even. You really want to scale up to go to the growth phase.
Growth expansion: growth is the key in that phase.
Maturity: who are my competitors?? Disruptive players that can attack my business.
Revenues differ amongst the different phases.
Different steps in financing process
1. Determine how much and when financing is required 2. Choose type of financing needed
3. Choose source of financing 4. Structure the deal
5. Harvest the investment
How much money do you need?
“More is better” vs. “Less is more” perspectives Insights from Inc. 500 companies Companies started with < $1,000 as likely to be profitable as those starting with > $100K Companies with > $100K seed capital employed on average 150 people and had $21M in
revenue; < $1,000 seed capital had 56 employees and $13M in sales
Arguments for raising as MUCH money as possible
Excess cash is a cushion against unexpected setbacks.
Excess cash affords flexibility to pursue unexpected opportunities. Excess cash makes obtaining credit from lenders and suppliers easier. Excess cash is comforting for the entrepreneur and key employees. Behavioral theory of the firm
Behavioural theory of the firm says the more money you have the better it is for your performance, because you are able to innovate and experiment for example.
Slack resources refers to excess resources. The amount of resources that is more than needed for the basic operations of your firm. When you have financial slack, you have access cash on your balance sheet. When you have that you have flexibility. It helps u to experiment, to innovate, it makes obtaining credit from lender more easy. Cash in your balance sheet and investors see this they will say: “this company is healthy”.
When Ablynx was not on the stock market yet they had a lot of cash on their balance sheet. They used the cash to hire a professional and he helped Ablynx to scale up. Now it is on the stock market because they had a lot of cash and they were able to hire such a professional. Without the
professional they wouldn’t be there.
Arguments for raising as LITTLE money as possible
Limited cash limits the loss if the venture fails. Limited cash disciplines the entrepreneur to focus on the objective. Limited cash promotes developing cash-management skills. Limited cash preserves ownership for the entrepreneur. Agency theory and Resource constraints theory
Agency theory: a lot of agency conflicts and when you have slack resources, managers will use it for their own interest. For example, use it for more expensive hotel rooms. When you have fewer slack resources, you are more creative in what to do with it.
Example
Different teams are struggling with the same innovation problem but have different financial resource endowments.
The big challenge in jet engines was and is to solve a performance dilemma: the more powerful the engine, the hotter it gets, and the more frequent are failures due to material fatigue.
At the end of World War II, several American teams under General Electric and several German teams under BMW and Heinkel were competing against each other in the race to resolve this dilemma. The stakes in this race were high, given that all parties recognized jet propulsion as the next ‘winning weapon’ in the skies.
The American team had a virtual blank check for buying whatever costly raw materials it needed to create the most heat- resistant alloys. By contrast, the German engineers were denied access to state-of-the-art heat resistant alloys due to funding problems and post-war disruptions of
international trade. They simply could not procure the required materials and had to make do with what was available.
The resource-constrained German team eventually resolved the performance dilemma in a simple way: by focusing on developing more efficient ways of cooling their poorer alloys, rather than
developing more heat-resistant alloys. The resulting ‘bypass’ technology (in which the rotor blades and other engine parts most exposed to high temperatures were hollowed out so that air could flow through them, thereby cooling them off) was in fact an analogy of the cooling system in piston engines, and is still used to this day.
It can be when you are more resource constraint that you will think more creative about what to do with your resources.
Having some slack is good but too much can be really bad.
Different stage in development. Different sources of financing amongst each stage.
4.Sources of Financing
“The biggest challenge for many entrepreneurs is not raising large amounts of outside money, but having the wits and hustle to do without it”
A lot of E that don’t have money and don’t know where to find the money. How developing the business?
What is bootstrapping?
Bootstrapping comes in the picture.1. Minimize the need for cash by securing resources at little or no cost, You try to acquire resources without using a bank or outside equity financing.
2. Acquire resources without using bank finance or outside equity finance. Refers to use of methods to decrease external financing need
5 euros. First think and then you do some action. Try to make more money on these 5 euros. Entrepreneurial investors do not only invest in small but also in big firms. Being creative in how you can raise money with only little amount of money.
Example
Omega pharma 1987:2 Belgian Pharmacists, Marc Coucke and Yvan Vindevogel developed a cheap but high quality shampoo…
In their garage
With personal loan (each € 3,750) and Bo wages in the beginning
November, 2014: Perrigo Company plc (NYSE: PRGO; TASE), a
leading global provider of "Quality Affordable Healthcare Products®," acquired Omega for €3.6 billion, or $4.5 billion
He started in his garage with a personal loan and in the begin he didn’t pay out wages. In November 2014 company was acquired by perriogo.
Garage of HP
Example
Markus Frind (Education: Computer Systems Technology; worked as a developer)
Founded PlentyOfFish in 2003 from his bedroom
Ran it independently until 2007/8 (began hiring employees / new Vancouver HQ). Outcompeting rival Match.com for traffic fourfold.
“By the time I found out what VCs were, I was already making millions in profit.” Acquired for $575m in cash by Match Group
Being creative and using bootstrapping techniques helps to grow your business.
Jobs approached a local computer store, The Byte Shop, who said they would be interested in the machine, but only if it came fully assembled. The owner, Paul Terrell, went further, saying he would order 50 of the machines and pay US $500 each on delivery. Jobs then took the purchase order that he had been given from the Byte Shop to Cramer Electronics, a national electronic parts distributor, and ordered the components he needed to assemble the Apple I Computer. The local credit
manager asked Jobs how he was going to pay for the parts and he replied, "I have this purchase order from the Byte Shop chain of computer stores for 50 of my computers and the payment terms are COD. If you give me the parts on a net 30-day terms I can build and deliver the computers in that time frame, collect my money from Terrell at the Byte Shop and pay you."
The credit manager called Paul Terrell who was attending an IEEE computer conference at Asilomar in Pacific Grove and verified the validity of the purchase order. Amazed at the tenacity of Jobs, Terrell assured the credit manager if the computers showed up in his stores Jobs would be paid and would have more than enough money to pay for the parts order. The two Steves and their small crew spent day and night building and testing the computers and delivered to Terrell on time to pay his suppliers and have a tidy profit left over for their celebration and next order. Steve Jobs had found a way to finance his soon-to-be multimillion-dollar company without giving away one share of stock or ownership.
Often AND-AND story, i.e., bootstrapping AND external funding
Bootstrapping
Reduce finance needs o Start in garage
o No (below-market) wages
o Partnerships with suppliers, customers o Optimise supply chain
o Optimise payment process (customers/suppliers) o Student workers, interim personnel,...
Research shows that early bootstrap strategies enhance new venture growth Do as much as you can without having to raise capital at all
When you do need to raise it, raise all the capital you need at once
Bootstrapping methods
1. Owner-related (work from home, withhold management salaries,…) 2. Joint utilization (borrow equipment from others, coordinate purchases with others,…)
3. Delaying payments (lease equipment instead of buying, delay payments to suppliers,…) 4. Minimizing investments (use routines to minimize inventory,…)
5. Minimizing accounts receivable (offer same conditions to all customers, cease relations with late payers)
6. Subsidies
Why is bootstrapping so important?
Often the only option To get investments later you may need to reach certain milestones / levels of traction Choice to retain full control
Session 2: sources of financing
4.sources of financing
4.1
bootstrapping
What is bootstrapping?1. Minimize the need for cash by securing resources at little or no cost, 2. Acquire resources without using bank finance or outside equity finance. Refers to use of methods to decrease external financing need
Bootstrapping means reducing financing needs. Examples of Bootstrapping:
- Steve jobs convinced his supplier that he would pay them after the customer has paid Steve Jobs
- Marc couke started his business in his garage.
At a certain moment you will have to call for external finance.
4.2
Friends, Family & Fools (3F’s)
Patient capital
Family will invest money in your project. This is called patient capital because your porotype is not ready yet and when you are still in the development phase
Involvement? Risks should be clear
Be clear in the beginning to your family that they can lose all their money. High risk involved in investing in the project.
Written contracts important o Terms of financing
o Rights and responsibilities investor o Liquidation options
o Control
Best is to draw up a written contract to make sure there is no disagreement. Will you give your parents shares or a loan? Try to lower the risks as much as possible.
Relational issues
Not a permanent source of capital: you cannot always go to them and ask them for money. At a certain time, you have to go to other providers of external financing.
4.3
incubator and accelerator
Sources of financing means not only the financial benefits but also the non-financial benefits Sometime investors provide more than just money but also access to network, coaching… Whole chapter on incubator and accelerator so she will be very brief.
Incubator
= an organization that provides startups with a shared operation space and also provides young businesses with networking opportunities, mentoring resources and access to shared equipment. Accelerator
= an organization that offers startups support services and funding opportunities, in intense programmes lasting several months that include mentorship, office space and access to capital and investment in return for startup equity.
Incubator has an horizontal base: there can be a lot of companies for very different industries that take part in an incubator. There are also incubators that are most focused but most of them have an horizontal base.
Incubator also focuses on individuals: when you have a great idea, you can apply for a program at an incubator. You don’t already have to have a team or something. When you are going to an accelerator you have to be further, you need a better idea, a team.
An accelerator really try to coach you, they invest money in your company, and they want to get an equity stake back from it.
Examples of incubators
Blue health innovation centre: a lot of incubators are supported by big companies.
Example of accelerator
4.4.
crowdfunding
Another type of financing where you can rely one.
Bedlam brewery
Bedlam Brewery is a Sussex-based craf brewery;
100% of the beer is brewed in an eco sustainable production facility and is delivered to the different stockists in Sussex area;
The company offers 5 different core cask beers in addition to limited edition seasonal sales; First equity crowdfunding capital raising of £550k in 2016 on Crowdcube from a crowd of
132 investors;
Second equity crowdfunding capital raising of £330k in 2019 on Crowdcube from a crowd of 271 investors.
Crowdcube is an equity crowdfunding platform based in Essex, UK;
Today, Crowdcube counts 755,754 members and £689,234,678 raised through 883 successful offerings (crowdcube.com, Jul 2019).
Founded in 2011
Crowdcube is a famous equity crowdfunding platform in the UK.
VCs, Angels, Banks Crowdfunding
Crowdfunding is a group of people that puts their money (small amounts of money) to support a business idea or a company.
VCs, angels and banks are individuals that invest in a company in different stages depending on the milestones that the entrepreneur has reached.
Two Trends go into Crowdfunding
Crowdfunding = crowd + funding The crowd becomes more and more popular nowadays. The voice of the crowd is really important.
It is easier nowadays to start a business, the cost to start one is lower than the last years. More and more business angels, venture capital funds that want to invest money. There are more funding options.
These 2 trends have led to crowdfunding
Definition
Crowdfunding is an innovative funding opportunity for small businesses and start-ups. It matches up business projects in need of funding with investors through an online platform.
In some crowdfunding types, investors in exchange receive returns on their investment.
You have the small businesses that put their project on the crowdfunding platform and then there are investors that will provide funding through this platform. Sometimes there is a financial return to the investors.
Crowdfunding Types
Donation crowdfunding already exists for a long period in time. Donate money and you get nothing back.
Reward crowdfunding: you get something back. Debt crowdfunding is similar to a loan
Different types of crowdfunding are different in complexity and information asymmetry. Debt and equity are much more complex because there are a lot of legal issues. For a lot of companies really difficult to understand what will happen if you invest in such a campaign. A lot of legal issues that are related to equity and debt crowdfunding.
Donation Crowdfunding
• Can include sites like Go Fund Me or Kiva • People either raise money for
themselves or charities
• Most campaigns very small
Reward Crowdfunding
One of the largest CF campaign ever Video game
Started through Kickstarter, now independent Campaign target: $2 M
Amount raised: > $250 M
We said, ‘Give us more money and we’ll give you a better digital ship in the [game’s]
universe.’ That was kind of revolutionary, since before that it was ‘We’ll give you statue, or a bigger box or dinner with development team.’ ... As a gamer, if I’m backing a game, I want something that improves the game, not sits off to the side.
Reward crowdfunding from star citizen. It was easy to get funding through the platform, so they started crowdfunding on their own website. People when they invested in the company, they got something in return. They got some in-game advantages.
Example: Jaswig
- Founded in 2014
- KICKSTARTER campaign in 2015 - #175 standing desks
- Partnerships: Delta Loyd, Securex & UGent - 2016: €50,000 debt financing
- PMV for follow-on-financing (marketing, internalization, and working capital requirement) Most research on Reward Crowdfunding!!
You could invest in the company and get something in return. Trough the company they have sold 175 desks. But what happened after the campaign? In 2016, they already had 250.000 euro revenues. Possibilities of partnerships and they also got debt financing. Consequences afterwards the campaign that provided them a lot of advantages.
Debt and equity crowdfunding are really complex. Most of the knowledge we have today is about reward crowdfunding.
Debt crowdfunding
• Very large amounts of money lended
• Often not considered to be a part of crowdfunding because many of the lenders are large companies
Mostly for large companies because platforms require some collateral. There is a huge due diligence process they have to go through before they can go on the platform.
Equity crowdfunding
Funding Circle is a peer-to-peer lending marketplace that allows investors to lend money directly to small and medium-sized businesses. Now raised well over £1 billion. Based in London, UK, but also serving businesses in the USA, Germany, Spain and the Netherlands.
Zopa is the world’s oldest and Europe’s largest peer-to-peer lending service having now lent over £1 billion. Zopa peer-to-peer lending works by bringing together individuals who have money to lend, and individuals who wish to borrow money. Based in London, UK.
This is really complicated. You get some shares if you invest in the company. Do you get voting rights or not? Some platforms work with the principle that when you raise more you get voting rights, when you invest low less no rights. Some platforms do not work with voting rights.
What type of platform, what are the conditions before you start investing? Equity CF is off to a slow start
Equity & Debt Crowdfunding in Belgium
Debt and equity funding becomes more and more popular in Belgium.
In 2016 they have raised 12 million in Belgium. In the Netherlands more than 100 million. France more then 120 million. Belgium not the best of the class.
Benelux Total Alternative Finance Market Volumes 2013-2016 (€ EUR)
In the Benelux we have an upward trend.
The Geographical Distribution of Platforms
UK is the best.
Comparative Market Volumes of Alternative Finance Transactions in
the EU (2016)
Equity Crowdfunding in Europe is still underdeveloped
Equity funding in Europe is still underdeveloped in vgl when we compare it to Asia and America. legal issues in Europe.
What’s the problem today?
Diverging national rules. In Belgium there are other rules than in the Netherlands, the UK… This makes it difficult for people and companies to understand what investing in such a platform means. It is also difficult to decide in which platform you are going to launch your project;
EU-wide passport would mean same conditions for every platform. Lack of information: what is the company doing?
3 most important reasons why the crowdfunding market in EU is still underdeveloped.
Advantages of Crowdfunding
Extra financing source (following the rule of thumb: “its best to get your money from your (potential) customers”)
Democratizing entrepreneurship
Market test of product/service demand (uncertainty reducing for follow-on investors)
Generates (early stage) customer feedback Generates attention from “crowd”
big advantages which are also established in the literature.
Wisdom of the Crowd
https://youtu.be/Zv80ibV-0FM?t=8sCrowd is really important for a lot of entrepreneurs. You can find out what the crowd is thinking for example. When there are a lot of people investing in your project, you know it will be popular when you go on the market.
Disadvantages of Crowdfunding
Often limited investments from a large crowd, more time-consuming than expected Legal constraints (equity and debt crowdfunding)
Reputational consequences
o 75% deliver products later than expected
o Complex technologies are difficult to translate to the crowd + leakage of sensitive information
Disadvantages are that you go on a platform and they promise a lot of things but then they do not give customers what they expected.
Entrepreneurs underestimate the time you have to put in launching the campaign on the platform. Legal constraints. 75% deliver products later than expected: this can lead to negative consequences for your firm.
Legal Framework
The general regulations for financial services apply, supplemented with a note from the Financial Services and Markets Authority (FSMA) from 2012.
Anyone who calls upon equity or lending based crowdfunding can in principle collect 100,000 euro without too many administrative obligations. If this amount is, however, exceeded, the FSMA must provide a license, which requires a considerable amount of preparatory administration and an (expensive) prospectus.
More recently, the parliamentary committee approved a legal proposal to modify this system and incorporate better investor protection. No prospectus obligation for projects:
o With a total collected amount up to 300,000 euro
o With a maximum investment of 1,000 euro per person and per project o Both conditions must be met.
Most important
This framework changes a lot. Launching a campaign, you have to go to the FSMA and read this. There are a lot of legal issues so check this before you start.
Academic Literature
Tips for successful crowdfunding
1. Clear strategy and deadlineWithin 6 months I have to reach this amount of money. 2. Create a prototype
You have to create something, so people understand what you are doing. 3. Select (active) crowdfunding platform
Even within one type of crowdfunding there are different times of platforms. Select the best platform for your idea of product.
4. Create your own project page (mind the details)
othe chance of success for projects with spelling errors is 13% less than those without
Read your pages very well before you launch. 5. Include a short (+/- 3 min.) video
o not including a video decreases chances by 26% It can increase your chances of getting funding through the platform.
6. Provide benefits to the crowd 7. Check payment portal
8. Contact your friends and family 9. Exploit the (social) media
Other investors can see your campaign and maybe become interested. 10. Provide updates to the crowd
o a lack of an early update reduces the chance of funding success by just over 13%
Crowdfunding is hard work!
Spend a lot of time on launching a successful campaign. Method for a lot of entrepreneurs to find some money.
4.5.
Business angels
Crowdfunding: group of people that pull money in the company. Business angels: individuals that invest money in company, project.
Innocent
Founded in 1998, team of 3 1 business angel
2009: Coca-Cola paid £30 mio for 10% - 20% of equity
It took them 7 years to find out what they wanted to do. Making their own juices.
Festival: ask a very simple question: “please drink my smoothie and tell me if I have to quit my job or not”. 2 bins with the answer. They quit their job. Then they sanded out an email to their friends and family with the question if they knew someone to invest. Mr pinto: providing money, mentoring, network, coaching.
The 7 things you think you know about business angels
https:/ /w w w.youtube.com/watch?v=1b8YLBFQy44Business angels
Informal source of (seed) capital High-net-worth individuals Often ex-entrepreneurs Hands-on approach
Seek more than purely financial return Long investment horizon
Minimum investment size: > € 30,000 Maximum investment size: < € 1,5 million
Personal fit with business important (e.g. industry)
They visit the company on a regular basis to coach the company. Seeking for more than financial financial return. Here the joy is the most important thing, real difference with venture capital where return is the most important. Business angel’s money can certainly in the beginning be very
interesting.
Stimulate eco systems between business and angels and entrepreneurs: connect them. Entrepreneurs might encounter some difficulties to find external resource
4.6.
Venture capital
For a lot of company’s business angels can be relevant but sometimes a lot of risk for example a tech company. They are looking for a lot of money, so they go to venture capital. It helps out a lot of big companies.
Google became big because of venture capital investors. Venture capital investors are important in the entrepreneurial finance world.
Galapagos
Founded in 1999 as biotech JV of Crucell and Tibotec 2002: first VC financing round (top VCs)
€23.4 mio 2005: IPO on Euronext
€22.4 mio
2006: private placement €42.1 mio
2007: share issue GlaxoSmithKline €4.4 mio
2009: private placement €18.2 mio
2010 22 Oct: private placement €28,7 mio
Venture capital video
You need to see the company before you invest in the company.
- Market size has an influence on the return of the venture capital. Venture capital can’t move your market.
- Technology
when you apply for funding at a venture capital the chances are very low that they will fund your project.
Sequoia
Invested in a lot of tech companies. They really had a niche.
Air bnb
Airbnb is a community online marketplace, based on sharing to list, discover, and book accommodation around the world;
Real estate listings belong to the single community members;
Airbnb plays the intermediary role of connecting hosts and travellers in exchanging
information and managing monetary transactions; the company makes profit by charging a fee which is proportional to the money transferred through the platform;
Founded in 2007.
In 2009, the company raised $9.0M of venture capital;
The funding was led by Sequoia Capital, along with other investors including Y Ventures, SV Angel, Greylock Partners and some individual investors;
Sequoia Capital is a venture capital firm headquartered in Silicon Valley;
Today, companies which have partnered with Sequoia Capital have an aggregate, public market value of over $3.3 trillion (sequoiacap.com, Jul 2019).
Sequoia
“When we first met Brian, Joe and Nate in 2009, they had big dreams, working from their tiny office on Rausch Street in San Francisco and leveraging our guide to writing a business plan to create their first investor deck. They had a small number of listings (about 1,000) on their website, but they drew us in with their scrappiness, imagination and storytelling—they had a knack for turning a crisis into an opportunity and then a great story. The trio showed all of us what it means to be a “cereal” entrepreneur.
Even then, their commitment to mission, values and culture was clear—and so was their far- reaching vision of a better future by first inventing "a better way to travel" where you are "never a stranger" in a world in which you could “belong anywhere.”
- Air bnb makes profit by charging fees. Such tech companies, only a few venture capitals backed companies. We as a crowd also like these companies.
- Venture capital investors mostly work together with other investors.
- Sequoia: attractive at air bnb was the team. Founders really had a great story. Team was important to convince VC’s to invest in air bnb.
Slack
Slack is a cloud-based collaboration sofware;
The company has the mission of giving power and alignment to the team to do the best work;
Slack brings team communication in one place, the #workplace, accessible by team
members who can enjoy messaging services (chat rooms organized by topic and objectives and direct messaging), search, storage and sharing tools;
Founded in 2013.
Google Venture led an investment in Slack of $150M in 2014;
Google Venture, born in 2009 as a subsidiary of Google, is now the venture capital investment arm of Alphabet Inc;
Google Venture seeks to invest in start up companies;
At the time of the funding, Slack had 30,000 active teams and over 200m messages sent each month (techcrunch.com, Jul 2019).
Google venture that invested in slack. Subsidiary of google.
Venture capital
Invests (quasi-) equity in unquoted companies
with as primary goal: realise capital gains medium-term investment horizon active management involvement
Independently managed, dedicated pools of capital that focus on equity or equity-linked investments in privately held, high- growth companies (Gompers and Lerner, 2004)
They do not do it for the joy, they want to make money. 5 - 7 years and then they want to realize some gains.
Term sheets: I want to have a place in the board of directors because I want to coach the company. High growth innovated companies are the audience for the venture capital investors.
Venture capital
Not a homogenous industryVenture capital will not invest own money: sometimes money comes from the stock market, or a fund of fund. Different types of venture capital investors.
Heterogeneity of venture capital investors
IVC: (US style limited partnership): independent venture capital
CVC: affiliated to a non-financial corporation: corporate venture capital investor BVC: affiliated to a financial intermediary: : bank venture capital
GVC: government owned management company: linked to the government. PNV in Belgium. Considerable differences relating to
financial objectives strategic objectives
the ability to mobilize resources and capabilities Venture capital
Not invest their own money Type of deals
Focus on larger deals
At least 1.000.000 Euro, occasionally less Amount of the investment
Dependent on fund size:
The larger the fund, the larger the minimum investment size as time needed for follow-up and selection is similar for big and small projects Maximum amount: often 10% of the fund in one project
Exit th rough
IPO, Trade sale, Sale to entrepreneur, or… Bankruptcy/liquidation VC investors are better able to deal with information asymmetries:
Intermediaries with superior screening capabilities (Gorman and Sahlman 1989): Specialization and syndication
Intensive monitoring (Kaplan and Stromberg 2001): “hands on” investors, staged financing
Never more than 10% of the fund in one project. Why? If they invest in a big or small project it doesn’t matter, the time they have to spend on the due diligence process is the same. Venture capital firm that has a lot of fund size available, they will only provide really large tickets.
For the venture capital, return is very important. Several strategies to realize their gain: exit strategy. Exit: get money back + something more.
Venture capital
Substantial infusion of financial resources
Professionalization (Hellmann and Puri, 2002): Enlargement of firm’s resources and
capabilities due to the coaching performed by the VC investor and its network of business contacts
Increase of agency costs as the financial and/or strategic objectives of the VC investors may diverge from those of firm’s owner-managers
There can be some agency cost when an external investor comes into the company. Investor can have other ideas than the entrepreneurs. VC investors see opportunities abroad and want to help the company to grow but some entrepreneurs want to stay in Belgium different objectives.
Investment return (dependent on phase)
What does this mean in practice?
When a VC investor, invests in an early stage than the return is much higher. But when the company is already more developed, risk is lower: return is lower. Different returns amongst different
countries. UK has a more developed VC market: more money available, so returns are higher.
Business angels require a lower rate of return. VC investor require a higher return between 50-55%. If they invest the same amount of money you see the difference in the return. Returns recorded in the beginning of the contract is really important. The multiple of your investment will be higher.
Diversify risk. By investing in multiple projects at the same time. Some projects can fail other ones can really be successful. They really try to diversify their investments. You see that the amount of money they have invested is 1000 euro over several projects and their return is at an acceptable level.
Differences between business angels and VCs
- Business angel owns money while VCs use money from someone else. - Difference in the involvement in the company.
- Business angels can be much longer in your company than VCs.
- VCs investors are important to build up a reputation, higher legitimacy.
Private Equity vs Venture Capital
Private Equity refers to unregistered equity and equity linked securities sold by private and public operating companies or partnerships to financial buyers.
Venture Capital is a subset of private equity and refers to equity investments made for the launch, early development or expansion of a business.
VC is a part of private equity. Private equity is much bigger and they invest much more money than a VC. Private equity ticket sizes are much larger: much more complicated to get a relation with private equity than with VC.
4.7 Banks
Need for Collateral Valuation based upon Balance Sheet and P/L of the past (=> starter?!) Need to build up confidence
Important ratios for banks are: o Debt ratio
o Debt coverage ratio Solvency
Banks are reluctant to invest in your company because they want to have collateral. They want to look at banks, but al lot of entrepreneurs don’t have collateral yet in the beginning.
Solvency ratios
Total debt ratio (%)
= Debt / Total equity and liabilities* 100
The higher the ratio, the higher the financial risk The more debt you have at the more risk you are Coverage of total debt
= CF after taxes / Total debt *100
Can all debts be paid back with the CF of one year only?
Cashflow is really importan, it shows if you can pay your debt when needed Coverage of LT debt payable < 1yr by CF
Include these ratios into your financial plan when you are going to a bank. Difficult for innovative companies to get funding by banks because of the lack of collateral.
Banks
Availability of debt financing for innovative start-ups ??? Lack of collateral (Di Giacomo, 2004; Lerner, 1999)
Require guarantees / collateral Covenant
Different types of loans
o Account receivable loans o Inventory loans
o Equipment loans o Real estate loans o …
Look broader to find guarantees from someone else.
4.8 strategic partners
Might bring in knowledge, distribution channels, complementary products, … Customers, suppliers, competitors, …
WhatsApp is a mobile instant messaging application;
The company has the mission of allowing people to communicate without any barriers all over the world;
At the beginning, WhatsApp used to charge users with an annual fee of $1; however, WhatsApp users are free of charge since 2014;
Founded in 2009;
Since inception, WhatsApp has experienced an extraordinary growth in users.
Coca cola invested in innocent and for both parties it was nice to work together. Strategic partners can be your suppliers, customer…
Whatsapp was acquired by Facebook in 2014, at a price-tag of $19B (more than Iceland GDP and one tenth of Facebook market value);
Mixed acquisition, $4B cash and around 184M Facebook shares;
Founders Jan Koum and Brian Acton are still into the business and WhatsApp is still running its operations completely independently;
Facebook acquired 72 companies before the WhatsApp deal, which is the largest Facebook acquisition;
This deal has the potential to generate synergies of talent, technology and revenue between the two companies.
4.9. Government measures
Government wants to stimulate the entrepreneurial finance world. It depends on the country and region you are in.
Are country and region dependent 7 types of measures
o Substitution (100% public fund---fi: Vinnof, Danish Growth Fund)
o Co-investment (government invests together with private partner--- Arkimedes, University Challenge Funds (UK))
o Refinancing (Arkimedes)
o Risk Sharing (fi. In case of losses---Tante Agaath (NL), Regional Venture Capital Funds (UK))
o Fiscal measures o Incubation structures o Loans and loan guarantees
Several ways how the government can become involved. They can provide guarantees or they can simulate incubation.
Examples
Own Equityo Notional interest deduction o 3F
o WinWinlening (fiscal advantage) o Tax Shelter for start-ups
o Tax Shelter for scale-ups
Tax shelter so they can get some money back from it.
o Exemption from withholding taxes on interests of loans via CF platforms o Banks
o Co-financing: loan together with subordinated loan of PMV Bank only provides you part of the money.
o Government guarantee o …
Venture Capital / Business angel financing o LRM: helps the region of Luxemburg. o BAN Vlaanderen
4.10 IPO
Only for the happy few. Most of the firms will not get this
Those firms are really exceptions. Dropbox was a unicorn. Those campaigns are rare. IPO market is relatively difficult. Only the successful ones get there.
Dropbox
Dropbox is a file hosting service;
Dropbox has a freemium business model, where customers enjoy a free account under the maximum storage of 2 GB;
Founded in 2007.
Dropbox went public in 2018 with an offer amount of $756M ($21 per share) on the NASDAQ market;
NASDAQ market is an American stock exchange;
At the time of the IPO, Dropbox counted around 11M paying users from 180 countries (corrierecomunicazioni.it, Jul 2019);
Pre-IPO valuation of around $7B which made Dropbox a Unicorn (Unicorn=private company valued more than $1B).
IPO
Provides publicity / increases reputation Costly when firm is small
Strict reporting standards Market dynamics
Will influence the valuation of your company when you are on the stock market. For large amounts of funding
Stay independent as a company.
Media
The capital markets have changed dramatically even as the IPO process has not. Historically, an IPO was the only way to raise a truly significant war chest for your company. But access to capital for private businesses has become much more abundant over the past 20 years. The cost of capital for a large Series D, E, F, or G round is often much lower than on a comparable amount drawn through an IPO.
Companies generally want to be public — they want liquidity for early-stage investors, employees, and founders; they want to be able to acquire other companies; and they want access to growth capital. They want to see their ticker symbol crawl across the bottom of the screen on CNBC. They just don’t want to run a gauntlet to get there.
Why aren’t there a lot of companies that go to the stock market to get the funding? Several reasons why they are not going (studio 100). There is a lot of private funding nowadays available. They do
not go to the stock market because it is costly and then they have to share sensitive information. They do not have to deal with market dynamics: what do people think about the company?
Differences between sources of financing
Keep in mind that there are different types of financing: what type of financing can be the most relevant? Internal and external financing. Equity and non-equity financing (subsidy).
Venture capital will diversify risk by investing in more projects.
Value added of course when you have a business angel onboard, bank doesn’t proceed as much added value as business angels
Cost for venture capital investors are much higher.
Main elements to evaluate when asking for financing
Very important!!!!!!a) Is the business exposed to high risk of failure? b) Is the business model scalable?
c) Is the business model understandable for everyone?
Questions you need to ask yourself in order to select your source of financing
A)Is the business exposed to high risk of failure?
How novel is the business? How young is the business?
Is the risk of making inadequate profits (or even losses) expected to be high? Why? Does the business owns some assets to be easily sold in the case of business failure? How
specific are the assets owned by the business?
Uber
At the time of launch, Uber was a brand-new start-up characterized by high level of novelty, since it introduced a completely innovative way of providing transportation services. Although the idea was promising, Uber was exposed to considerable risk of making inadequate profit since the reaction of society to the “cultural change” was uncertain (Would people trust the platform? How would regular drivers react?). Furthermore, in the case of business failure, Uber did not own any assets to sell, except from the informatic system in support of the platform.
A business with high probability of business failure is not likely to borrow money from a bank;
Banks usually lend money to businesses which are characterized by low risk of business failure, often associated with moderate levels of novelty;
As they do not share profits, they are not interested in exponential growth, while they value low probability of making inadequate profits and the ability to guarantee the repayment of interest rates;
Banks also look at whether the business owns some assets to sell in case of business failure.
B)Is the business model scalable?
How easy is the business growing? How sophisticated and costly are the resources needed by the business to grow? Is the business capable to multiply revenue with minimal incremental cost? Is the business able to grow?
Is the business expected to handle increased market demands?
Does the network play a role in determining the growth of the business?
Uber
Uber has the potential to grow very easily. Once the Uber platform has been designed, resources to grow are characterized by low level of sophistication and low costs. Indeed, no cars are owned and no car drivers are employed by Uber. Consequently, the number of users can increase quickly for almost no incremental cost. Uber is expected to handle radical growth in market demands. The role of the network is key for its growth.
When you scale up you really need to have the tools to scale up. Network was really important for uber.
A scalable business model might be based on a very simple idea, w hile its strength lies in the ability of detecting high- demand potential;
Investors looking for high scalability bet on the probability of the business to anticipate market's needs by creating a new market demand;
As venture capitalists and business angels share profits, they are likely to value scalable business models, leading to exponential growth in profits.
C)
Is the business model understandable for everyone?
Is the business model based on unique knowledge in the industry? Is the business model hard for a competitor to replicate? Is the business model difficult to understand for the general public? Is the business model conservative?
Is the business model offering a more efficient way to satisfy an existing need? How elastic is the market demand which the business model aims to satisfy? Can I understand what the company is doing?
Uber
Uber’s business model is understandable for everyone and is not based on unique knowledge in the industry. The key competences needed for its functioning are about running an online platform, easily replicable by competitors. Uber might not be the most efficient way to fulfil market’s demand. However, the strength of its network makes Uber the undisputed leader in the industry. Uber has an unconventional business model, as it offers a radical new concept for connecting drivers with customers. Nevertheless, market demand is elastic, as there are a number of substitute services, such as taxis and means of urban public transportation.
Everyone could understand what uber was doing: network was important
A business model which is understandable for everyone might be suitable to raise capital through equity crowdfunding;
Indeed, in equity crowdfunding, the average unsophisticated investor has to understand what the idea is about;
Crowd investors do not necessarily need to understand every detail about the business model, while they need to understand what is good for;
Equity crowdfunding platforms alsohave a preference for conservative business models which act at regional level, have organic growth and can quickly generate solid returns for investors.
On the other hand, a business with high level of specificity is based on unique or hard- to-replicate knowledge;
Investors looking for high specificity in a business bet on the probability of the business to perfectly fit a market demand which is well-known, not yet fulfilled;
As venture capitalists and business angels share profits, they are likely to value the ability of a business to fulfil existing (inelastic) market demands better than competitors, leading to sure profits.
Understandable business models than crowdfunding is interesting to rely on. Not understand every detail but only the big lines.
Startup financing cycle
Session 3: financial planning
How much cash is needed?Figure: Cash flow pattern at start-up
What is the cash burn rate? Weight at which the cash is consumed in the company. How fast your cash will be consumed in your company
Negative CF’s in the beginning depends on type of business: o Bio tech company has more negative CF’s.
o Pizza company realises easier positive CF’s
Financial planning
Decision making tool: scenario and sensitivity analyses A basis for estimating the value of a project/venture
Helps the entrepreneur/project leader to compare strategic alternatives for developing the business and select the one with the highest expected value
Benchmarking for performance measurement HOW MUCH financing is needed and WHEN?
It helps you to see what happens in the best/worst case and what happens if we change some variables? Certain assumption and what will be the consequences? For example: it will take much longer to realise sales, what is the effect on financial planning?
It provides better insides on the value of your company. You can compare strategic options and pick the best one. Figures that you are expecting but after a period you have actual figures and then you compare with these figures and then you can make some decision.
Outputs of Financial Plan
Outputs of Financial Plan
1. P&L statement (film) Overview of results (operational, financial, exceptional over a period of time)
Not only fixed at one point in time, but at several months, several years. 2. Cash flow statement (film)
Projection of future receipts and expenses o Basis for estimation of financing need o Basis for valuation
How much financing do we need? 3. Balance sheet (photo)
Overview of company belongings and how they are financed Picture on point in time at the end of the year.
Outputs of Financial Plan
3 outputs. A lot of assumptions you have to make when you want to build your financial planning. Assumptions from 2 different students in the same exercise, they can have another solution. A lot of assumptions that entrepreneurs have to make, and this might influence your result.
Sales: assumption will determine what your revenues will be, for example how much will you sell? Talking to potential customers. Costs.
Investments: what will the size/depreciation?
Financing: go to bank and ask for loan or not? When you have a loan, this will influence everything. Subsidies will also influence your financial planning
Net working capital: credit sales: invest in working capital. When you buy something from your supplier, you get some supplier credits and you pay after 30 days.
Steps in the development of a start-up’s financial plan
4. Balance sheet
Go to this order because you need figures form the steps before to do the other steps
Step 1: Revenue Forecast
Revenues depend on market estimations (cfr. Entrepreneurial marketing) o Market size
o Market development speed / growth How fast will the market grow? 2 Different methods of forecasting sales
o Top-down approach
Total available market is “this” and we will try to reach “that” percentage
o Bottom-up approach
Total market analysis: start form the bottom and then you determine your revenues
Step 1: Revenue Forecast
Top-down AND bottom-up approach
Why making a bottom-up sales pipe estimation? o Estimate the effort needed to sell
o Take into account that you need to convince diverse parties: economic buyer, user buyer and technical buyer
oConvincing first “real” customers takes usually longer than expected Difference between testing product and buying it on a large scale
And story. The more approaches you follow the more realistic you are in determining your revenues. Different types of buyers that you have that have an influence on your revenues. Pizza restaurant everyone will be curious, and they will visit once but not those people that are going to realise your revenues. Only the ones that come back. Convince real customers and it takes longer.
Example Top-Down Approach
Total global market = 10 million userso Europe: 3 million o US: 4 million o Row: 3 million Market share o Europe: 10% o US: 3%
QualiPro
o Row: 1% Total users: 450.000 Price/product: €100 Total Sales: €45 million
Example Bottom-Up Approach
Database of 100 leads => 1 qualified leado Specific names of customers needed! Sales cycle = 1 year
Number of calls per sale = 40
Number of visits per sale = 16 mandays or 4 visits with team of 4 people estimation of effort needed from back and front office sales in order to realise turnover
Lead is 1 potential buyer. It takes one year till I sell something. Visit potential customers on a daily basis. Estimate effort that is needed to convince your buyers.
Important to determine revenues and to determine how much personal do I need to convince these people. This will lead to better estimation for personal cost.
6 reasons why my VC funded start-up did fail
1. We didn’t sell anything2. We didn’t sell anything 3. We didn’t sell anything
4. The market window was not yet open 5. We focused too much on technology 6. We had the wrong business model
They have problems because they didn’t find the right customers. Good idea but without sales revenue then you have nothing. Do homework on doing business.
Case Study QUALIPRO
How this is done in practice?(Book, pages 210-213)
Life science instrumentation spin-off from UGent and IMEC Research institute specializing in microelectronics in 2006
Developed a new medical device, ProSample 16, w hich enables high-speed quantification of DNA samples in laboratories
QualiPro
Patented microfluidic ProPlates, through which 16 micro- volume DNA samples can be processed and quantified in a fully automated workflow
Prototype of ProSample 16 ready at start-up, developing a beta version of the prototype
We have to realise recurrent revenues, create cash inflow while we are busy developing our devices. We need these proplates to be able to run your machines.
QualiPro
Equity: €340k – Fidimec (seed stage fund IMEC)
Round 1 expected => €3.5mio from start-up Not possible – not sufficient interest!
They wanted to start up. In the beginning they only found 340k euros. They started up with a first initial plan. Cumulated free cash, and they came to the conclusion that they needed much more money. 3,6 million for start-up otherwise we cannot start our business.
The management team prepared a new plan
Covering Sept 2007 – Dec 2010 Compared to the first budget:
o Lower initial sales levels (more realistic) o Lower costs
o Lower investments
They went back to their financial planning, and they prepared a new plan. Compared to the first budget they have lower costs: costs are related to the sales they have.
Hopefully then it will work it out.
Revenue budget
ProSample 16: first sales expected in July 2008 o 500 devices until 2010
o ProSample 96: first sales expected in Jan 2009 o 100 devices until 2010
o ProPlates: consumables (recurring) Maintenance contracts: services (recurring)
Revenue budget
Revenues that they try to target.
These are assumptions you have to decide yourself. Assumptions have to be realistic.
New Plan: REVENUES
Sales and services are payable within 30 days
On working day, we need 2 pro plates. 44 pro plates per month. Pro plates will be sold for 2 euro. Second for 8 euros.
Some customers 30% will pay some cost for us revenues. 83 per month. There are credit sales: they will not get immediately the money.
REVENUES – 2008
3 devices they would sell which means 30.000 euros.
Pro plates: 44 per months: 2 euros per plate and we sell 3 devices in the first month so 264 euro. For the second month you will have more pro plates: sell again some devices but now you need for 6 devices pro plates.
Maintenance cost: 83 euros per and 3 devices sold. So, you can get the total revenue
REVENUES – 2009
REVENUES - 2010
Step 2: P&L Statement
What are the costs of my good sold/linked to the products that I sell?
Direct: attributable to unit of product sold / manufactured.
o For example: electricity of machine uniquely used for manufacturing the product Variable: vary with the number of products sold / manufactured.
Direct cost: attributable to a certain product. Fixed cost: does not vary with the products you sell.
Indirect cost: it is not for this or this biscuit… more biscuits so indirect. Direct cost: machine for this biscuit.
Different types of costs
Step 2: P&L Statement
Personnel costs
o Manufacturing
o Sales cfr. sales pipe estimation (Front Office / Back Office sales) Sales pipe estimation can help you to determine those costs. o Administration, ...
Marketing costs
Services rendered by third parties
o Patent attorney, lawyer, PR agency,… Operational costs
o Travel, communication,... o Strongly depend on the project o No general benchmarks
Start from revenues: sales
EBITDA: what will be the size of my investments? Calculate your depreciation cost and then you get EBIT
Loan means that you have to pay interest charges. Then deduct taxes Taxes are calculated on the EBIT!!!!
Interest charges are zero when you don’t have a loan.
