One Two Four Entrepreneurial Financial Strategies

1www.venturebean.com

Entrepreneurial Financial Strategies

Anjana Vivekwww.venturebean.com

[email protected]


Overview

One..two….four!



ONE

Money is only one dimension


TWO

Valuation in an entrepreneurial venture is often driven by the following two factors:

1) Expected Cash Burn and2) Stake promoters are willing to

give away and acceptable to investors


FOUR

Four things to watch

• Revenue • Profits• Cash flow• Value


Financial Forecasts



FINANCIAL FORECAST: Overview This is based on and driven by

your business model It helps to spend significant time

thinking of your business strategy and business model

A business model develops and evolves over time – it is not static


Business model

The following are some key areas to be considered while developing a business model and plan- Business / idea- People behind idea/project- Market size expected- Marketing strategy- Competition- Financials- Other information which makes this complete


Think – Long term– Medium term– Short term

FINANCIAL FORECAST: Overview


Balance Sheet Profit and Loss Account Cash Flow

NOTE– If you do not understand the basics of financial

statements you may spend time to learn– Financial statements are communicating tools

for business i.e. business language– You do not need to be an accountant or MBA to

understand the basics



May be – Monthly– Quarterly– Annual

– In the initial years, these may be monthly or quarterly, in the long term, may be annual



Look at Various revenue streams Capital expenditure (land, computers,

vehicles, furniture etc.) Revenue expenditure (Salary, raw

material cost, maintenance and repair costs etc.)

You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW?



Think through Requirements of cash infusions at

different stages of the business Resource constraints Possible valuations at these

stages



FINANCIAL FORECAST: Preparation Use tools available – i.e.

spreadsheets Link and create templates,

suitable to your requirement


FINANCIAL FORECAST: Preparation

Uncertainties and unknowns can be captured through:

Scenario and sensitivity analysis Templates that allow for different

scenarios – i.e. optimistic, pessimistic, expected,

– i.e. by making the changes in the input, the output financials should show the impact


Valuation;Negotiations



VALUATION

Valuation is based on:- intangibles and - tangibles

Valuation can be computed in multiple ways, the popular methods:- multiples of revenue; profit etc.- multiples of key drivers, eg.user base- cash flow based


VALUATION

Valuation may be driven by - the stake the entrepreneur is willing to give up at a particular stage of investment in the business and - the amount of money required by the business at that stage


VALUATION

Different persons can value the same business differently because they may- use different methods of valuation- use variations in the methods - have different inputs in the methods

Thus, valuation perceptions can vary, and we do have situations where there are divergent views on valuation


VALUATION

Deals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance


NEGOTIATIONS: PreparationIt is useful to think through: What you want from a proposed

transactions Transaction/deal maker issues Transaction/deal breaker issues The point where you may be need

to walk away


NEGOTIATIONS: Preparation Put yourself in the shoes of the other

party Prepare for a due diligence Break up the transaction issues into

small sub-issues which could be dealt with separately, rather than as a package

Think through the steps post the transaction


NEGOTIATIONS: Preparation

Prepare with a list of possible questions that may be asked and how you will answer them

Who will negotiate, will it be based on the area, i.e. business issues, legal issues etc. …would these be handled by the subject matter specialists?

Understand the strengths and gaps of your team members


Transition;Roles of stakeholders



TRANSITION

Look at the stage of your business and plan accordingly

Growing to the next level may lead to issues such as- letting go of control- letting go of leadership

Are you ready for this?


ROLES

Plan on roles and responsibilities of team members; stakeholders

Plus think through issues of contribution- in money- in kind- in intangibles


to trigger thinking…



Entrepreneurial finance Entrepreneurship has many

definitions, has elements of risk-taking, innovation and pursuit of opportunities relentlessly without regard to resources controlled

One needs to understanding finance in the context of entrepreneurial firms


Entrepreneurial finance Finance involves

– resource allocation–cost of capital–deciding on funding source–managing working capital needs

and ….most importantly–managing cash


Entrepreneurial finance Evaluation of business opportunities

– from start-up stage to later stage companies

Understanding the value drivers of the business

Exploring options to create value, – for the business – for the stakeholders


Entrepreneurial finance

Needs understanding of People Business Environment Deal issues Synergies


Sources of funding Funding gap can be met from multiple

ways, traditional, new ways of funding and looking at creative options

Can you think of these and list them Each option has its own advantages and

disadvantages; can you think of what these could be?


Sources of funding - I

Funding gap can be met from Equity investment

– Angel investment– Venture capital investment

Debt financing


Sources of funding - II

Funding gap can also be met from Strategic investment Increasing revenue by

– changing product mix or – cash flow timing

Innovatively sourcing cash


Some examples IT product development company being

let down by investor Confectionery/chocolate producer needing

extra funds to meet expected surge in demand during the Christmas Season


Utilisation of fundsFunds raised are invested in Available opportunity Opportunity that is latent and not obvious Creating opportunity Based on strategy of entrepreneurs, which

may change and evolve over time

The question to be asked: Is value being created or is there an attempt to create value?


Entrepreneurial finance and financial strategy in Summary Strategic financial planning

– for short term, medium term and long term Preparing and implementing

– business plans, financial forecasts Review of funding options Continuous monitoring and updation

– setting up internal controls, management information systems

Preparing for alliance partnerships– including due diligence review, valuation and

negotiation, deal terms and conditions Value creation


THANK YOU

Wishing you all success

One Two Four Entrepreneurial Financial Strategies

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