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Finding funding for your business idea. Developing and pursuing a strategy. Topics Refresh on objectives of business activity Knowing where you are in the value chain Crafting a strategy to establish what you need Funding is fundamental Uses can determine sources Reflections on failure

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finding funding for your business idea
Finding funding for your business idea

Developing and pursuing a strategy

  • Topics
    • Refresh on objectives of business activity
    • Knowing where you are in the value chain
    • Crafting a strategy to establish what you need
    • Funding is fundamental
    • Uses can determine sources
    • Reflections on failure
    • Appreciate an iterative process requires passion
    • Planning for the long haul

Colin K. Drummond

[email protected]

business activity
Business activity

What is the role of investment?

Inputs

The Firm

Outputs

  • Transformation based on:
    • Intellectual capital
    • Entrepreneurial competence

Raw Materials

Components

Financial Capital

Physical assets

Technologies

Products and services

Value!

Investment

Activity

last strategic points
Last strategic points

Top reasons businesses fail

1.

2.

3.

last strategic points1
Last strategic points

So, need to know what investors are looking for

  • On winning the race:
    • First, need the right horse (the concept)
    • Then, have to have the jockey to lead through the rough spots
    • Finally, to ensure you are in the right race (market!)
  • Leadership serves as the trainer to get the horse ready to race!
  • Securing investments is iterative but most people are not comfortable negotiating
let s go
Let’s go!

Time to craft a strategy

  • How much do you need?
  • What is your risk level?
  • What would you do if you did not get the funding?

Let’s spend some time on the next page…

financial objectives
Financial objectives

Do you agree with the following?

Key Financial Objectives

  • Earn a profit
    • Investing in Company X versus putting money in the bank
  • Stay solvent
    • Have sufficient cash to pay debts as they fall due

Other Objectives

  • Provide jobs for people
  • Creating new products to serve the community
  • Protecting the environment
  • Providing goods at a lower cost
  • Etc…

Is this the right priority? From what perspective?

what is the color of money you need
What is the color of money you need?

Going to spend some time on this

Balance Sheet

Income Statement

Assets = Liabilities + OE

Net Income = Revenue - Expenses

You

+$10

Cash

+$100

Paid-in capital

+$90

  • Gift?
  • Loan?
  • Equity?
tell me about transactions
Tell me about “transactions”

Management

Decisions

Products

Information

Customer

Transactions

Data

Analyze

the

Transaction

Measure

Categorize

& Record

Synthesize

and

Report

Accounting

Support for decision-making about investments

Investments

financial statements
Financial statements

Capture data in ways to facilitate decision-making

Statement Purpose

Balance sheet Statement of financial position

Income statement Profit and loss

Statement of cash flows Solvency

Change in Owners’ equity Changes in wealth

Dr. Drobek will come back to this point in a few minutes ….

financial statements1
Financial statements

OK create data to facilitate ‘start-up’ decision-making

tell me even more
Tell me even more

1

2

3

Exactly HOW do you create value?

Is a

result

of ...

Which is

measured

by ...

Which is the

result of ...

Overall

Business

Success...

Revenue

Growth

Owner’s

Equity

and

Stock

Price

Net Profit

After Tax

Operating Cost

Reduction

After

Tax

Cash

Flow

Tax

Minimization

Fixed Capital

Efficiency

Return on

Net Assets

Working Capital

Efficiency

developing financial projections
Developing financial projections

Central to your plan but process is iterative and takes time

  • Start with basic sales projections
  • Enough to overcome cost of goods?
  • Enough to be worthwhile to investors?
  • What can I control?
  • What things can’t I predict?
  • Actually, a lot of things might change
    • Scenario analysis becomes central to risk management
    • Is the “idea” really a “greater good” idea?
developing financial projections1
Developing financial projections

Life with paradox: Management is a balancing act

developing financial projections2
Developing financial projections

Best to “just do it!”

  • You will work through a simple financial projection for your business concept
  • Sample pro forma readily available.
  • Keep “mapping” your ideas against:
    • Potential transactions
    • Business purpose
    • Scenarios
business model
Business Model

A company’s method for making money in the current business environment

  • How do we make money?
  • Whom do we serve?
  • What do we provide?
  • How do we differentiate and sustain competitive advantage?
  • How do we provide our product or service?
whew let s get to the finding part
Whew! Let’s get to the “finding” part

Gifts: Spend some time discussing the basis for each

Family, friends, and …

1.

2.

3.

Foundations …

Government (SBIR, STTR) …

more on the finding part
More on the “finding” part

Loans: more time discussing the basis … note “investors”

Family

1.

2.

3.

Banks

Investors

yet more on the finding part
Yet more on the “finding” part

Equity: Yet even more time discussing the basis

Family, friends, sweat …

1.

2.

3.

Investors

VC

revisit the plan
Revisit “the Plan”

What if I need more than I asked for?

revisit the plan1
Revisit “the Plan”

Specifically, what variance occurred?

  • General outline for estimating new venture cash flows.
    • Start-up, the initial outlay.
    • Sales forecast, units and revenues…develop & document assumptions.
    • Cost of sales and expenses.
    • Assets—new assets to be acquired, including working capital.
    • Depreciation.
    • Taxes and Earnings.
    • Summarize and combine—adjust earnings for depreciation and combine it with the balance sheet items to arrive at a cash flow estimate.
proforma
Proforma

A view of the future

  • Financial statements for a new venture are “pro forma”.
    • What financial statements will be if planning assumptions are true.
    • Financial projections…..project the firm’s financial statements into the future.
  • Hard to forecast a new operation --
    • No history on which to base projections.
    • Maybe refer to Pro forma Excel Template at this point (or later!)
debt and equity finance
Debt and equity finance

Measures the mix of debt and equity within total capital.

An important risk measurement - a high debt level burdens the income statement with excessive interest making failure more likely.

Debt to Equity Ratio = Long Term Debt : Equity

Debt to Equity = $6,200 : $3,300 = 1.9 : 1

(Stated as 1.9 to 1, since $6,200/$3,300 = 1.9)

A high debt ratio is viewed as risky by investors.

What is your risk tolerance?

debt and equity finance1
Debt and equity finance

The color of money dictates where you find it!

  • Capitalization / Capital Structure includes both debt and Equity.
  • Firms spend two kinds of money…
    • Day-to-day funds – come from normal profits, support routine activities.
    • Large sums needed for major projects and to get businesses started - comes from selling financial assets.
        • Borrowing money: Debt Financing
        • Selling stock: Equity Financing
summary
Summary

The color of money dictates where you find it!

  • Consider the journey carefully
  • Know exactly what you are looking for and why
  • Know what you will do if you don’t get what you want
  • Work on the “elevator pitch” every day
  • The money IS there, it just has to align with your proposed business.
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