AVB II 2006 Jay A. Smith 1 Classes 10-11 Venture Business Finance (continued) Raising Capital and Bootstrapping

AVB II 2006 Jay A. Smith

1

Classes 10-11Venture Business Finance (continued)

Raising Capital and Bootstrapping

AVB II 2006 Jay A. Smith2

Revised Class Schedule as of 1/19

⑧⑨ 　 1/12( 金 ) 14:30-17:40 More Finance & Accounting/Business Plans & Assignment

⑩⑪ 　 1/19( 金 ) 14:30-17:40 　 Capital, Financing & Bootstrapping/Business Plan Overview⑫⑬ 1/26( 金 ) 14:30-17:40 Special Topics In Venture Business (Joya) /Business Plan Workshop⑭⑮ 2/2( 金 ) 14:30-17:40 　 Final Student Business Plan Presentations

[email protected]

www.venturesmith.us


Today’s Topics Business Plan Presentations Finance

Forecasting Review Financial Management & Bootstrapping Investors and Investments

Nobel Peace Prize


Final Assignment ２月２ ? 日　 PowerPoint (15 minute +Q&A) (J/E)

Springboard format www.connect.org/programs/springboard/documents/SpringboardPresentationTemplate.ppt

Demo/prototype Package for soap… Mock-up HP…

Marketing Poster/Advertisement, etc… ２月５日　 Short (3-5p) Business Plan (J/E)

Picture Perfect +


A Good Plan Concisely Explains… Why this is a great idea How it will be executed How return will be maximized How risk will be minimized What is the sustainable competitive advantage

/ barriers to entry (being copied)


10 Characteristics for Success

1. Provides value/solves problem

2. Large Market Opportunity

3. Growth

4. Repeat sales/recurring revenue

5. Brand Strength

6. Special know-how

7. Sustainable & Defensible

8. Creates many supporters

9. Unique, Something Different

10. Interesting & fun (Passion)

1. __________ ________ ___________

2. __________ ________ ___________

3. __________ ________ ___________

4. __________ ________ ___________

5. __________ ________ ___________

6. __________ ________ ___________

7. __________ ________ ___________

8. __________ ________ ___________

9. __________ ________ ___________

10. __________ ________ ___________

Your Company


Business Plan Questions What is the opportunity?

What is happening? Why? How big can it be? When?

What is the business strategy? Does it fit? Is it sustainable?

What is the business model? How do they make money?

Are these the right people? What is missing?

No. 1 merit No. 1 risk How much funding is

needed, really? Sales/Profit/Investment

Years 1-3 Confidence of it working

When will you know if it is working?

How/Why?


Sample Plan Presentation Outline: Company Name, Team Members (positions CEO, CFO…) Company Mission, Vision

Opportunity (what problem/opportunity are you addressing, how big, growth) Product/solution (diagram and/or prototype)

Business Model & Business Strategy Marketing Strategy

Customer/market size, customer segmentation, Product line, pricing, promotion, Distribution channel(s)

Operations Organization and personnel Production (purchasing, logistics) R&D, Product/Service Development

Finance Revenue Forecast How much investment needed & uses Breakeven Assumptions and Risks

FOCUS ON KEY ISSUES

And Highlights

For YOUR

Particular Business


Business Model 　“ Profit Engine” Revenue Sources Key Expenses Size (how big?, volume, scale)

Profit Sales - Product Costs Units Overhead = x - Year Unit Year Year)(

(Margin x Volume) - Overhead


Model Driven Pro-Forma P&LMonth

Assumptions for Model ISP 1 2 3 4 5 6 7 8 9 10 11 12 Year 1

Past Members 0 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751

3,000 acquisition cost New Members 333 333 333 500 500 500 667 667 667 667 667 667

5% attrition per month Lost Members 0 (17) (33) (48) (70) (92) (112) (140) (166) (191) (215) (238)

Total Members 333 650 951 1,403 1,833 2,241 2,796 3,323 3,823 4,299 4,751 5,180 5,180

Fee/Member 2,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Member Revenue 666,667 1,950,000 2,852,500 4,209,875 5,499,381 6,724,412 8,388,192 9,968,782 11,470,343 12,896,826 14,251,984 15,539,385 94,418,347

1,000,000 each 1,000 members Ad Revenue 0 0 0 0 1,000,000 1,000,000 2,000,000 2,000,000 3,000,000 3,000,000 4,000,000 4,000,000 20,000,000

Total Revenue 666,667 1,950,000 2,852,500 4,209,875 6,499,381 7,724,412 10,388,192 11,968,782 14,470,343 15,896,826 18,251,984 19,539,385 114,418,347

Support

1 per 100 members # of Staff 3 7 10 14 18 22 28 33 38 43 48 52 52

200,000 per staff Cost/Support 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000

Staff Salary 666,667 1,300,000 1,901,667 2,806,583 3,666,254 4,482,941 5,592,128 6,645,855 7,646,895 8,597,884 9,501,323 10,359,590 63,167,787

budget Marketing 1,000,000 1,000,000 1,000,000 1,500,000 1,500,000 1,500,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 19,500,000

budget R&D 800,000 800,000 800,000 800,000 800,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 12,400,000

budget SG&A 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 12,000,000

Operating Exp. 3,466,667 4,100,000 4,701,667 6,106,583 6,966,254 8,182,941 9,792,128 10,845,855 11,846,895 12,797,884 13,701,323 14,559,590 107,067,787

Operating Profit (2,800,000) (2,150,000) (1,849,167) (1,896,708) (466,873) (458,529) 596,064 1,122,927 2,623,448 3,098,942 4,550,661 4,979,795 7,350,560

Strategy Implication: Get More Members Sooner


Revenue Sources What are the revenue “streams” (sources)?

Sales Service fees Advertising Subscription

Single-stream, multiple-stream? How big? How Important? Growth Rate? Interdependence of streams? Loss leaders?


Revenue Models Subscription/Membership

Sports club, magazine, YahooBB, cable, NHK Volume/Unit-based

Restaurant, hair salon, clothing shop, taxi Advertising-based (user doesn’t pay or pays less)

Google, Broadcast TV, Newspapers Transaction Fee

Payment to conduct a transaction (Yahoo Auction, Ebay) Licensing/Syndication/Royalty

Fee to use (or resell) product, service, or mark Snoopy, Hello Kitty, AP, Star Wars, The Beatles, Incredibles Software, Copyrights, Patents, Trademarks, Franchises


New York Yankees Revenues

Ticket Sales

Food & DrinksSales/Attendee

Price/ticket

# of Attendees

Attendees

# of Tickets

MerchandiseTotal Revenue

Television

Other

Cable Contract

Broadcast

Stadium Lease

MLB Sharing

Licenses


Key Expenses Cost drivers Types:

Variable (changes directly to volume) Semi-variable (increases in step-wise fashion) Fixed (do not change with volume of sales) Non-recurring (unusual or infrequent expenses)

Relative size? Importance? How will they change over time


New York Yankees Expenses Player salaries Management salaries Stadium operations Insurance Advertising Franchise Fee Taxes Lawyers

Mostly Fixed Costs


Forecast Income StatementSUPERIOR SOFT CORP. 2005

Price/ Unit 400Units Sold 10,000

Total Sales $4,000,000 100%

Cost of SalesMaterials Per/ unit 10 $100,000 3%Manufacturing Per/ unit 15 $150,000 4%Commissions Sales Price 10% $400,000 10%Shipping Per/ unit 8 $80,000 2%Total Cost of Sales $730,000 18%Gross Profit $3,270,000 82%

Operating CostsSalaries budget $800,000 20%R&D budget $500,000 13%Rents budget $100,000 3%Marketing budget $300,000 8%Other budget $100,000 3%Total Operating Costs $1,800,000 45%

Operating Profit $1,470,000 37%Non- Operating Costs $50,000 1%Pre- Tax Profit $1,420,000 36%Taxes Rate 30% 426,000 11%Net Income 994,000 25%


Breakeven ExamplesSoftware Software Computer Computer

Unit Price $400 $200 $400 $500

Cost of SalesMaterials $1 $1 $200 $200Manufacturing $10 $10 $100 $100Packaging $20 $20 $20 $20Commissions $20 $20 $10 $10Shipping $10 $10 $30 $30Total Cost of Sales $61 15% $61 31% $360 90% $360 72%

Contribution $339 85% $139 70% $40 10% $140 28%

Fixed CostsSalaries $1,000,000 $1,000,000 $1,000,000 $1,000,000R&D $500,000 $500,000 $100,000 $100,000Rents $100,000 $100,000 $100,000 $100,000Marketing $300,000 $300,000 $300,000 $300,000Other $100,000 $100,000 $100,000 $100,000Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000

Total Fixed Costs $2,000,000 $2,000,000 $1,600,000 $1,600,000Contribution $339 $139 $40 $140Breakeven Units 5,900 14,388 40,000 11,429


Guy Kawasaki Build Bottom-up Forecast Under-staff and outsource Start as Service Business

Focus (pick your battles) Position against the leader/standard way Direct to customer Ship, then test (except medical)

Forget “Proven” team Function over Form Build a board of director, advisors Get some supervision

Face reality Concentrate on the Big stuff Execute…


Guy’s Guide to Bootstrapping Manage For Cash Flow

Low capital requirements Short sales cycle (<1 month) Short payment cycle (<1

month) Recurring revenue Word of mouth advertising


Stocks & Bonds


Major Types of Securities Debt – (Notes, bonds)

Promise to repay fixed amount Plus fixed interest payments No ownership

no share in “upside” of company Not common for venture companies

Unpredictable cash flow = risk due to payment commitment

Equity – share of ownership

Common Stock Preferred Stock

Higher ranking than common stock Anti-dilution clause, redemption rights,

liquidity preferences, director appointments, dividend preference,


Balance Sheet

Assets Debt & Equity

Short Term Assets• Cash• Receivables• Inventory

Long Term Assets• land• buildings• equipment

Short Term Debt• Payables• Short term loans

Long Term Debt• bonds• mortgages

Equity• stock• retained earnings

ASSETS = DEBT + EQUITY

• EQUITY = ASSETS – DEBT• DEBT = ASSETS – EQUITY

“LEVERAGE” = DEBT / EQUITY

• Assets: things the company owns• Equity: ownership of the company (stock)• Debt: what the company owes (loans, bonds)

Internally generated from Profits. Sustainable source to fund growth


Park24 Comparative Balance Sheet

Current Assets

PP&E

Long-Term Assets

Intangible Assets

Total Assets

Investments

Current Liabilities

Long-Term Liabilities

Shareholder Equity

Retained Earnings

Common StockAdd’l Paid In Cap.Revaluation

AS OF DATE


Different Investments & Risks

Perceived Risk

Potential R

eturn

The higher the perceived riskthe higher the potential return required

Treasury Notes (1%-2% per year)

Corporate Bonds

Fortune 500 Stocks

Small Cap Stocks

Venture Companies (20%-30%/year)


Types of Investors Founders, employees Friends & Family Angels Venture Capital Firms (VCs) Corporations (financial / strategic investors) Other Investment Funds & Partnerships Public Investors

Individuals Mutual Funds, Pension Funds, Insurance Companies, Etc.

Institutional Investors

Lower

Higher

RIS

K

Not all money is equal - not all investors are equal


Venture Investments & Investors

Seed 1st Round 2nd Round 3rd + Round IPO Follow-on

Seed/early stage

Late-stage Mid-stage

Public

PrivateC

ompany

Investment

s

Attempt to stage each investment round after a business milestone that reduces a significant risk

Key staff Product Done Key Partner Signed Strong Sales [capital market ready]Development Stage Execution Stage Expansion Stage

Higher Risk/Lower Price Lower Risk/Higher Price

Investor Profit = Stock Sale Price – Stock Purchase Price


Venture Capital Firm Partnership created to manage investments in

venture businesses Act as general partner – actively manage the fund Manage one or more venture funds ($5mil - $1billion) Biz. Model: sharing return on fund & management fees

Investors in VC funds Limited partners May be individuals or organizations

Focus on certain technologies, investment stages Major VC firms may receive 1000+ b-plans / year


One Mid-Stage VC’s Investment Rules Must have real customers Must have defensible technology Must have clear path to market Bet on proven markets (e.g. software) Doesn’t require huge amounts of capital to reach

profitability/breakeven (software vs. telecom) Excellent management 20x opportunity

(Michael Halloran, Esq.)


Exit Strategy – How to Get Return Investor profit = sales price – purchase price IPO - Initial Public Offering

Private Stock is now publicly tradable Can be sold in regular trading or secondary

Merger & Acquisition　 Cash Flow – dividends & interest Liquidation (Bankruptcy破産 ) -- NOT A GOOD OUTCOME

Employees Suppliers Debt holders Preferred shareholders Common shareholders


Valuation Valuation = “price” of the whole company

Market Capitalization = Stock Price x #Shares Enterprise Value = Market Cap + Debt - Cash

Valuation depends on both company and market for stocks Public stocks are priced in an open market Private company stocks are usually negotiated in a

“deal” between company and “lead” venture capital investor


Many Factors Affect Valuation Opportunity-Related

Is this a good business opportunity? How big a business can this be, when?

Company-Related Is it a good business strategy? Is this a good team? What are the business strengths/weaknesses? What are the biggest risks, challenges? Is there a sustainable competitive advantage? What else is needed to make this work? What questions are unanswered? How badly does the company need financing?

Capital Market-Related What are prices for companies that are similar? How much VC competition is there for the investment? What are the public stock markets doing? (up, down, sideways)


Valuation Valuation of company = price for the whole company

Valuation = current stock price x total shares Example 1: $30.00/share x 5,000,000 total shares = $150,000,000

Determined by what investor will pay to own piece of company Example 2: VC buys 25% of company for $2 mil. = $8,000,000

valuation

$8,000,000 “post-money” valuation… $6,000,000 “pre-money” valuation

(pre-money = post-money – investment : $8 - $2 = $6million)

$2 million

$6 million


Investment Valuation CalculationSUPERSOFT CORP. Now YEAR 1 YEAR 2 YEAR 3

Sales 10,000,000

Net Income 1,000,000

Price/Earnings Comps: 15 x 15,000,000

Future Value 15,000,000

Required Rate of Return 30%

Number of Years 3

Current Value to VC future value / (1+rate) years 6,827,492

15,000,000 / (1-.30) 3

VC Ownership

Investment 2,000,000

Ownership Required 29% 4,394,000


The Deal Simple, fair deals are best

Valuation – supply & demand Terms – typically preferred securities Good deal does not hinder future investments

Process Presentation Due Diligence Negotiation Lots of Documents: Term Sheets, Purchase Agreements,

Shareholder Agreements, Stock Certificates


2006 Nobel Peace PrizeMuhammad Yunus & Grameen Bank

Dr. Muhammad YunusFounder, Grameen Bankhttp://www.grameen-info.org/

2006 Nobel Peace Prize Ceremonyhttp://nobelprize.org/award_ceremonies/ceremony_oslo/video/2006/index.html


Cox Bazar

Bangladesh

Dhaka (Capital City)

Bengal Tiger


Bangladesh Surrounded by India and Bengal Sea Size: 144,000 km2 (Japan= 377,000 km2 ) Population 147 million

Population growth was among the highest in the world in the 1960s and 1970s, when the count grew from 50 to 90 million

Ffertility rate is now 3.1 children per woman, compared with 6.2 three decades ago.

Population is young, 0–25 age group comprising 60%, while 3% are 65 or older.

4,000 year old culture

88% Islam, 11% Hindu

1971 Declared independence from Pakistan

2004 Per capita income: US$440 (~ \50,000/year)

Google Map


2004 Flood Recent Major Floods: 1988, 1989, 1998, 2000, 2004

2004 Flood Photos


Political, Economic, Natural Challenges Two-thirds of Bangladeshis are farmers, more than three quarters of Bangladesh’s export

earnings come from the garment industry, which began attracting foreign investors in the 1980s due to cheap labour and low conversion cost. In 2002, the industry exported US$5 billion worth of products. The industry now employs more than 3 million workers, 90% of whom are women. A large part of foreign currency earnings also comes from the remittances sent by expatriates living in other countries.

Since 1990, the country has achieved an average annual growth rate of 5% according to the World Bank, despite the hurdles. The middle class and the consumer industry have seen some growth. In December 2005, four years after its report on the emerging "BRIC" economies (Brazil, Russia, India, and China), Goldman Sachs named Bangladesh one of the "Next Eleven,"[30] along with Egypt, Indonesia, Pakistan and several other countries. Bangladesh has seen a sharp increase in foreign direct investment. A number of multinational corporations, including Unocal Corporation and Tata, have made major investments, the natural gas sector being a priority.

According to the World Bank's July 2005 Country Brief: "Among Bangladesh’s most significant obstacles to growth are poor governance and weak public institutions."[29] Obstacles to growth include frequent cyclones and floods, inefficient state-owned enterprises, mismanaged port facilities, a growth in the labour force that has outpaced jobs, inefficient use of energy resources (such as natural gas), insufficient power supplies, slow implementation of economic reforms, political infighting and corruption.


Grameen Bank “Microcredit” Process Voluntary formation of small groups of five people to provide mutual, morally binding group guar

antees in lieu of the collateral required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well. No Collateral, No Legal Instrument, No Group-Guarantee or Joint Liability . the group is not required to give any guarantee for a loan to its member.

Average loan size about $100 - $140, Four interest rates for loans : 20% (declining basis) for income generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for Struggling Members (beggars).

The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities

Telephone-Ladies Grameen Bank has provided loans to 268,298 borrowers to buy mobile phones and offer telecommunication services in nearly half of the villages of Bangladesh where this service never existed before. Telephone-ladies run a very profitable business.

Intensive discipline, supervision, and servicing characterize the operations of the Grameen Bank, which are carried out by "Bicycle bankers" in branches


Grameen Bank Success Story Total number of borrowers is 6.83 million,

97 per cent of them are women Recovery Rate 99 per cent (?) 58% of borrowers have crossed the poverty

line Impacts 1-2% of Bangladesh GDP


Local Solution to Local Problem Grameen Bank model is highly culture-sensitive and works o

nly in the hands of the local bankers. Presence of foreigners is found to have dis-empowering and dis-franchising effects. North-South "cooperation" is found to be particularly damaging (as one can imagine).

The Management-Expense-Ratio (MER) required of a typical Grameen Bank replication can not sustain the cost of involving Western aid-workers, either directly or indirectly. The MER of a Grameen Bank replication is based on the expectation that the workers salaries will be in line with the average national income of the country where the replication is being attempted (that is $20 - $100 a month!).

http://www.gdrc.org/icm/grameen-supportgrp.html