Finance in brief

8/14/2019 Finance in brief

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2001J.Kreisel- GENES

Joerg KreiselInternational Consultant

Finance in Brief

ESA SME Training

Course B: Financing Innovative ProjectsESTEC, Noordwijk, 17-21 September 2001

JOERG KREISELInternational Consultant

&Partner @ GENES GmbH Venture Services

Germany


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What do We Need to Know:The Big Picture

Finance Is Much More than Figures & Money! It Is Key to Success!

Dimensions of Finance

Sorts of Finance

Sources of Finance

Stages of Development & Phased Financing Approach

The Financials

Valuation & Return Issues

Finance Drivers

The Challenge is: How to get Started & How to Do it Well! (Help)

The Focus is Not Budget or Project Finance!


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Genesis of New Commercial Business

0 Idea Business Plan Commercial Business

Challenge 2

Professionalism

Challenge 3

Implementation

Real World Issues

CreativityAssets

Know-How

Capacity

People

Market & Business Case

Experience & Know-howSexy Story & USP

Finance (internal)

Support

People

Startup Activities

Management / PeoplePartnership

Finance (internal & external)

Organization & Structure

Advice

Challenge No. 1

Creativity

Requirement & Boundary Condition: Long-Term-Strategy / Policy(Vision, Business Acumen, Commitment, Intruments/Processes, Advice )

Status

ActivityPeople

Effort (EUR) ~50-200k ~200-2.000k ~2.000-20.000k

Core or Exit?

Go / No-Go

Go / No-Go Go

J. Kreisel/GENES


4/202001J.Kreisel- GENES


New Business Creation Process

from Complexity to Feasibility

IdeaBusiness

PlanAlternatives

Growing Complexity Growing Feasibility

Gadget

(Technology)

Strategy/Policy

(Economy)

GOALS ?

Markets

J. Kreisel/GENES

Already at this Stage

Financing Is Crucial




Finance in Brief- Dimensions

Types of Finance

What?

Financial Needs

What For?

Sources of Finance

Where From?

Instruments

How?

Seed/Start-Up

Growth

MBO/MBI

Diversification

R&D Finance Project Finance

Joint Ventures/ Internal Ventures

Subsidiaries

Mergers & Acquisitions

Consolidation/Turn-Around

etc.

Equity

Quasi-Equity

Debts & Loans

Long Term Loans

Short Term Credit Lines

Mezzanine Finance

Bridge Finance

Leasing

Factoring

Subsidies

Other Supporting Programs

etc.

Fixed Assets

Intangible Assets

Tangible Assets

Financial Assets

Current Assets

Stocks/Inventories

Receivables Liquidity

Projects

Losses

etc.

Supporting the Due-Diligence Process

Business Plan

Private Placement Memorandum

Public Placement Document

Bank/Investor Relations

Venture Managers/Intermediaries

Commercial

Space

Business

Internal

Entrepreneurs/Founders

Internal Financing

Private Sources Employees

External

Banks

Public Participation Companies

Venture Capitalists

Stock Markets

Industrial/Strategic Investors

Public Bodies

Employee Participation Models

Underwriters

Investment Banks

M&A-Consultants

Reasons for FinancingWhen?

GENES




Investors

Lenders

Public

Business

Sorts of Finance

Equity

Debt

Grants/Subsidies

Revenues

Major Financing Needs

Losses Capital Investments




Equity vs Debt - Simplified Definitions

Equity = Liable Capital Is Provided by Investors

Is Capital Gains Oriented (No Interest Payments)

Dividends Are Being Paid Performance-Related

Does Not Require Collateral (= Unsecured)

Covers the Business Risk

Defines Shareholder Structure

Debt = Basically a Loan

Is Typically Provided by Banks

Requires Interest Payments & Repayments (Scheduled) Requires Collateral (Needs to be Secured) & Healthy Equity Ratio

Interest Payments Are Not Performance Related

Reduced Risk/Risk Bearing: Different Risk Classes

Does Not Represent Ownership in the Business

Mezzanine: Semi-Equity &/or Semi-Debt

Creates a Company or FinancesGrowth, Consolidation, Turn-Around ...

Covers Start-Up Losses

Enables for Further Financing

Creates Good Standing

Requires Business Plan, Partnership,Risk Readiness & Upside Potential

A Buffer When Something Goes Sour

Provides Cash

for Investments,

Stocks, Receivables,

Project Finance ...

Requires the Ability

to Serve the Loan and

a Good Standing




Equity Classes & Venture Capital Players

Equity

Private EquityPublic Equity

Main Market Parallel Markets Venture Capital Later-Stage Equity

Independent

Corporate

Captive

Business Angels

Mezzanine

Independent

Corporate

Captive

-

MezzaninePre-IPO

GENES


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Sources of Finance - Young/Growth Business

Internal Entrepreneurs/Founders

Sweat Equity

Contributions in Cash Contributions in Kind

Shareholder Loans

Internal Financing

from Cash Flow

(by Asset Stripping)

Private Sources

Family

Friends

Business Angels (passive)

External

Banks

Public Participation Companies

PE & Venture Capitalists

Stock Markets

Industrial/Strategic Investors Public Bodies

Employee Participation Models

Underwriters Investment Banks

M&A-Consultants

Business Angels (active)

J.Kreisel - GENES


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Profil/Terms of Conditions

Image

Financial Strength

Continuous Coaching and Monitoring

Market Know-How/Expertise

Antitrust Issues

Interest Conflicts

Decision Making Policies

Readiness to Take Risk

Independence to Act (Management) Timing Aspects

Value Adding

Searching Financial Partners (Companies)


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Profile of Early-Stage Equity Investors

Understanding of Financial Need good weak

Ability of Further Financing high low

Decision Behavior assessable in-assessable

Readiness to Take Risk high low

Value Adding (Industry) high low

Value Adding (Lifecycle) high low

Image of Financial Partner good less good

Term of Partnership short long

Impact by Financial Partner high low

Independent Venture Capital & Active Business AngelIndustrial Investor

Passive Business Angel

GENE


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Lifecycle Technology-Based Start-Up: e.g. SpaceProfit

t

Product

Development

Market

Entry

Market

Penetration

Market

Diffusion

100% 66% 50% 33% GENES

Equity(Semi-Equity)

VENTURE

EquityMezzanine

Debt

VENTURE

DebtDebtMezzanine

Equity

(Stock Markets)

Equity?Project Budget ?

VENTURE

Early-StageSeed Start-Up 1st Round

Later-StageGrowth/Expansion Maturity/Bridge Stagnation

Foundation

R&D

Optimal

Equity-Ratio

GENES


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Financials

The Financials Are Forecasting (Over the Planning Period) The Financial Needs of a Business

How It will Be Financed

How Profitable & Stable It Will Develop

& Allow Financial Engineering

The Financials Consist of the Following Elements (e.g. in the Business Plan):

Profit & Loss Account/Income Statement (Costs/Profitability/Effectiveness)

Balance Sheet (Status/Assets/Financing) Cash Flow Statement/Liquidity Plan

Financial Plan

Financial Needs

Financial Sources/Structure (Shareholder Structure/Valuation over Time: Dilution Effects)


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P&L, Balance Sheet & Liquidity Plan

Sales/Revenues

- Costs of Goods Sold

= Gross Margin/Gross Profit

- Expenses/CostsPersonnel

Administration

R&D

Marketing & Sales, etc.

Depreciation

= Operating Result (EBIT)

+/-Financial Income/Expenses

= EBT

- Taxes

Net Income (Loss)

Assets

Fixed Assets

Intangible Assets

Tangible Assets

Financial Assets/Inv.

Current Assets

Stocks/Inventories

Receivables/Debtors a.o. Securities/Investments

Cash

Prepaid Expenses

Equity & Liabilities

Shareholders Equity

Subscribed/Share Capital

Capital Reserve

Revenue Reserve

Retained profits/

Acc. Losses b.f.

Net Income/Loss for theYear

Accruals/Provisions

Liabilities/Creditors

Deferred Income

Profit & Loss Account

Balance Sheet

Beginning Period Cash

+ Income (Period)

- Expenses (Period)

= Ending Period Cash= Liquidity(MUST be >0!)

Liquidity Plan

Impact

Impa

ct


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Valuation

Analytical Methods Others

Asset-Based(Balance Sheet)

Net Asset Value

Earnings-Based(Profit & Loss Account)

Net Present Value (NPV)

Discounted Cash-Flow

Price/Earnings-Ratio (P/E)

X-Based

Strategic (Synergy, Market..)

Rules of Thumb

Analogy

Stomach

Selected Valuation Techniques(Unquoted Companies; otherwise Share Price)

Valuation Is an Art Form and by no Means an Exact Science!


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Valuation (contd)

Factors to Be Taken Into Account

Investors Return Needs

Size of the Equity Stake & Value Adding Possibilities

Reliability of Business Plan Forecast

Exit Multiple Potential/IRR

Exit Timescale

Exit Route (IPO, Trade Sale, Buy-Back, Liquidation)

...

But Also

Quality of Management Team

Proprietary Nature of Product or Service

Market Share (Vulnerability)

Technological Trends

...

Valuation Is Based on Business Plan

Based on Income Statements/Balance

Sheets

Typically Used:

Future Earnings Figures Multiplied by a

P/E-Ratio (Price/Earnings)

Helpful: P/E-Ratio of Comparable Quoted

Stock ./. 25-33% Discount

Discounted Cash Flow Method

Alternative for Profitable Companies:

Future Maintainable Earnings Stream to

Be Expected for Next 3-4 Years to

Generate a Payback-Ratio (Multiple)

(Financial Equity Investors)

The Net Present Value Method Is Not the Holy Grail When Co-Financing is Needed!

Legal Issues (Handling/Protection of IPRs, etc.) Not to Be Underestimated!


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Return Issues

What is a Return (on Investment?): Output(t)-Input(t)

Input: Equity/Debt, etc.

Output: Dividends/Interest Payments/Capital Gains

Return Measures

Return on Investment (ROI) = (Internal Rate of Return IRR)

Be Careful When Computing (Monthly, Annual, etc.)

Perspectives

The Companies View

The Investors View

All Forecasts Are Only As Good As the Assumptions Used

Return Expectations Rise According to the Risks Involved


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Finance Drivers

Whos Interests Are Driving the Financing?

Financiers

Companys

Managements

Shareholders

The Business PlanManagement

Market

ProductReturn/Exit

Business Nature&

Financing Needs

Environment / Climate

Technology?

l i i S f S


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- 1

Example:Financing Strategy for WINS

3 4-1021Year - 5 - 4 - 3 - 2

FinancingFinancing

Start-up Phase

Ground Segment Procurement

Satellite Production. and Manufacturing

Initial PublicOffering (IPO)

WINS Development PhasesWINS Development Phases

Total Need:

1 Billion EURO

Launch

Base Unit Procurement

Virtual CompanyFounders

Venture

Capitalist

Debt

Financial

Investor 2

High Yield

Bonds

Total Debt:

545 Million EURO

Total Equity:

525 Million Euro

Debt

High Yield

Bonds

Strategic

Investor

Debt

Financial

Investor 1

Debt


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Contact


Space Com mercialization, Business & FinanceCoaching of Com mercial Projects

Fund Raising Support & Investor RelationsVenture Capital

Education & TrainingInternational Connectivity

Com municationGeneral Advice

E-mail: [email protected]

(Joerg Kreisel -Partner @ GENES Gmbh Venture Services)

Documents

Finance in brief