Presents: Finding Start-Up Capital Students to Start-Ups Entrepreneurial Skills Workshop Series

Presents:

Finding Start-Up Capital

Students to Start-UpsEntrepreneurial Skills Workshop Series


Who or What is SCORE?Who or What is SCORE?

What is “Students to Start-ups”?What is “Students to Start-ups”?

Students to Start-Ups

I. Workshop Series

I. One-on-One Counseling

II. Future (web and/or pod casts, CD, etc.)

Finding Start-Up CapitalFinding Start-Up Capital

By Jim Chamberlain

Start-Up Costs & Capital SourcesStart-Up Costs & Capital Sources

Start-Up Cash Investment Fixed Capital Investment

Start-Up Growth Maintenance

Working Capital Investments Start-Up Growth Maintenance

Cash Outlays Until Breakeven


Fixed Capital How do you calculate how much your business needs

at start-up and to maintain growthDo not confuse the justification with how it will be

financed. Justify first, then determine how to finance the investments

Sales Forecast - 24 to 36 monthsHow much “capacity” investment is required?How fast will you grow? New products or services?


Working Capital InvestmentsThe excess of current assets over current

liabilities or the amount of cash required to fund the business on a day-to-day basis

An indication of short-term financial strengthDon’t be under-capitalized

Working Capital = Current Assets minus Current Liabilities


Working Capital InvestmentsHow do you calculate how much your business

needs at start-up and during periods of growth?

Sales Forecast – 24 to 36 MonthsWorking Capital increases and decreases with

sales. It is a variable investment.Example: Figure $.20 increase for every

incremental sales dollar increase.

Start-Up Costs (Investments) Start-Up Costs (Investments)

Fixed CapitalOffice Furniture $ 2,000

Vehicles 20,000

Tenant Improvements 10,000

Printing Machines 20,000

Total Fixed Capital – Start-Up $ 52,000

Vehicles $ 20,000

Printing Machines 10,000

Total Fixed Capital – Year Two $ 30,000

Start-Up Costs (Investments) Start-Up Costs (Investments)

Working CapitalOperating Cash $ 10,000

Inventories 15,000

Prepaid Rent 5,000

Prepaid Insurance 8,000

Total Working Capital – start-up $ 38,000

Cash losses – first six months $ 25,000

Total Working Capital – Year One $ 63,000

Required Working Capital – Year Two $ 10,000

(Based on a $50,000 increase in sales)

Capital SourcesCapital Sources

How Businesses Are Really Funded Seed Cash – Percentage of Inc 500 CEOs

surveyed (2002) who launched their company with seed capital (including personal assets) of: Less than $1,000 14% $1,000 - $10,000 27% $10,001 - $20,000 10% $20,001 - $50,000 15% $50,001 - $100,000 12% More than $100,000 22%


Does seed capital effect long-term profitability or growth rate?

Only 65% of companies that started with more than $100,000 were in the black after one year compared with 83% of those businesses that were launched with $1,000 to $10,000.

Source: Inc Magazine


Percent of CEO’s who got some capital by these means:

Private Equity 82% Personal Loans 19% Bank Debt 19% Venture Capital 9% Supplier Financing 5%

Source: Inc Magazine


Equity Funding Financing your business by selling a minority equity

interest. This cash is less risky but more expensive. Valuation issues must be addressed. Initial and target valuation calculations must be made.

43% of founders started the company alone The rest had:

1 partner 12% 2-3 partners 36% 4+ partners 9%


Private Equity and Venture Capital Funding The average angel investor is:

Between 48 and 59 years oldHas a postgraduate degreeHas experience in management and building a

companyTypically invests between $25,000 and $250,000

per deal in one to four deals per year


Private Equity and Venture Capital Funding Angel investors tend to like proprietary products and

non-capital intensive businesses. They anticipate future rounds of financing.


Private Equity and Venture Capital Funding Angel investors look for:

1. Market niches – potential to dominate or be #1 or #2 in the industry

2. Advanced technology and a disruptive model (going to change things)

3. Compelling and sustainable advantage – not “me too”

4. Planned exit in 4-6 years

5. Reasonable valuation

6. Performance equal to 5 -10 times original investment

7. ROI equal to 30-40% per year

8. Sitting on your board but not having control

9. Higher risk business models


Bank Loans or Debt Financing 1. Banks will loan 2.5 – 4.0 times Cash Flow – usually based

on EBITDA

2. Banks would like to see a 3-5 year track record or a history of business experience

3. Debt is less expensive but more risky than equity

4. Banks will not lend on pure projections: You must have a history of cash flow or a current personal guarantee.

5. Three sources of repayment Cash Flow Liquidation value of assets Personal Guarantees of each 25% equity owner


Negatives to a Banker 1. Getting involved with something outside your normal business model

2. Absentee management / ownership

3. Divorce

4. Burnout

5. Growing beyond owner’s capacity to operate the business

6. Parent turns over business to son or daughter

7. Computer conversions

8. Relocation and / or expansion of facility

9. Companies “hit the wall” at: Manufacturing companies at $2 million in sales Distribution companies at $4 million in sales Retailers at 3 stores and distance Service companies at 12 employees Contractors at 2 or more big jobs


Questions a Banks Will Ask You: 1. Do you have a Business Plan?

2. How much experience do you have in this industry?

3. How is your credit and how much personal debt do you have?

4. How much is your down payment? Is it at least 25%?

5. How much collateral do you have?

6. Who is the competition?

7. Do you have personal and business insurance?

8. Do you have services of an accountant and attorney?

9. Have you ever filed for bankruptcy?

10. Do you have 2-4 years of tax returns available?


Small Business Administration The SBA does not loan money. It guarantees (to the bank)

approximately 85% of the loan proceeds to you. Five to ten year payback terms. Interest rates of prime plus 2 – 4% depending on the program and terms.

This reduces the banker’s risk, thereby enabling the loan to be approved. They use basic credit standards: Character Management ability Cash Flow Equity Feasible Business Plan Sufficient collateral


SBA Eligibility (there are exceptions) Must be “for profit” Must be an operating company. SBA does not

allow speculation or investment companies.Must be a small business:

Manufacturing 500 -1,000 employees Wholesaling less than 100 employees Services receipts test for each

classification


SBA EligibilityCannot be a business in lending, life insurance, real estate

development or rental property.Gambling, promoting religion, pyramid sales plans, consumer

marketing cooperatives and persons of poor character are ineligible.

Individuals must be lawfully in the U.S. Business cannot be located outside the U.S.Import businesses may be ineligible

Go to www.SBA.gov for a complete list of ineligible businesses. Also, a good resource for minority and micro-loan plans.

ExitExit

Many of the CEO’s plan to cash out41% of CEO’s started the company with at least

one exit strategy in mind. Some had several:

Those strategies included: Going Public: 47% Selling to a private buyer: 80% Leaving the company to heirs: 7%


Mistakes Entrepreneurs Make When Raising Capital1. Don’t understand share prices or valuations2. Confuse broad market with served market3. Make unrealistic assumptions about an exit strategy4. Don’t understand long term capital needs5. Have no clue about competition6. Don’t understand that marketing beats technology 9 out of 10 times7. Write a poor executive summary8. Use “off the wall” numbers or pull numbers from thin air9. Lack focus; e.g. many products or niches10. Develop too simplistic of a market plan / analysis11. Underestimate expenses12. Rely on financial plans with major inconsistencies; e.g. numbers don’t match

or tie13. Speak in “techno-jargon”. No one understands what they are saying


Best Ways to Irritate a Private Investor 1. Lying to investors or not being forthright; omission of material

information

2. Inability to answer direct questions with direct answers

3. Surprises; e.g. problem with credit checks, hidden liabilities or debts

4. Over hype or exaggerate upside

5. Your story always changes

6. Arguing with investors

7. Late for meetings

8. Excessive secrecy or legalese; expect investor to sign NDA

9. Investing capital in fancy facility and furniture

10. Fail to attract top talent


Lease FinancingMany start-ups may want to consider lease

financing for their fixed capital needs.Leasing sometimes shifts the risk of ownership,

such as technological obsolescence onto the lessor thus freeing the lessee to finance working capital needs.

There also may be possible tax advantages in certain cases that makes leasing less expensive on an after-tax basis.

QuestionsQuestions

Jim Chamberlain

[email protected]

Additional ResourcesAdditional Resources

Webwww.SCORE114.org/business_library_3.html

http://www.score114.org/business_library_3.html

Additional ResourcesAdditional Resources

WebVenture Funding Blog http://

www.allensblog.typepad.com/

PeopleUCI Center for Entrepreneurship and Innovation

[email protected]

SCORE Orange County www.score114.org

http://www.allensblog.typepad.com/



mailto:[email protected]

http://www.score114.org/

UPCOMING WORKSHOPS

March 21st

Driving Growth Through Distribution Channels and Sales Management

April 4th Nuts & Bolts of Business Structure and Licensing

April 18th Refine Your Unique Value Proposition

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Thank You! Thank You!

Documents

Presents: Finding Start-Up Capital Students to Start-Ups Entrepreneurial Skills Workshop Series