1 Entrepreneurial Finance Business Entrepreneurship (BUS 301) Faculty of Management and Computing The Maldives National University Week 10 Chapter 13 13-2 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21 st Century (A Pacific Rim Focus) by Timmons et al. Results Expected 1. Examined critical issues in financing new ventures. 2. Studied the difference between entrepreneurial finance and corporate finance. 3. Examined the process of crafting financial and fund-raising strategies and a financial strategy framework, and investor preferences.
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
Entrepreneurial
Finance
Business Entrepreneurship (BUS 301) Faculty of Management and Computing
The Maldives National University
Week 10
Chapter 13
13-2 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Results Expected
1. Examined critical issues in financing new ventures.
2. Studied the difference between entrepreneurial finance and corporate finance.
3. Examined the process of crafting financial and fund-raising strategies and a financial strategy framework, and investor preferences.
2
13-3 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Entrepreneurial Finance
• Three core principles of entrepreneurial finance:
• More cash is preferred to less cash.
• Cash sooner is preferred to cash later.
• Less risky cash is preferred to more risky cash.
13-4 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Cash Flow Impacts
• Increase in sales.
• Customer defaults.
• Hiring/securing more space.
3
13-5 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
13-6 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Spreadsheet Mirage
• Only report and manipulate data.
• Need to know:
• Connections and interdependencies between:
• Financial structures.
• Business decisions.
4
13-7 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Spreadsheet Mirage
• Spreadsheets cannot model:
• Complex financial and
• Strategic interrelationships.
Financially knowledgeable CEO enjoys a
competitive ‘weapon’.
13-8 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
5
13-9 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Central Issues
• Value creation: • Who are the constituencies for whom value must be created
• Slicing the value pie: • How are deals, both for startups and for the purchases of
existing ventures, structured and valued, and what are the critical tax consequences of different venture structures
• Covering risk: • How much money is needed to start, acquire, or expand the
business, and when, where, and how can it be obtained on acceptable terms? What sources of risk and venture capital financing-s-equity, debt
13-10 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
6
13-11 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Owner’s Perspective
• Popular financial theories and models do not apply.
• Understanding limitations/assumptions underpinning popular models.
• Not suited to the ‘real’ world of entrepreneurial ventures.
13-12 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Owner’s Perspective
1. Cash and cash flow: • Cash flow and cash are king and queen in entrepreneurial
finance
2. Time and timing: • time for critical financing moves often is shorter and more
compressed
3. Capital markets: • they are frequently inaccessible, unorganized, and often
invisible.
4. Emphasis: • higher potential entrepreneurs invariably opt for the value
added (beyond money)
7
13-13 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Owner’s Perspective
5. Strategies for raising capital: • The concept of "staged capital commitments,“ and wise
entrepreneurs may refuse excess capital.
6. Downside consequences: • consequences for such entrepreneurs of running out of
cash or failing are monumental and relatively catastrophic, since personal guarantees of bank or other loans are common.
7. Risk-reward relationships: • Entrepreneurs or investors who create or recognize lower
risk/very high-yield business propositions, before others jump on the Brink's truck, will defy the laws of economics and finance
13-14 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Owner’s Perspective
8. Valuation methods: • The assumptions normally are irrelevant or grossly
misleading for valuation of smaller private firms because of dynamic and erratic historical and prospective growth curves.
9. Conventional financial ratios: • Current financial ratios are misleading when applied to
most private entrepreneurial companies
10.Goals: • Creating value over the long term, rather than maximizing
quarterly earnings.
8
13-15 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
13-16 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Defining Capital Requirements
• Opportunity lead and drives business strategy.
• Drives the financial requirements.
• Sources
• Deal structures
• Financial strategy
9
13-17 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Determining Financial Needs
• Asset needs.
• Operating needs.
• Need to ‘sweat the details’.
• Entrepreneur’s capacity can be stretched to the limit.
13-18 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
10
13-19 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Bargaining Power
• Three vital corollaries determining bargaining power:
• Burn rate
• Time to OOC (Out Of Cash)(when will the company be out of cash).
• TTC (Time To Close) time to close the financing and have the check clear.
13-20 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Free Cash Flow
• The core concept in determining the external financing requirements of the venture is free cash flow.
• The cash flow generated by a company or project is defined as follows: (free cash flow)
• Earnings before interest and taxes (EBIT).
• Less tax exposure (tax rate times EBIT).
• Plus depreciations, amortisation and other non-cash charges.
• Less increase in operating working capital.
• Less capital expenditures.
11
13-21 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Free Cash Flow
• Economists call this result free cash now.
• The definition takes into account the benefits of investing;
• The income generated;
• The cost of investing;
• The amount of investment in working capital and plant and equipment required to generate a given level of sales and net income.
13-22 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Operating Working Capital
• The definition can fruitfully be refined further.
• Operating working capital can be defined as follows:
• Transactions cash balances
• Plus accounts receivable
• Plus inventory
• Plus other operating current assets
• Less accounts payable
• Less taxes payable
• Less other operating current liabilities
12
13-23 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Operating Working Capital
• Finally, this expanded definition can be collapsed
into a simple one: • Earnings before interest but after taxes (EBIAT)
• Less: Increase in net total operating capital (FA + WC)
• Net total operating capital is defined as: • Increase in operating working capital
• Plus Increase in net fixed assets
13-24 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Factors Affecting Finance
• Accomplishments and performance to date.
• Investor’s perceived risk.
• Industry and technology.
• Venture upside potential and anticipated exit timing.
13
13-25 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Factors Affecting Finance
• Venture anticipated growth rate.
• Venture age and stage of development.
• Investor’s required rate of return or internal rate of return.
• Amount of capital required and prior valuations of the venture.
13-26 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Factors Affecting Finance
• Founders’ goals regarding growth, control, liquidity and harvesting.
• Relative bargaining positions.
• Investor’s required terms and covenants.
14
13-27 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
Factors Affecting Finance
• Operations financed through combination of debt and equity.
• Use of personal guarantees.
• Awareness of criteria used by various sources of funding.
13-28 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
15
13-29 © McGraw-Hill Australia Pty Ltd 2011 PowerPoint slides for New Venture Creation: Entrepreneurship for the 21st Century (A Pacific Rim Focus) by Timmons et al.
International Finance and Trade
• Role of the internet in finance.
• Acceleration of transactions and collections.
• Opportunities in foreign markets.
• Potential exchange rate issues.
Related Documents
