Finance For Generation X & Y - YES Aruba Launch Event

LOGO

Edward M Erasmus, MA

September 10, 2013

Finance for Generation X & Y

The future of startup funding in Aruba

Roadmap

Sources of financing

5 things to consider before seeking financing

Getting funded: what lenders look at

Creative funding alternatives

Finance: the science and the practice

Key takeaways

Startup Challenges

• No financial track record

• Lack of evidence of success

• Unknown/unconvincing business concept

• Scope of risk

• Doubtful financial projections

Finance: the science

• Funding of assets: own capital or borrowing from third parties

• Debt can increase a company’s return on equity

• But too much debt can take a company into bankruptcy

• How much debt can a company carry? Debt to equity ratio

Finance: the science

Golden rule in financing: • Current assets should be financed with short-

term debt

• Fixed (non-current) assets should be financed with long-term debt

Finance…

Finance is way more than just

“showing me the money”

Investment budgeting

Financing structure

Day-to-day operations

Scope of Corporate Finance

Three key questions in financing

1. What investments should the firm undertake? Capital budgeting decision

2. What is the best way to finance these long-term investments? Debt or equity?

Capital structure decision

3. How should the firm manage its short-term assets and liabilities, such as cash?

Working capital management

Finance: the practice

• It takes money to make money!

• Next to choosing the right products/services (the ‘BIG’ idea), getting the right funding might be the most important decision you’ll ever make for your business venture

• Its a daunting task

• Risky business (high failure rate)

Startups in Aruba

1 2 3 4 5 6 7 8 9 10 11

total company registrations 1181 1267 1216 1450 1390 1390 1245 1297 1088 1143 1124

1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

amount of companies registered

Total Company registrations

Source: PriceWaterhouseCoopers Aruba (2012)

Entry Patterns of businesses in Aruba 2001-2011

Startups in Aruba

Source: PriceWaterhouseCoopers Aruba (2012)

Year of establishment Percentage of companies that still exists after

0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year

2001 93% 84% 76% 69% 61% 55% 49% 46% 42% 39% 37%

2002 94% 83% 73% 66% 59% 52% 49% 43% 41% 39%

2003 91% 79% 69% 63% 56% 52% 47% 44% 41% - -

2004 94% 82% 73% 64% 59% 53% 50% 48% - - -

2005 94% 81% 72% 66% 61% 56% 54% - - - -

2006 95% 82% 75% 68% 64% 61% - - - - -

2007 92% 82% 73% 66% 61% - - - - - -

2008 95% 84% 75% 70% - - - - - - -

2009 93% 80% 74% - - - - - - - -

2010 94% 88% - - - - - - - - -

2011 95% - - - - - - - - - -

Average 94% 83% 73% 66% 60% 55% 50% 45% 41% 39% 37%

Startups in Aruba

Source: PriceWaterhouseCoopers Aruba (2012)

Year of establishment Percentage of companies that still exists after

0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year

2001 93% 84% 76% 69% 61% 55% 49% 46% 42% 39% 37%

2002 94% 83% 73% 66% 59% 52% 49% 43% 41% 39%

2003 91% 79% 69% 63% 56% 52% 47% 44% 41% - -

2004 94% 82% 73% 64% 59% 53% 50% 48% - - -

2005 94% 81% 72% 66% 61% 56% 54% - - - -

2006 95% 82% 75% 68% 64% 61% - - - - -

2007 92% 82% 73% 66% 61% - - - - - -

2008 95% 84% 75% 70% - - - - - - -

2009 93% 80% 74% - - - - - - - -

2010 94% 88% - - - - - - - - -

2011 95% - - - - - - - - - -

Average 94% 83% 73% 66% 60% 55% 50% 45% 41% 39% 37%

On average: seven out of ten new firms survive at least 2 years, half of the companies survive at least 5 years, a third at least 10 years.

Finance: generally two sources…

Capital/Equity Debt

Company

Sources of funds

Types of early stage financing

• Capital/Equity: – Own funds (savings)

– Angel investors

– Venture capital funds

– Private equity funds

• Debt (loans): – Bank / financial institution

Angel investors, VC’s, PEF’s

• Wealthy individuals

• Includes: FFF’s • Small investment

amounts • Little

involvement in day-to-day operations

• Corporate entities that use funds from other investors

• Large investments • Require seat in the

board • Control in

operations • Large stake in

company

• Usually family-owned firms

• Small & large investment amounts

• Networks • Some

involvement in operations

Debt: available in all ‘shapes’ and

‘sizes’

• Short-term: – Working-capital loans (credit lines)

– Credit Cards

– Etc.

• Long-term: – Non-revolving loans (asset-backed)

– Mortgage loans (property & building)

A third source…?

Capital/Equity Debt

Company

Sources of funds

Grants/Sponsors

Grants/sponsors

• Crowdfunding (donations/sponsors)

• Crowdsourcing (free knowledge/ expertise/resources)

• Government grants

Crowdfunding

Crowdfunding

Crowdsourcing

Alternative funding options

• Personal credit/Microfinance (VKB Aruba)

• Suppliers credit

• Franchise advances/loans

• Barter

• Business plan competition and other contests

• …..

5 things to consider before

seeking financing

• Create a business plan

• Do your homework

• Shop around

• Seek advice

• Have a Plan B

Startups funding in the U.S.

Source: U.S. Census Bureau (2012)

The future of startup funding in

Aruba

• Most startups do not have enough funds to launch their ideas.

• Possible funding aids: – Innovation fund

– Venture capital funds

– Academic (venture) funds

– Crowdfunding (donation-based/investment-based)

A win-win for the capital market

(lenders)

Initial funding (Zuckerberg & Saverin): around $20,000

Angel investor (Peter Thiel): $500,000

VC (Accel Partners): $13 million

2nd round VC’s: $28 million

Microsoft: $240 million

IPO: $16 billion

A win-win for the capital market

(lenders)

• Enough financial track record is built

• Success of business is proven

• Established reputation

• Better understanding of operational structure

• Banks are more comfortable in providing lending

Key takeaways

• Know your business

• Proper funding is key to success

• Consider the broad perspective of finance

• Explore all avenues

• Additional platforms for funding is recommended

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Edward M. Erasmus, MA

[email protected]

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