Access
Insurance
Parking
Fuel
Maintenance
Lease
Contribution Margin/ Member
Monthly interest
# Uses
Hours/Use
$/Hour
Miles/Use
$/ Mile
$/ member
i rate (monthly)
Key May ’00 Biz Plan/ Actual September Data
Recurring View (Monthly) – Blended Model
Hours used/ month
Utilization rate
Costs/ Car
Members/ Car
Revenues/ Member
# Members
Total Contribution Margin/ Month
Monthly Usage
Monthly Fee
Attrition
Beginning Members
New Members
Car Cost/ Member
Balance Sheet
- The company’s financial position at one moment in time.
- Basic equation: Assets = Liabilities + Owners’ Equity
Assets: provide benefit to the firm in the future, valued at lower of cost or present market value.
Liabilities: amounts or obligations owed to third parties.
Owners’ Equity: what’s left. Also = to original paid-in capital and retained earnings, less dividends.
Income Statement (Profit & Loss Statement)
- Operations over a period of time (quarter, year).
- Basic equation: Revenue earned-expenses incurred = net income - dividends = retained earnings
Four main categories of expenses:
- cost of goods sold
- selling, general, and administrative costs
- interest cost
- provision for income taxes
Statement of Cash Flow
Beginning Balance
+/- Operating Activities: Money generated by and spent in doing business, and Interest & Taxes
+/- Investing Activities: Money used in things that support operations or in financial assets. Primarily used for purchasing assets that increase productive capacity.
+/- Financing Activities: Money used for issuing or retiring debt or equity, or paying dividends.
= Ending Balance
Beginning cash+cash inflow-cash outflow=ending cash
The Cash Flow Cycle for a Venture
CumulativeCumulative Cash Flow in $Cash Flow in $
TimeTime
BurnBurn RateRate
Date of First Cash Flow PositiveDate of First Cash Flow Positive
MaximumMaximum FinancingFinancing NeedsNeeds
DaDatete of Cumulative Cashof Cumulative Cash BreakevenBreakeven
Remember
• People who are giving you money want to get it back, plus a return
• Required Return is a function of perceived risk– Core risk of project– Capabilities/track record of entrepreneur– “Security”
Investor Background also Influences Perception
• Functional /Industry Experience
• Investing Experience
• Potential involvement in venture
Risk/Reward Management
Probability of
OccurrenceExpected Value
-100% +25% +100% Return on Investment
Probability ofLosing 100%
Goal # 1
Goal # 2
Goal # 3
Sources of Financing
• Own Money/Customers/Suppliers• Friends and Family• “Angels” and Sophisticated Angels• Early Stage / Seed VC• Traditional VC• Banks• Corporate Partners or Strategic Investors• Public Capital Markets
No External Financing is the Best Option
• Keep control and equity upside
• Minimize pressure for exit / liquidity event
• Creative use of contracting, collect-in-advance, pay later strategies
• Not possible when large absolute amounts of capital are required
F&F & Angels
• Individual investors often invest for some reason other than pure cash return
• What are their reasons: a + or – for you
• Managing info flows is key
Venture Capital
• Require Probability of exceptional returns – swinging for the fences
• Need to put large amounts of capital to work
• High stakes – majority of founders do not make it
Banks
• Will always look to cash flow first
• Then to corp assets
• Then to personal assets, guarantees
• You can reach a point where it is in their interests to pull the plug – their last chance to get out whole - will not be in the equity holders’ best interests
Questions to Ask
• What are the venture’s MONTHLY cash flows?• How much cash is required in total – how deep is
the trough?• What size bites do we want it in?• What are the particular risks and rewards and who
has an appetite for them?• How can the Reward / Risk ratio be managed?• What returns will investors expect?
More ?s
• What terms matter other than price, and am I willing to live with these terms ?
• Do the deal terms align our interests, or not?• What alternatives do I have?• What do I need other than $$, and What do they
bring other than $$?• Likely exit routes / liquidity path?• What will the returns look like for me after I give
up what will be required?
Pluses and Minuses
21
Source + - Own money/Customers/ Suppliers
Relatively Easy Helps assure future success Retains control with minimum
oversight
Requires well-established network Requires some personal wealth Requires positive cash flow
Friends & Family Easily Accessible Good Terms Little Due Diligence
Thanksgiving Dinner Lack of sophistication
Angels & Sellers Eager/Knowledgeable “Good” Terms
Idiosyncratic More or Less sophisticated
Early Stage VC Expertise Legitimacy
Managerial control Scarcity of Early Stage VC firms
Traditional VC Expertise Legitimacy
Deal Terms It’s about the money
Asset Lenders Leverage Benefits No/Little Equity dilution
Covenants Bankruptcy Exposure
Corporations Extensive Resources Provide Credibility Exit Strategy
Slow Decision Making Process Foreclosing Exit Options
CEO’s average equity holdings by round of financing
25%
17% 16%
12%
8%6% 6% 6%
0%
5%
10%
15%
20%
25%
30%
1 2 3 4
Source: Noam Wasserman, “Inside the Black Box of Entrepreneurial Incentives.” Based on survey conducted in July/August 2000 of 211 private Internet/software firms.
Founder CEOFounder CEO
ProfessionalProfessionalCEOCEO
When do you need to consult a lawyer?
• Early
• There are lots of legal risks– forgotten founders– danger of unprotected intellectual property – employment/stock agreements
• You often can’t fix them later, even if you have more time and money
Valuation
• Implied or Implicit or Imputed Valuation is Different than “Calculated (NPV) Valuation”
• Have you ever bought a share of stock?
• do the math: $/% = Implicit Valuation
Investors generally Back into a valuation, don’t start there
• What is my best guess about terminal value and exit time
• What is my best guess about future funding requirements and resultant dilution
• What is the most I can afford to pay now i.e., what is the smallest % ownership I can walk away w/ and still get my required return
The Math
REQUIRED/TARGET RETURN = R
YEARS UNTIL EXIT = n
INVESTMENT = I
REQUIRED STAKE % = I * [(1+R)^n]
TV
I/POST$ = ACQUIRED STAKE %
I/POST = I * [(1+R)^n]
TV
Idea from previous job
71%
Discovered by luck20%
Swept in by PC revolution
5%
Systematic search
4%
Source: Amar Bhide (1994), “How entrepreneurs craft strategies that work,” Harvard BusinessReview (March-April).
Where 100 of the 1989 Inc. 500 founders got their ideas
7 casual job into business6 wanted as consumer4 happened to read about industry
Career Implications
If you are interested in finding an opportunity (or being involved in someone else’s), then the following matter a lot:
– Industry you work in– Whether you are known in your industry– Where you live– Your network of personal and professional
contacts– Your reputation– Planned serendipity