Entrepreneurship & Innovation Financial Planning & Funding PDF

Entrepreneurship & Innovation Financial Planning & Funding Prof. Dr. Mahmoud Al-Kilani Agenda Financial planning Funding Institute of Management 2 Learning Objectives Gather financial data of your project and enter in planning tool Apply key financial instruments Critically assess the...

Entrepreneurship & Innovation Financial Planning & Funding Prof. Dr. Mahmoud Al-Kilani Agenda Financial planning Funding Institute of Management 2 Learning Objectives Gather financial data of your project and enter in planning tool Apply key financial instruments Critically assess the financial position of a business Analyse different funding options and select appropriate ones Plan how to access funding for your project Institute of Management 3  Financial Planning Institute of Management 4 Goals of financial part of the business plan shows business idea and its implementation over the next 3 to 5 years in numbers shows profitability under transparently presented assumptions shows liquidity and its development under transparently presented assumptions shows when and how much equity or external funding are needed Institute of Management 5 Institute of Management 6 Institute of Management 7 Goals Ensure financial liquidity at any time and focus on break-even point into profitability Long- and short-term perspectives: Liquidity Profitability Short-term goal Long-term goal Institute Institute of of Management Management 8 Assumptions Financial planning is about the future and therefore always based on assumptions Make all assumptions transparent Show evidence that the assumptions are realistic Show the sources, thoughts and calculations behind your assumptions Work with scenarios. Change a set of assumptions and calculate a new scenario, such as Best case / worst case Direct sales / indirect sales Pay per use / subscription pricing model … Institute of Management 9 Timeline Usually the financial part shows all financial statements for the first 3 to 5 years, of which the first year is often shown on monthly or quarterly basis The chosen period depends on the business. The chosen period has to include the pathway to break-even (as a minimum). Institute of Management 10 Financial planning – Instruments 1. Income planning (income statement forecast) 2. Liquidity planning (cash flow statement forecast) 3. Funding situation (balance sheet forecast) 4. Break-even analysis including transparently presented assumptions Institute of Management 11 Revenues: 1. Volume Plan the estimated amount of units sold in the first 3 – 5 years. You have to: - define the units (pieces, hours/time, clients, subscriptions, ….) - estimate the amount of units sold and make them transparent - give some evidence that the estimated amounts of units sold are realistic (è link to market description / market research) Institute of Management 12  Revenues: 2. Pricing The defined prices – have to be higher than the calculated costs – have to be competitive – have to be lower than the customers’ benefit The price is too high is no longer accepted on the Price cap market Price perception of the target customers Price policy scope Prices of the competition Marketing strategy Cost Price floor The price is too low and no longer covers the costs Institute of Management 13 Revenues: Pricing Cost pricing – The prices have to cover all direct and indirect costs and include a mark-up (profit margin). Market-based pricing – The price has to be competitive (è link to competitors analysis and positioning on the market) Value-based pricing – The price is slightly below the customers benefit we / our products / our services create. (è link to customers needs) Institute of Management 14 Costs: Salaries Salaries are generally the biggest cost factor. Therefore, salaries have to be planned carefully. – How many employees of which category do we need in the first 3 – 5 years? Show evidence that the estimated volume of production/services can be done by this amount of employees. – Define the salaries per category and calculate the salary expenses. Include the salaries for the owner(s). – Add the contributions for social security (approx. 15%). Quelle: Compendio - Finanzwirtschaft 2: Betriebsbuchhaltung und finanzielle Führung – TK 2019, S. 76 Institute of Management 15 Costs: All other costs List all other costs detailed and transparently for the next 3 – 5 years. Show plausibility for all relevant costs (ask suppliers for offers, check online…) Investments in property, plant, and equipment are not considered as costs, but the depreciation of these investments are. Don’t forget a reserve of 5 percent for unplanned expenses. Institute of Management 16 Income statements forecast With revenues and costs, income statement can be made. Make income statements forecasts for the next 3 – 5 years. (perhaps the first year on a monthly or quarterly basis) Institute of Management 17 Investments List all needed initial investments and estimate their useful life List all subsequent investments for the first 3 – 5 years. è Depreciations belong to income statements forecasts è Investments belong to cash flow statements Institute of Management 18 Financing activities / Cash flow statement The seed capital needed can be calculated easily with the cash flow statements (see next slides). The cash at the end of each period can’t be negative. Realistically you have to plan with a certain liquidity reserve. You have to account for the planned raise of equity as well as all loans, mortgages, credits,… Sources of funds will be a separate topic. Institute of Management 19 Cash flow statements Prepare the cash flow statements for the first 3 – 5 years. The first year on a monthly or quarterly basis. - Cash flow for operations - Cash flow for investing activities - Cash flow for financing activities - Show cash at the beginning of the period, changes within the period, and cash at the end of the period Institute of Management 20 Financing / Seed capital 1. Calculate § Needed capital can be derived from the cash flow statement. § Liquidity must be positive (i.e. cash at end of period). § Reserves must therefore be available for unforseen circumstances (see cash at the beginning of the periode in the cash flow statement). 2. Assess § Capital requirements need to be assessed. § Can be described with one sentence (i.e. covered by shareholders’ capital / equity). § Or it has to be explained in more detail where seed capital is coming from (i.e. the sources, see next chapter) and how investors can be convinced. Institute of Management 21 Balance sheets With the previously shown steps you have all relevant information to prepare the balance-sheet forecasts. You will need the following additional information: – average debtor time – average creditor time – average storage period Sources of funds will be a separate topic. Institute of Management 22 Scenarios Play around with your numbers. Change your assumptions. Increase/decrease sales. And see what would happen. You will gain a deeper understanding of your business and its potential and pitfalls. Calculate and present different scenario, e.g. worst case, realistic, best case scenario. Show the main conclusion in your business plan and add the calculations into your appendix. Institute of Management 23 Sensitivity analysis Play around with your numbers. Change only ONE variable and see what happens. You will gain a deeper understanding of your business and its vulnerability. Examples Increase COGS Decrease sales / volume / price Etc. Institute of Management 24 Leaving the ‘valley of death’ Source: Francis (2020, P.201) Institute of Management 25 Break-Even Analysis Shows how startup will become profitable: - how many units you need to sell - how many clients you need - e.g - Restaurant: how many guest do we need per day? What do they need to consume? - Platform: how many subscriptions do we need to sell per year? - Consulting: how many days do we need to bill per year? - Fashion shop: daily turnover needed? Institute of Management 26 Break-Even Analysis https://corporatefinanceinstitute.com/ Institute of Management 27 Break-Even Analysis à See IfU tools Institute of Management 28  Funding Institute of Management 29 Agenda What Goal Options: Types of start-ups and Understand what investors are financing options interested in Players: Where to ask for money Understand where you could ask for money Procedures: What you need when Understand the investment process looking for money Valuation: How to determine the Understand the valuation issue and financial value of your start-up ways to solve it Institute of Management 30 Startup growth / funding phases Phase Early stage Start-up Growth Expansion Name Seed Series A Series B Series C… # Employees 1-3 1-10 5-200 100 - … Capital requirements 0 - X0’000 X0’000 – X million X00’000 – X(X) X Mio – XX million million Focus Idea/project Idea development, Market penetration Internationalisation / assessment, market entry and market share Planning for exit / team creation growth Initial Public Offering Bootstrapping Family, friends, fools Crowdfunding Business Angels Venture Capital Private Equity Banks “Valley of Death” Institute of Management 31 Funding sources / strategies Mezzanine Equity capital Debt capital capital Internal funding “Quasi” equity / Credit from (cash flows) dept banks Capital increase (convertible Accounts (shares to loans) payable (“credit” internal and from suppliers) external entities) Institute of Management 32 Agenda What Goal Options: Types of start-ups and Understand what investors are financing options interested in Players: Where to ask for money Understand where you could ask for money Procedures: What you need when Understand the investment process looking for money Valuation: How to determine the Understand the valuation issue and financial value of your start-up ways to solve it Institute of Management 33 Funding Sources Bootstrapping FFF Crowdfunding Incubators / Accelerators Business Angels Venture Capital Private Equity High-street banks Other Sources à Appendix Institute of Management 34 Bootstrapping Most important source to set up a new company Early phase / start-up phase A method of building a business with your own and very little financial resources. Startups that use bootstrapping finance themselves through their own cash flows and try to keep their expenses low. Sources: –Your personal savings –2nd, 3rd pillar savings (use with caution!) –Free-of-charge work –Loans on your personal assets Cheap, no securities required, no strings attached First and best source of funds, unless you need to use your 2nd / 3rd pillar savings Institute of Management 35 FFF – “Love Money“ FFF” = “Family, Friends, and Fools” “Love Money” = money from people who like you Start-up phase Sources: – Personal loan to you – Loan to your company – Share capital – Inheritance or anticipatory succession – Guarantee / security on a loan Excellent source of funds – Relatively easy to access, if you have wealthy friends / family – Use with great care 36 Crowdfunding “Crowdfunding”: A large number of people contribute relatively small amounts of money Why? – A lot of small investments may still add up to a large amount – Emotional attachment to the investment => help selling – Small amounts => quick write-offs => little interest – “Little” investors will probably not interfere with the business – They do not necessarily expect a return on investment soon and do not take any influence on the development. Why not? – Can’t expect business support from investors – Huge overhead – 100 investors, each CHF 10’000 vs. 5 investors, each CHF 200’000 – Cost of the agency: 5% to 15% of the investment sum Advice: – Consider if you have an easy-to-understand business model (usually B2C) 37  Crowdfunding + + Pros Small investors don't/barely interfere in the business. Many small contributions can add up to a large sum → write-off if it doesn't work. Emotional attachment Cons Little direct help (contacts, infrastructure,...), only money. Agency costs (5% - 15%) of the investment amount Projects that do not meet the demands and ideas of the crowd (e.g. also complex business models) have hardly any chances Institute of Management 38 Crowdfunding - Examples Crowdinvesting: E.G., – www.investiere.ch – www.c-crowd.com Crowdfunding: E.G., – 100-days.net – www.wemakeit.ch Loans: E.G., – www.direct-lending.net (loans for companies) – www.cashare.ch (loans for individuals) Check out their terms and conditions! 39 Incubators Provide space and resources at early to growth stage Offer necessary conditions for development and growth Longer-term engagement as a collaborative work environment Connection to local mentors and supporters Easy to get in, not as competitive as accelerator where MVP is rquired Types - General vs focused by topic or vertical market (e.g., for medical technology) - Stand-alone vs corporate incubators 40  Accelerators Start-up / growth phases, ideally with ready MVP Usually operated by companies as an industry-specific temporary support for start-ups until they have a prototype. The start-up must apply for participation in the accelerator. If the start-up finds an investor, the Accelerator usually receives a certain share in the company (5% - 20%). 41  Accelerators Pros Offer a structured program for 3 to 6 months Offer access to a large industry-specific mentor network in exchange for low equity capital Start-up moves forward quickly with other startups and can leverage each other's synergies Cons Accelerators are very selective The emerging know-how also ends up at the accelerator Accelerators have no patience Institute of Management 42 Y Combinator Source: https://www.wsj.com/articles/tech-incubator-y-combinator-takes-new-tack-with-venture-capital-fund-1444938590 43 Business Angels Types Most business angels do not want – Entrepreneurs who have sold their company to spend too much time on one – Wealthy families who invest part of the wealth in project - but some do start-ups – Wealthy line managers who want to give something back Finding Business Angels: – Through business angel networks (=> Invest time, money to support the “match makers”) company – Through your personal network (especially industry-related) – Start-up, expansion money Typical investments: Work with Business Angels if: – CHF 25’000 to CHF 250’000 – they understand your industry – Minority shareholders – can and want to support you – Wants to sell after 3 to 5 years – Invested in 5 to 20 companies Beware of “Business Devils” 44 Business Angel Club (1/2) 5-10 clubs in Switzerland for Business Angels (and would-be’s) to meet and check out projects – Start-up and expansion phase Club board members and management are normally very well networked Investments in “down-to-earth” projects preferred Most – but not all – are NPOs – Advice: Avoid mixing for-profit and not-for-profit organisations in the same financing round: VCs and BAs do not blend well 45 Business Angel Club (1/2) Larger organisations: – Business Angels Switzerland => 20 events per year, 40-50 presentations, total investment volume n’000’000 CHF – Start Angels => ~ 5 events per year, 20-30 presentations, total investment volume n’000’000 CHF – BioValley Business Angel Club => Focus on life science projects – B-to-V => for-profit, focus on Germany Many smaller clubs Advice: Talk to them! – Learn how they’re set up and financed => success fees? – Many wealthy people are attached to one or more clubs 46 Swiss ICT Investor Club (SICTIC) Formerly ICT Investor Day Non-Profit Organisation seit 2014, independent of government connect Smart Money Investoren with early High-Tech Startups Organised and supported from SwissICT & Sponsoren (over 210 Investoren) Several events per year, including angel investor training Investment volume: Unknown Quelle: https://www.sictic.ch 47 Venture Capital Funds Organisations that (usually) invest in companies in expansion stage (sometimes start-up stage) Investments normally starting at CHF 1 Mio – Time, effort required to assess the project (CHF 30’000 +) must be in reasonable relation to potential profit Examples: – New Value => focus on renewable energy – Novartis venture fund => total investment USD 15-20 mio per project, initial investments starting at USD 100’000, life science – Creathor, Red Alpine => also start-up money Understand the goals, focus of the fund Ask them only if you match their goals Institute of Management 48 Private Equity Money from wealthy individuals/ Typical investments: families – CHF 100’000 to CHF 1’000’000 – Portfolio of 5 to 20 investments Later stage, low risk – Not interested in shares, but takes them Directly or through their “family Can sometimes be unreliable: office” – Medium to low interest in your project – Main interest: management of portfolio, Mostly well-known people / families network,... – Receive extremely many offers – Generally not interested in start-up Lists: SECA (Swiss Private Equity financing Association), www.seca.ch – Very difficult to get funds Institute of Management 49 Banks Heavily regulated Primarily conservative investments Risk-averse with startup investments Based on long-standing relationships But: Some banks increasingly focus on stratup investing 50 Agenda What Goal Options: Types of start-ups and Understand what investors are financing options interested in Players: Where to ask for money Understand where you could ask for money Procedures: What you need when Understand the investment process looking for money Valuation: How to determine the Understand the valuation issue and financial value of your start-up ways to solve it Institute of Management 51 Funding – first steps… Check out www.gruenden.ch and Swiss Venture Guide Don’t be proud - accept any help you can get – Especially from industry experts and experienced entrepreneurs Apply for – CTI Entrepreneurship – SwissUpStart Challenge (http://upstart.swiss-challenge.org/) – All other courses / trainings Make a business plan and have it verified Understand your financing needs: – Do I need financing at all? – How much? – Am I ready to pay the price? Develop elevator pitches Develop 10 minute pitch Institute of Management 52  Funding Process § Highly time-consuming § Long preparation and appliaction periodes § Invested time not used to acquire customers / develop product Term Due Post- Analysis of Businessplan Selection / Initial Sheet / Diligence Investment Startup (Financial Plan) Pitching Meeting Letter of Prozess Activities Intend Duration of months to years Approx 20% success rate for funding Quelle: Boue, A.R. (2008): Wie komme ich zu Venture Capital? Praxisratgeber mit Insider-Tipps für die erfolgreiche Kapitalakquise, Linde-Verlag, Wien, S. 10 Institute of Management 53 What You Need Business: – Prototype (Functional, industrial, mock-up) – Business plan – Team, 80% complete (CEO, CTO, Marketing & Sales) – Company (founded or ready to be founded) Documentation: – Elevator pitches: 10 secs / 30 secs / 60 secs / 90 secs – “Teaser”: One-page summary – Investor presentation: 10 slides with the most important information – Business plan (Word or Powerpoint) – Term Sheet and Shareholder Agreement (for risk capital) Quelle: Boue, A.R. (2008): Wie komme ich zu Venture Capital? Praxisratgeber mit Insider-Tipps für die erfolgreiche Kapitalakquise, Linde-Verlag, Wien, S. 10 Institute of Management 54 Agenda What Goal Options: Types of start-ups and Understand what investors are financing options interested in Players: Where to ask for money Understand where you could ask for money Procedures: What you need when Understand the investment process looking for money Valuation: How to determine the Understand the valuation issue and financial value of your start-up ways to solve it Institute of Management 55 Valuation based on negotiation No market price available as with listed companies Fators to consider in valuation Track record (turnover, number of new customers, cost structure etc) Team Prototype General business model (innovation) Scalability Pay-back potential / exit potential Institute of Management 56 Appendix Funding Players Institute of Management 57 Awards and Competitions (AC) Feedback from experts Normally, “the winner takes it all”: A few startups grab all the awards Media presence (can be positive or negative) – Same jury members in all competitions Broader visibility with experts (Mostly positive) Joining competitions and constantly Money (generally, “no strings attached” => better winning: than investors’ money) – Can pay the salaries – Gives media presence => Easier access to investors, Free-of-charge services experts, customers,... – Coaching, training, offices,... – Needs lots of time (one 100% job if you’re serious – Beware of the decoy! about it) – Can be bad for your reputation (“don’t they have better Entry tickets to other events things to do?”) – Venture Kick 1=>2=>3 => CTI Invest – Venture 20xx => Business Angels Joining competitions and constantly – … losing: – Waste of time, bad for your reputation 58 AC – Swiss Challenge Wettbewerbe 3 rounds: – CHF 20’000 for winner (3 categories) supported by: FHNW, Kanton Aargau, UBS. 12 jury members / 25 coaches Great starting point Quelle: http://www.sechallenge.ch 59 AC: Venture (www.venture.ch) Training / Coaching: Seminars, workshops, and coaching sessions Seed and start-up phases Networking Platform: Apéros Competitions: – Business Ideas (Oct – Jan): CHF 2’500 for top 10 Ideas – Business Plans (Jan – May): total ≥ CHF 125’000, First price CHF 60’000 – Excellent media presence for the winners Initiated and supported by ETH, CTI, McKinsey, and 17 Swiss companies Open to anyone who lives in CH, FL and > 18yrs old, company less than one year old Participating teams: ~100 Experts: ~80 jury (A, B, C), ~200 coaches (A, B, C) – Many CTI coaches and well-known business angels involved as jury, coaches Quelle: https://www.venture.ch/ Go there! https://www.venture.ch/helpful-documents 60 AC: VentureKick 3 rounds: – CHF 10’000 (academia project, company not set up yet) – 8 candidates per month, every other gets the price money and qualify for the next round – CHF 20’000 (business case prepared) – 4 candidates per month, approximately every other gets the price money and qualifies for the next round – CHF 100’000 (ready to enter the market) – ~ 2 candidates per month, few get the price money Foundations involved: Gebert Rüf, Ernst Göhner, OPO, AVINA. 80 jury members Great starting point if you have an academia project Quelle: https://www.venturekick.ch 61 AC: De Vigier Foundation in Solothurn Start-up phase 5 winners per year, each gets CHF 100’000 Huge formal event, media presence,... Cooperation with innosuisse Invest Good place if you don‘t mind the media – See and be seen Quelle: http://www.devigier.ch 62  AC: ZKB Pionierpreis Technopark Award donated by Zürcher Kantonalbank – Start-up phase – CHF 98'696.04 For academia projects and businesses Award assigned in April, huge event in Technopark Zürich Good place if you don‘t mind the media – See and be seen Quelle: https://www.pionierpreis.ch 63 AC: More Awards National: – Swiss Economic Award (Swiss Economic Forum): – 3 awards, each CHF 25’000 – Huge media presence, professional movie – “der bedeutendste Jungunternehmerpreis der Schweiz” (“the most important award in Switzerland”) – Some more Regional: – Heuberger (3 awards, each CHF 150’000, Winterthur only), – Basel, Thun,... Industry-related: – ICT, Sports, Media, Medtech,... Many, many more Comprehensive lists: – “Swiss Venture Guide”: http://www.cti-invest.ch/Swiss-Venture-Guide/Swiss-Venture-Guide- 2012.aspx; www.gruenden.ch 64 Foundations Industry on its own About 11’000 foundations for public welfare – Few regulations, no directory Total assets: About 30 Billion CHF Donations total: About 1 Billion CHF per year Donations for startups / innovation projects: Unknown Some examples (not representative) – Gebert Rüf Foundation (Geberit): CHF 8 – 10 Mio per year, currently 84 projects – Avina Foundation (Stefan Schmidheiny): CHF 14 Mio per year (2008), 66% social projects, currently 203 projects – Volkswirtschafts-Stiftung: Interest-less loan, max. CHF 300’000 (in combination with a CTI project) – STI (Stiftung für technologische Innovation): Interest-free loans for start-ups in the Mittelland Finding the right foundation needs time: https://www.edi.admin.ch/edi/de/home/fachstellen/eidgenoessische- stiftungsaufsicht/stiftungsverzeichnis.html Typically seed and start-up money Excellent source of funds 65 Startup Invest Ehemals CTI Invest, Swiss Startup Invest Formell unabhängige NPO seit 2003 Verschiedene Networking-Veranstaltungen Vierteljährliche Matchmaking-Veranstaltungen mit Investoren Venture Days Startup Days IPO Days 5-10 Startup-Präsentationen pro Event etwa 50% der Unternehmen, die vorgestellt haben, erhalten schließlich eine Finanzierung Investitionsvolumen~ 10-20 Mio CHF per Jahr Quelle: https://startupinvest.ch https://www.startupticker.ch The Art of Pitching, https://www.pitching.ch 66 Match-Making – Web-Basierte Platform “Crowdfunding”: A large number of people contribute relatively small amounts of money Why? – A lot of small investments may still add up to a large amount – Emotional attachment to the investment => help selling – Small amounts => quick write-offs => little interest – “Little” investors will probably not interfere with the business Why not? – Can’t expect business support from investors – Huge overhead – 100 investors, each CHF 10’000 vs. 5 investors, each CHF 200’000 – Cost of the agency: 5% to 15% of the investment sum Advice: – Consider if you have an easy-to-understand business model (usually B2C) 67 M&A Consultants / Match Makers Individuals who know the market very well and understand where to find investors Normally, they are quite selective – depending on the fee structure Fee structure: – Payment in advance: Don’t – Payment per hour: Don’t, unless you need to work with them – Payment based on success: Fees in the range of 3%...5% (... 10%) of the transaction volume Sometimes related to an incubator / bank / VC May help you with your documentation (“dressing the bride”) Their network can be of great help – Try to negotiate transaction-based fee – No exclusive mandate 68 M&A Companies Companies that make a living from helping finding and selling companies – Very often, excellent network – Most companies work in specific industries Will work extensively with you to make you more attractive to the buyers Hourly and transaction-based fee – Often require a certain minimum transaction value, i.e. CHF 1M / CHF 10M – 2% up to 15% transaction fee + hourly fee For expansion and exits – Not for early-stage companies 69 Swiss National Science Foundation (www.snf.ch) Focus on research projects (before seed) “The Swiss National Science Foundation (SNSF) is the most important Swiss agency promoting scientific research.” “It supports […] all disciplines, from philosophy and biology to the nanoscience and medicine.” Total budget: CHF 800 Mio p.a. Many programs and directions Direct support of research projects Advice: Absolutely try to get funding from them if you have a research project. Quelle: http://www.snf.ch/de/foerderung/auswahlhilfe-foerderungsinstrument/Seiten/default.aspx 70 The Innovation Promotion: Innosuisse (ex CTI) Focus on applied research Seed phase and before – “CTI is the Confederation’s innovation promotion agency.” – “[…] knowledge and technology transfer between companies and universities by bringing them together as partners on applied research and development projects.“ – “CTI also provides assistance to start-up companies.” Total budget: CHF 110 Mio p.a. No direct investments into start-ups Programmes: – Research and Development Project Promotion – Innovation Management and KTT (Knowledge and Technology Transfer) – Start-up Promotion and Entrepreneurship 71 Credit Insurance & Surety Associations (CISAs) «Bürgschaftsgenossenschaften» Entrepreneurs often do not qualify for a bank loan CISAs: self-help organisations that provide securities to the bank, for loans up to CHF 500’000 CISAs in Switzerland are backed by government –Carries 2/3rds of eventual losses of the CISA, carries some of the management cost Customers: Mostly commercial shops, craftsmen,... Institute of Management 72 CISAs: http://kmu-buergschaften.ch/ Institute of Management 73 European Financial Instruments Many European Reasearch and Supportprogrammes For SMEs und Start-ups Link: “Access to EU finance“ – Library: http://europa.eu/youreurope/business/funding-grants/access-to- finance/search/en/financial-intermediaries?shs_term_node_tid_depth=2281 74