Lesson 1: Financing Ventures & Start-Up Operations PDF

LESSON 1: FINANCING on the form of business. VENTURES and START – UP OPERATIONS Calculating Initial Start – Up Cost 1. Determine whether to rent a business space, Study Objectives...

LESSON 1: FINANCING on the form of business. VENTURES and START – UP OPERATIONS Calculating Initial Start – Up Cost 1. Determine whether to rent a business space, Study Objectives operate at home, or build a new place. Understanding the basics of financing 2. Take into account signage cost. ventures. 3. Office furniture and equipment. Understanding initial capital requirements 4. Machinery and equipment or vehicles. in a venture. 5. Office stationery and supplies (Administrative). Determining initial start - up cost. 6. Insurance cost. Fund sourcing and Capitalization 7. Licenses and permits. 8. Professional services. Introduction 9. Initial raw materials and supplies inventory New ventures need financing. As a new expense (Production and Operation). ventures are just starting off, they do not 10. Capital requirements for manufacturing generate enough income to be able to equipment and tools. pay for the up - front costs. Without 11. Funds for marketing, advertising and sufficient funding, many brilliant ideas promotion. have met stumbling blocks and come to a 12. Contingency fund for unexpected expenses. sad end despite holding great potential. Monthly Budget for Recurring Expenses Start Small 1. Rental or Lease payment. Many entrepreneurship advise starting 2. Mortgage payment. small dreaming big. 3. Inventory replacement. Starting small allows the entrepreneur to 4. Labor and employees salaries. learn gradually about the enterprise on a 5. Bank charges & Interest payment smaller scale while taking less risk. 6. Insurance premium. Starting a small business, you may be able 7. Office supplies and stationery to provide all the start - up money you will 10. Repairs and maintenance expense need. 11. Cost of utilities The entrepreneur grows in knowledge and 12. Suppliers' bills ability as the business develops and 13. Sales taxes expands. 14. Transport and delivery expense. Capital Requirements Sources of Personal Financing One of the critical factors in keeping a new Personal Financing venture alive. ▪ The seed money that gets a company off This requires the preparation of a start – up the ground comes from the founder’s own budget that shows the financial pocket or personal fund. requirements of the enterprise. Personal savings. Start – up budget gives the entrepreneur an Personal property. idea of how much capital is available to sustain the business until profit is realized. Family and Friends The opportunities and ability of the new 2nd source of funds for many new venture to raise capital will vary, depending Ventures.  Form of loans or investment Outright gift EQUITY FINANCING Forgone or delayed compensation – Entrepreneur sells portion of the Reduced or free rent business ownership Bootstrapping (minimizing start-up expenses) – It requires sharing of ownership and profi Cost cutting technique ts with the funding source Money saving tactics – Investors assume the risk of failure – Safer for new business Common share Preferred share Sources of Capital Two Basic Types of Financing ❖ Equity Financing Business angels Sources of Equity Financing Initial public offering Business Angels Venture Capital Informal risk capitalist ❖ Debt Financing Wealthy individuals back up emerging Commercial Banks entrepreneurial ventures with their own Government financing program money and labor hopes of earning high Other sources profits when the ventures become successful Lesson 2: Sources of Capital Hands on investors providing advice or direct management input Sources of Capital Two Basic Types of Capital Financing Initial Public Offering Equity Financing First sale of stock by the firm to the public Business angels Stock is traded on the stock exchanges/ Initial public offering Market Venture capital A firm is not able to go public until it has Debt Financing demonstrated that it is viable and has a bright future Commercial Banks Government financing program Investor Venture Capital Other sources  Rich individual investors or groups of investors provide venture capital firms in start - ups and small businesses with exceptional growth potential. Investment of the venture capitalists are usually in cash in exchange for shares of stocks in the company for a longer time Horizon Venture capitalist participate in business manag ement through membership in the Board of Directors Corporate Venture Capital Sources of Debt Financing Venture capital firms are companies that Banks and Commercial Banks invest money in small businesses operating – Major source of debt financing for small in particular industries, in which they are business. familiar with and have high growth and – Offers secured and unsecured loans profit potentials. Venture capital firms also – Provides intermediate term loan. look for business with competent – Short term and long term loans. management and competitive edge. In – Credit Loans. return, they expect a significant ownership – Inventory Financing. interest in the business Government Financing DEBT FINANCING Program It involves a payback of the funds plus The government has a variety of financing an interest for the use of money. programs for small businesses. The range.It is stated as a liability in a company’s of financial assistance rendered aims to balance sheet. help SMEs improve their workforce, develop products or technology, promote their product or services and restructure their debts. Government institutions. DBP, LBP, BSP & other GOCC’s. Other Sources Trade credit Vendors can extend their credit in the form of delayed payment. Microcredit Institutions Available to entrepreneurs who do not have collaterals to put up Center for Agriculture and Rural Developme nt Inc.,(CARD) Landless People’s Development Fund (LPDF) Tulay sa Pag - unlad inc., (TSPI_  The minority equity position of an incoming PE LESSON 3: GROWTH EQUITY investor shapes all aspects of the investment process , from deal structuring and operational Growth Equity Defined decision - making during the holding period, to Growth equity funds occupy the space between the course of action at exit. It is important for (and thus co minority investors to understand the motivations mplement) venture and buyout investing, of the majority shareholders and ensure they are providing fast - aligned with the fund’s investment thesis, its growing but established businesses with funds base case scenario for expansion and its plans for and support f change. Still, focusing on an agreed - upon or a transformational leap in their development. plan and executing the necessary changes can It accounts for the largest number of private prove quite challenging from a minority equity (PE) deal position , even with a good working relationship s executed in emerging markets. and appropriate minority shareholder rights in In addition , following the global financial crisis, place. growth equity investments have gained fresh momentum in FOCUS ON PARTNERSHIP developed mar In an ideal scenario, owners, existing management kets, as they provided an avenue to deploy capital and new investors will form a successful at a time partnership contributing complementary skills when debt markets were closed. that help obtain superior operating results at the portfolio company. Growth equity funds has moved beyond the start - As growth equity does not primarily provide up stage) in exchange for a minority liquidity to the owners, the economic interests of equity stake. Given the lack of control, a strong both parties are well aligned. Furthermore, it is for working relationship and trust - based the best interest to keep the existing manage partnership between the investors, existing ment in place and in control, as they have a owners, and management are required to achi working knowledge of the operating business and eve the desired outcome : advancing the company its to a new stage of development. markets. A growth equity investment will These dynamics are shown in : therefore often be minimally disruptive to the Exhibit 3.1. Defining Characteristics in Growth operating Equity dynamics of a business, since existing relationships between owners, management, suppliers, MINORITY EQUITY STAKES customers and other stakeholders are maintained. The minority equity stakes strategic and To ensure a smooth working relationship, both operational control of the company will parties need to agree on growth and development remain with its existing business owners. Typically, targets and align their interests from the start. A it consists of predominantly newly issued clear understanding of the culture and approach shares , although a portion of funding may be used to business at both the PE firm and the target to provide an exit for existing business ow company can help manage expectations and set ners. Only a small subset of growth equity deals realistic rules of engagement for both parties. PE results in the PE firm acquiring more than 50 investors and existing company owners must e % of a company’s equity and benefiting from the ach carefully select partners that complement ensuing majority shareholder rights. their individual investment and management style. For example, a hands - on active investor may be access to deeper pools of capital to scale their best advised to avoid investing in a “closed” fa activities and execute secondary or tertiary growth mily business , and a passive investor might not be strategies. Thus, engaging with a growth equity the right partner for a business with fund clearly marks the transition from a start - up urgent restructuring needs. to a robust, sustainable business. Like VC (venture UNLOCKING GROWTH capital) funds, growth equity funds may continue Growth equity funds invest in established to businesses with proven business models and deploy capital into these companies over several attractive rounds of investment and may over time future prospects for expansion. Portfolio establish a path to a controlling stake. companies often operate in expanding economies, in MATURE SMES sectors exceeding a country’s average national Mature businesses with a unique competitive growth, or in industries ripe for disruption. A advantage and attractive development prospects growth equity fund’s capital, its industry and offer perfect opportunities for growth equity operational know - how can provide a company investment. These companies often possess a with strong market position with a well - recognized the resources to unlock latent potential, improve brand and a solid network. Investments from a profitability and enable accelerated growth. growth equity fund frequently represent the The capital invested by a growth equity fund is firm’s first and only engagement with a financial typically used for two purposes : investor. As SMEs are in many cases family To fund specific, value - accretive projects at the businesses or entrepreneur owned and controlled, portfolio company. a To provide liquidity to the current owners and minority investment allows these owner/managers founders and help simplify its shareholding to maintain control of the board and the structure. company’s day - to - day operations. This differs from a successful late - stage VC - backed company, GROWTH EQUITY TARGETS where founding entrepreneurs have typically given Growth equity funds targets to invest up significant equity and governance rights in predominantly in three types of businesses: earlier fundraising rounds. Late - stage venture capital - backed companies, M ature small and medium - sized enterprises SPIN - OFFS (SMEs ), and Growth equity investors at times target divisions S pin - offs from large corporations. of large corporations that are well positioned for divestment or spinoff. In these instances, a LATE - STAGE VENTURE - BACKED corporation will typically retain control of the Growth equity is a crucial ingredient for VC - division backed companies that have established a initially but add capital and know - how from the successful PE investor to spark growth and pave the way for business model, claimed a defensible market a smooth handover to a new investor (including position and reached profitability in their steady - public market ) when the corporation eventually state decides to step out. These targets are often operations. Having arrived at this stage, these inadequately resourced from a funding and talent post - revenue and post - profit companies require perspective and thus offer greater upside under a END new ownership and governance structure outside the parent entity. Value Creation Whether a mature SME, a VC - backed company or a corporate spin - off, growth equity portfolio companies share similar levers for value creation. As growth equity investors rarely employ de bt to magnify returns on their equity stake, their focus will be on driving change at the operating company (through strategic, operational and financial initiatives), or professionalization and go vernance optimization, as shown in: Exhibit 3.2 Value Creation in Growth Equity