1 start up funding by john seelinger score counselor [email protected]

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Start Up FundingStart Up Funding

by

John Seelinger

SCORE Counselor

[email protected]

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START UP COSTSSTART UP COSTS

• IF YOU DON’T HAVE ENOUGH CASH TO START YOUR BUSINESS RIGHT, WAIT UNTIL YOU CAN.

• BUSINESS PLAN WILL HELP

Start Up Cost Estimates Start Up Cost Estimates

• Average Start Up Cost Estimates - $65K

– Construction - $82K– Retail - $98K– Manufacturing - $175K

-Babson College survey

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START-UP COSTS and CAPITAL SOURCES


• START-UP CASH INVESTMENT FIXED CAPITAL INVESTMENTS

• START UP• GROWTH• MAINTENANCE

WORKING CAPITAL INVESTMENTS• START UP• GROWTH• MAINTENANCE

CASH OUTLAYS UNTIL BREAKEVEN

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• FIXED CAPITAL – How do you calculate how much your business needs at start-up and to maintain growth? Do not confuse the justification with how it will be financed. Justify first, then determine how to finance the investments.

SALES FORECAST – 24 to 36 months

How much “capacity” investment is required?

How fast will you grow? New products or services?

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• WORKING CAPITAL INVESTMENTS – The excess of current assets over current liabilities or the amount of cash required to fund the business on a day-to-day basis. An indication of short-term financial strength. Don’t be under-capitalized.

• No business has ever failed because they had too much working capital.

Working Capital = CURRENT ASSETS minus CURRENT LIABILITIES

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• WORKING CAPITAL INVESTMENTS - How do you calculate how much your business needs at start-up and during periods of growth?

SALES FORECAST – 24 to 36 months

Working Capital increases and decreases with sales. It is a variable investment.

Example: Figure $.20 increase for every incremental sales dollar increase.

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CAPITAL SOURCESCAPITAL SOURCES

Does seed capital effect long-term

profitability or growth rate?

Only 65% of companies that started with more than $100,000 were in the black after one year compared with 83% of those businesses that were launched with $1,000 to $10,000.*

*Inc Magazine

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• 42% of the Inc 500 CEOs surveyed had a formal business plan before the company was started

• 31% are family owned• 17% have one or more offices overseas

How start-ups are really funded:Self Financed 82%Loans from Family or Friends22%Bank Loans 35%Private Equity, Venture Capital 8%

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• EQUITY FUNDING – Financing your business by selling a minority equity interest. This cash is less risky but more expensive. Valuation issues must be addressed. Initial and target valuation calculations must be made.

56% of founders started the company with a partner.

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Private Equity and Venture Capital Funding

The average angel investor is between 48 and 59 years old, has a postgraduate degree, has experience in management and building a company, and typically invests between $25,000 and $250,000 per deal in one to four deals per year.

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CAPITAL SOURCESCAPITAL SOURCESPrivate Equity and Venture Capital funding

Angel investors tend to like proprietary products andnon-capital intensive businesses. They anticipate futurerounds of financing. Angel investors look for:1. Market niches – potential to dominate or be #1 or #2 in the

industry2. Advanced technology and a disruptive model (going to change

things)3. Compelling and sustainable advantage – not “me too”4. Planned exit in 4-6 years5. Reasonable valuation6. Performance equal to 5 -10 times original investment7. ROI equal to 20-40% per year8. Sitting on your board but not having control9. Higher risk business models10. Angels spend, on average, 51 hours on due diligence per

investment

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BANK LOANS or DEBT FINANCING

1. Banks typically will loan 2.5 – 4.0 times Cash Flow – usually based on EBITDA.

2. Banks would like to see a 3-5 year track record or a history of business experience

3. Debt is less expensive but more risky than equity4. Banks will not lend on pure projections: You must

have a history of cash flow or a current personal guarantee.

5. Three sources of repayment:• Cash Flow• Liquidation value of assets• Personal Guarantees of each 25% equity owner

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CAPITAL SOURCESCAPITAL SOURCESNEGATIVES TO A BANKER

1. Getting involved with something outside your normal business model

2. Absentee management / ownership3. Divorce4. Burnout5. Growing beyond owner’s capacity to operate the business6. Parent turns over business to son or daughter7. Computer conversions8. Relocation and / or expansion of facility9. Companies “hit the wall” at:

1. Manufacturing companies at $2 million in sales2. Distribution companies at $4 million in sales3. Retailers at 3 stores and distance4. Service companies at 12 employees5. Contractors at 2 or more big jobs

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A bank would rather see a 640 FICO score with all payments as agreed (no late payments, foreclosures, repossessions, charge offs or collection accounts) than a 740 FICO score with a past foreclosure, and three previously delinquent accounts now paid.

Having a stable source of income to meet personal income requirements can be a significant factor in reducing business risk for a start-up.

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CAPITAL SOURCESCAPITAL SOURCESQUESTIONS A BANKER WILL ASK YOU

1. Do you have a Business Plan?2. How much experience do you have in this industry?3. How is your credit and how much personal debt do you have?4. How much is your down payment? Is it at least 25%?5. How much collateral do you have?6. Who is the competition?7. Do you have personal and business insurance?8. Do you have services of an accountant and attorney?9. Have you ever filed for bankruptcy?10. Do you have 2-4 years of tax returns available?

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SMALL BUSINESS ADMINISTRATION (SBA)

The SBA does not loan money. It guarantees (to the bank) approximately 85% of the loan proceeds to you. Five to ten year payback terms. Interest rates of prime plus 2 – 4% depending on the program and terms. This reduces the banker’s risk, thereby enabling the loan to be approved. They use basic credit standards:– Character– Management ability– Cash Flow– Equity– Feasible Business Plan– Sufficient collateral

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SBA ELIGIBILITY (There are exceptions)

• Must be “for profit”

• Must be an operating company. SBA does not allow speculation or investment companies.

• Must be a small business:– Manufacturing 500 -1,000 employees– Wholesaling less than 100

employees– Services Receipts test for each

classification

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SBA ELIGIBILITY• Cannot be a business in lending, life insurance,

real estate development or rental property.• Gambling, promoting religion, pyramid sales plans,

consumer marketing cooperatives and persons of poor character are ineligible.

• Individuals must be lawfully in the U.S. • Business cannot be located outside the U.S.• Import businesses may be ineligible

Go to www.SBA.gov for a complete list of ineligible businesses. Also, a good resource for minority and micro-loan plans.

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EXITEXIT

Many of the CEO’s plan to cash out.

41% of CEO’s started the company with at least one exit strategy in mind. Some had several.

Those strategies included:

Going Public: 47%

Selling to a private buyer: 80%

Leaving the company to heirs: 7%

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MISTAKES ENTREPRENEURS MAKE WHEN RAISING CAPITAL

1. Don’t understand share prices or valuations2. Confuse broad market with served market3. Make unrealistic assumptions about an exit strategy4. Don’t understand long term capital needs5. Have no clue about competition6. Don’t understand that marketing beats technology 9

out of 10 times7. Write a poor executive summary

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MISTAKES ENTREPRENEURS MAKE WHEN RAISING CAPITAL

8. Use “off the wall” numbers or pull numbers from thin air

9. Lack focus; e.g. many products or niches10. Develop too simplistic of a market plan / analysis11. Underestimate expenses12. Rely on financial plans with major inconsistencies;

e.g. numbers don’t match or tie13. Speak in “techno-jargon”. No one understands

what they are saying

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CAPITAL SOURCESCAPITAL SOURCESBEST WAYS TO IRRITATE AN INVESTOR

1. Lying to investors or not being forthright; omission of material information

2. Inability to answer direct questions with direct answers3. Surprises; e.g. problem with credit checks, hidden

liabilities or debts4. Over hype or exaggerate upside5. Your story always changes6. Arguing with investors7. Late for meetings 8. Excessive secrecy or legalese; expect investor to sign

NDA9. Investing capital in fancy facility and furniture10. Fail to attract top talent

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LEASE FINANCING

Many start-ups may want to consider lease

financing for their fixed capital needs. Leasing

sometimes shifts the risk of ownership, such as

technological obsolescence onto the lessor thus

freeing the lessee to finance working capital

needs. There also may be possible tax

advantages in certain cases that makes leasing

less expensive on an after-tax basis.

Capital SourcesCapital Sources

• ROYALTY FINANCING:• basically loaning money against

the promise of a future sales. The lender collects a portion of the gross revenue on a monthly or quarterly basis until an agreed to total amount is paid back, usually 4 times the original loan amount. This works with companies that are pre-revenue and are just at the point that they can begin to make sales but need financing to buy inventory or materials for manufacturing or need to invest in key

marketing expenses to fuel their revenue machine. The companies cannot usually borrow from traditional lenders

because

they lack a documented means to pay the loan back (historic sales),

may have been in business less than 2 years, and do not have collateral to secure the note.

Capital Sources(Royalty Financing cont’d)


• Often the valuation for a company at this stage is relatively low compared to their potential once fully operational; therefore any equity investment would take a substantial amount of equity. Companies that fit this model tend to have high margins and non-cash transactions. Example: Terralink Software Systems, of Maine, needed to turbo-charge its sales and marketing efforts of its PC based software products. Terralink was selling their product and having moderate growth. The founders felt that an infusion of $200K could get them to their target of $750K in sales and repeat customer sales transactions. However, they did not want to give up a substantial part of their equity for that money. A $200K loan against future sales seemed ideal.



• In exchange for this “advance”, the investors received 3% of Terralink’s sales for 10 years or until they received payments totaling $600,000. This amount would represent the original $200,000 investment plus $400,000 more. If Terralink repaid the advance over 10 years, investors would earn a compound annual return of 11.6% or their investment. If however, Terralink’s sales took off and the $600,000 was paid to the investors in five years, the compound annual return would be a juicy 24.5%.

Capital SourcesCapital Sources

• Asset Based Lending

• Factoring

Good To Know WebsitesGood To Know Websites

• SBA.Gov

• Score.org

• Score114.org

• Rjbradley.com/blog

• Business.gov

• Grants.gov

• Prosper.com

• Boefly.com

More WebsitesMore Websites

“Crowd Funding”– Profounder.com– Peerbackers.com– Kickstarter.com– Indiegogo.com– Rockethub.com

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QUESTIONSQUESTIONS

?SCORE

JOHN SEELINGER

[email protected]

1 start up funding by john seelinger score counselor [email protected]

Documents

capital sources fixed

capital increases

capital sources private

breakeven slide

magazine slide

startup costs

business needs

business right