What is venture capital?
Venture Capital is structured financial capital provided to early-stage, high-potential and high-risk start-up companies
Possible losses due to an angel investment
Dilution of ownership
Dilution in control
Representatives in corporate governance (board member)
Increased risk of business take over
What is entrepreneurial finance?
Entrepreneurial finance is the process of making financial decisions for new ventures
Uncertanties for a start-up
Markets
Management
Product
Regulations
Finance
Top causes for financial problems
Unexpected investments in R&D
Pre-financing of orders
Unexpected customer behavior
Insufficient sales experience
Late market launch
Decisions that have to be made at the begining of a start-up
Investment
Financing
Difference in time and certainty of cash in- and outflow
Cash outflow
Rent
Furniture
Staff…
—>Prensent & certain
Cash inflow
Sales
Entrance fees
Advertising
—>Future & uncertain
It is essential for your start-up to bridge the gap between cash outflow and inflow
Key learnings to minimize liquidity risk
Create a weekly cashflow plan: Liquidity risks represent the core risk for young start-ups
Closely monitor outstanding receivables: Granting credit periods is a core reason for a drift between liquidity developments and operating results
Include all claims and receivables in the cashflow plan: Make sure that you include all relevant claims and receivables in your planing
Fail early: Liquidate your business to avoid bankruptcy in case there you continue to be unable to pay your bills on time
Objective of short term vs. long-term planning
Management of short-term operative business activities with a focus on cost control, variance analyses, short-term liquidity issues
Observation of start-up developments in the next 2-5 years with a focus on assessing requied capital invesments for financing rounds
Groundrules of short-term liquidity planning
Cluster sales into relevant key account groups
Compare actual vs. budgeted sales performance by key account
Cluster your costs into relevant groups
Develop a weekly Cashflow statement
Define minimum levels of liquidity for your operative business
Determine cash-burn of previous month in order to define expected cash-ot dates
Benefits of short-term liquidity planning
Transparency on core cost drivers
Identification of committed capital
High level of financial control
Early warning systems
Core principles of long-term budgeting
Develop a detailed financial plan for the next 2 years and a high level finacial plan for the next 5 years
Conduct industry research on potential when developing your budget - due to the lack of past experiences budgeting in start-ups is more time consuming and complex than in established firm
Stay flexible to regularly adapt your budgets if necessary. Regular adaptations help to minimize the gap between actual developments and budgets
Conduct extensive research on potential cost drivers when developing your budget - due to the lack of past experiences budgeting in start-ups is more time consuming and complex than in established firm
Steps of Long-term budgeting
What is the most important information of all financial statements for investors?
For investors the Cashflow statement provides the most important information of all financial statements
The Cashflow Statement shows how much cash the Start-Up has generated and how that cash has been allocated during a set period
Structure of a Cashflow statement
What causes 80% of start-up failures?
missing control mechanism
—>Start-ups tend to disregard economic principles by focusing solely on the operative business
4 core functions of effective controlling
Supervisory role
Secure the continued existence of the start-up
Balance flexibility against focus on details that is required for internal steering and investors relation
Informational role
Devleop an efficent reporting system
Implement an effective cost and activity accounting
Planning and Coaching role
Implement an effective KPI system that translates planning objectives into measurable results
Steering role
Support the CEO in business decisions and act as an early warning system: report significant variances from objectives, provide analyses for business decisions
What are the two key elements of a start-ups required reporting standards?
Balance sheet
Income statement
What is a balance sheet?
Provides an overview of the firm’s assets and liabilities - snapshot of the firm’s financial position at a certain point in time
What is an income statement?
List the firm’s revenues and expenses over a period of time and provides a bottom line measure of the firm’s net income
Structure of a balance sheet
Difference between a balance sheet in corporate and a start-up?
Corporate
Current assets exceed current liabilities since cash balances and other assets accumulating from increased profitable sales
Stockholders equity rises to fill the gap between assets and liabilities
Start-up
Limited or no generation profits and free cash flow in early start-up phase so that current liabilities exceed current assets
Stockholders equity is negative to fill the gap between assets and liabilities
Structure of an income statement
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