Schlagwort: sources of capital

  • Strategy – why do we even bother with all of this? (b)

    Balance sheet

    Your balance sheet – yes, you have seen it when the yearly accounts were prepared but it really did not matter to your start-up. For you the one and only key was liquidity in the beginning, followed by profitability but what now? Yes, those accounts become important eventually. What do I mean by that – well, once you have established your strategic goals you will need to optimize your balance sheet accordingly. If you are preparing for a sale, potential investors (and their highly-skilled forensic accountants) will look at your accounts. Are you planning to change your debt to equity ratio and work with more capital? Will a bank lend you money? Are you going to build / buy your next office or remain a humble tenant?

    There are a lot more questions to ask and you are now playing with the big boys. A Fortune 500 CFO will be very concerned with her balance sheet and watch movements in these accounts closely. As an eCFO of a start-up this is a new area for you and you should slowly get into it as your business develops.

    In summary a balance sheet can also teach you lots of interesting things about your business and serve as an important stepping stone to your business’s next growth / development stage.

    eCFO Tips: Do not be afraid to think about new things. If you are working in an innovative start-up there might be lots of balance sheet optimization questions that nobody has really thought about. Are facebook fans in generic groups that are rented out for advertising assets? Should the initial investment into these groups be on your balance sheet and depreciated over time? How do you value your investments in other start-ups? What happens with your old, cancelled projects? Make sure you have good advisors and get lots of support when tackling these questions.

    Strategy can mean a lot of different things depending on your situation but as a general rule of thumb I would suggest that you consider anything that is not based around daily operational tasks as “strategic”.  Given your unique position in the business and access to information, you have the opportunity to support the other management team members in occasionally taking a look around and consider the bigger picture, away from the grind of daily demands. This is were you can add a lot of value and a sound strategy will help the business to develop faster and to reach goals that you did not think possible only a short while ago.

  • Strategy – why do we even bother with all of this? (a)

    So, why do we even bother with all of this? Initially, you need to make sure that your business performs well, does not run out of money and that financials analysis and data points support operational decisions. All of that you can do but if you are a serious eCFO this is probably not the stuff that makes you get out of bed every morning.

    What really should get you excited is building a healthy, growing and extremely successful venture.  Your operational measures will support that but more importantly you should be influencing the strategic development of your company – if you are not doing that you chances are you will never be more than a glorified accountant.

    Strategic decisions

    In order to make a strategic decision you will need a strategy. This may sound a little too simple, but ask some start-ups about their strategy and often you will find that they either do not have one or are unclear in what it is they are trying to achieve. How much time do you think an operationally involved management team has for strategic discussion, decisions and evaluations? From my personal experience: very, very little. Daily business and the demands of a growing venture will eat up all available time.

    This in turn means that your role becomes more important. As an eCFO you can provide plenty of data and input for creating a strategy. Often you will also be more shielded from client demands and product needs than the other members of the management team. Make sure you  that you add a discussion about strategy every now and then to the weekly/monthly meeting agenda.

    Formulating a strategy will require a highly customized approach as your business will have individual needs, goals and problems. Nevertheless, I can assure you that if you have implemented the measures discussed on this blog, than you have all the necessary tools, processes and data to support and drive a successful strategy formulation and implementation process. This in turn will help the entire management team to make better business decisions. I have chosen a couple of strategic measures that can be undertaken to provide examples of what I consider to be strategic decision for an eCFO. As I said these are just examples and you should think long and hard about strategic elements for your specific business situation.

    Profit distribution

    So let’s assume that business is going well and money is flowing in. Operationally, you have fixed most major issues and business is good. With the money comes a totally new perspective for a start-up. You have to decide what to do with a refilling pool of cash – should you distribute to hardworking employees, enrich your shareholders, reduce prices for your valuable clients or invest like crazy? Again there is no perfect answer to this but a sound financial analysis will help you to make a better decision. You should start to think about concept such as ROI calculations to evaluate which return perspective each of your investment/payment decisions has. Furthermore, you need to open a dialogue with all of potential stakeholders to find out what exactly there demand and needs are. Often you will be surprised by stakeholder expectations. Note: it might be dangerous to communicate too much to each stakeholder on, as this may raise unrealistic expectations which then lead to disappointment.

    eCFO Tips: Communication, communication, communication… when it comes to strategic decisions never assume that you know what each stakeholder wants. You will most likely approach a decision from a financial analysis perspective – most other (normal) people will not think that way – so make sure you talk to everyone and do not assume anything. Often you will be surprised – sometimes pleasantly and sometimes not so J.

  • Interesting article „Managing the legal process in an early stage startup“ …

    Here an interesting article from London based Seedcamp partner Carlos – great read!

    Managing the Legal Process in an Early Stage Startup

     

  • FolienKnecht – a case study (b)

    Business model testing (Is it profitable? Is it scalable?)

    Regular checks are important for a start-up. Have your previously set goals been reached and if so, can the business be scaled further? We usually measure the scalability by starting with relatively small trial cases that cover a broad range of marketing measures. Can we generate sales through Google Adwords, mailings, e-mail marketing, tele-marketing, direct marketing events or any other method? If there are a couple of measures that allow us to generate sales with a positive return e.g. if we spend 50 cents we can generate 51 cents in revenue we know that this potentially could allow the business to scale. Once we have found a method that seems to work, we scale the test case – if we can generate EUR10,000 in revenue by spending EUR500 through adwords, could we also generate revenue of EUR100,000? As an eCFO you need to push this test case as quickly as possible to make sure that the business model actually is sustainable and has significant revenue potential. If not – kill it quickly.

    eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.

    Event overview!

    Investments and financing

    I admit – this is a special case since FolienKnecht is a services business, a powerpoint designer, which can grow through its own cash flow generation ability. Therefore, I just needed to make sure that I fully understood the cost structure and what was needed to bring the business to break even cash flow generation without raising significant capital. As with most agencies it is possible to grow with this easy formula: “one employee needs to generate enough cash to pay the salary of two, two for four, four for eight and soon growth is possible”. In addition, your cost structure will mostly consist of salaries and some marketing investment but both cost items should quickly generate revenue. What is more important is that you create structures that are highly efficient and streamlined for cash generation.

    For any other type of venture that require significant start-up capital I would suggest that you calculate your financial needs, then add 30% of that total to your numbers and you are good to go. Once you have determined your financial needs, raise a little bit of capital yourself and build a prototype. Investors are much more likely to give you money (even for a higher valuation) if you can show them a working prototype vs. a slide presentation with nice ideas on it.

    Overall, I hope that these posts provided some operational examples of how to implement the measures I described in previous posts. As always I am looking forward to receive your feedback and comments!

  • FolienKnecht – a case study (a)

    Enough of all the theoretical posts! Here is a more interesting, operationally focused case study. I think that my previous posts have theoretically highlighted various aspects of being an eCFO but what does it mean for operational reality? In order to further highlight this I was able to get permission from one of our venture teams to write about them in this post.

    Here a quick description of the business model:

    FolienKnecht (German for “PowerPoint slide servant”) is focused on providing high quality outsourcing services. Its first line of business is creating, designing, and improving PowerPoint presentations. (www.folienknecht.de; Spanish: www.ppt-express.com)

    Its second business line has recently gone online with a video creation/design offering (www.videoknecht.com) and it also provides a range of other outsourcing services through www.165euro.de. The business was initially tested through an intern and eventually bringing it into fully operational mode through incubating it within our company (www.etribes.de).

    Timeline of development

    FolienKnecht was incubated in the beginning of January 2012. We found a very capable management team consisting of two guys. One is the intern who developed the project and the other is an experienced entrepreneur. Both were willing to take this project forward with the eventual goal of founding a company and creating a business outsourcing company with multiple revenue lines from various business services.

    Operationally, they received support from our incubation structure but this case study will focus specifically on the financial aspects. If you are interested to read a case study from another perspective you can find additional insights (sorry, in German only) here: http://www.kassenzone.de/2012/05/30/powerpoint-malerei-outsourcen/

    eCFO tasks for a new venture

    As the eCFO in our holding company it was my responsibility to take care of the financial aspects. In this role I helped the management team to develop a strong financial understanding to ensure that the company eventually developed into a financially strong independent entity.

    Team

    Within the team responsibility was shared between the two founders. In start-ups everybody does a little bit of everything to make sure that things get done quickly. This is necessary and a good starting point but fairly quickly set roles should be developed. I asked the founding team to provide only one contact point for all financial questions, analysis, and data points.

    Basics

    Our incubation services take care of all central basic services. This ranges from office space, to laptops, water/lots and lots of coffee and other basic things you need to run a business. In addition, we take care of central services such as accounting, HR, recruitment, and legal consultation. These services are initially provided free of charge to speed up the incubation process. However, it is important to make sure that the entrepreneurs are aware of the actual (expensive) services the venture incurs. The company therefore needs to track these expenses and needs to start to implement liquidity controls, budgets and financial planning. This is best done through an Excel spreadsheet that mirrors an actual P&L statement.

    Controls

    Initially, we determined the basic costs incurred by running FolienKnecht and set clearly defined goals we needed to reach in order to move all activities from our incubator into the new entity. Spreadsheets and preparation of financials are also important controlling functions. Here it was important that once a clear goal had been defined, the necessary measures were put into place to ensure that it could be tested on a monthly basis whether or not the venture was successful. We came up with a simple P&L statement that showed expenses, income, and sales funnel in an excel spreadsheet. This is a quick, slightly dirty, way of preparing the necessary financial information. In addition, we provided access to our billing software so that every bill can be generated by the management team but, more importantly, so that they can understand payment cycles and all connected liquidity concerns. If you are incubating a business within an already existing structure, you need to make sure that from the get-go the management team feels the same constrictions and problems it would feel as an independent business.

    eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.

    To be continued in the next post …

     

    Here you can find an example of their work:

    Die
    FolienKnechte    [slideshare id=13542261&w=427&h=356&sc=no]

    View more presentations from FolienKnecht

  • German tax privileges for entrepreneurs under fire…

    Very interesting article for German entrepreneurs on Gründerszene.de. Watch out what the tax treatment for your equity shares will change in the coming month!

    http://www.gruenderszene.de/recht/gesetzesaenderung-exit-holdings

  • Ernst & Young Article

    For those of you fluent in German here an interesting article from Ernst and Young in regards to financing phases. http://bit.ly/JOprgC

     

  • Financing or getting married?

    Setting the tone…

    Financing is a fundamental decision for each entrepreneur. Unfortunately, there is no perfect financing partner and each financing process should be highly tailored towards an entrepreneur’s individual needs.

    I often compare financing to marriage – as crazy as it might sound a financing process has many comparable steps. From the initial flirtatious phase where a person goes out and looks for a date to eventually marry–an entrepreneur’s initial hunt for an investor to the final signing of documents in front of a notary has a lot of similarities. Whether you see your perfect partner on a dance floor or see a famous venture capitalist walking around at a networking event – I promise your heart will start to beat faster. Once a relationship becomes serious and an engagement looms on the horizon an entrepreneur will face a lot of due diligence questions – similar to going for your first trip with the future in-laws. Marriage is just the same – some will be great, long-lasting and highly profitable for both sides, while others will end in a quick and maybe even messy divorce where both sides wish they would have paid more attention to the wedding contract. Most importantly there are a couple of comparable lessons entrepreneurs should take from marriage:

    1. Choose your partner wisely – you might be together for a long time
    2. Make sure you can live with each other BEFORE you get married – after you signed the contract it is much harder to get out
    3. Make sure you have a complementary skillset – as with most marriages your partner will help to mitigate your weaknesses with his strengths and vice versa
    4. A good relationship requires hard work, dedication and trust – both sides need to work on keeping the relationship happy

    Before going into the more technical aspects I hope that I set the tone for financing and the importance it will have for your venture – it can be a game-changing experience and that is how seriously you should take your financing partner selection process.

    This post will now highlight different funding options for entrepreneurs and their new ventures. Aside from all the operational issues the question of a) how much money do I need and b) who should I get it from – are often the most difficult choices an entrepreneur has to face.

    In order to define some variables for the case studies below I will show my view of financing stages – there is a lot of debate and options on what stage is what so here are the definitions I found easiest to work with:

    Pre-seed:        €0 – €50.000

    Seed:               €50.000 – €250.000

    First round:    €250.001+

    Pre-seed should always be used to get a small test case going that outlines the feasibility of the project and in my opinion this should be 100% financed by the entrepreneur and her team. If an entrepreneur is not able to either raise that amount of capital from FFF (friends, family and fools) she should reconsider if starting a venture is the right thing to do.

    eCFO Tips: Especially online focused ventures can easily create a fully functional click dummy, wireframes and a strong web presence to convince investors with more than just nice looking slides. This will help you to move your valuation discussion to a whole new level.

    It becomes trickier in the seed financing round. Here the amounts of money needed are more substantial and can often not be contributed by only the entrepreneur or FFF. I would advice to look for a partner in this stage who can contribute more than just capital. This is probably one of the most overused and equally misunderstood statements ever used. 

    eCFO side note: my personal favorite and number one overused phrase is: teams – people are everything and I only invest in A team – especially if it comes from a VC or incubator team that replaces its entrepreneurs after every little bump in the road and does not care at all about the entrepreneur who put his blood, sweat and fortune into building a high risk venture. Make sure you check on an investor’s reputation and how past teams of entrepreneurs have been treated.

    … more than capital …

    More than capital for me means either excellent investor contacts that lead to initial sales, technology knowledge or direct hires. It is often difficult to fully understand how good these contacts are prior to actually using them. Here I would advise the entrepreneur to call at least three different references who can talk about their relationship and experience with the investor. Often entrepreneurs think that ONLY the investor can undertake an in-depth due diligence – this is not true. The entrepreneur should also fully understand whom she is taking on board as an investor and should make sure that her due diligence is thorough.

    …sources of capital…

    In terms of capital sources I would like to provide three sources of capital that are build on my prior experience and the experience of many other entrepreneurs I have talked to over the years.

    Venture Capital

    Pros: Venture capital from a professional VC firm or investor is a highly potent source of financing. A VC will, in most cases, have an excellent network and a strong understanding of financing processes. He (and most often it will be a he) is also a specialist in legal and financing documentation. The can provide strategic advice and will have strong market knowledge. In addition, most VCs will have access to either additional capital from their fund or alternatively have a network of financing or exit partners that ensure future capital when an entrepreneur needs to raise more capital.

    Cons: For an entrepreneur there is a dark side to all of the previously mentioned positives. VCs will have an excellent network but make sure that the network is right for you – just knowing a lot of other VCs and entrepreneurs might not be what you need. Strong contacts to marketing partners or future clients might be much more important. The strong experience in financing processes and legal documentation is the most frequently used weapon against an entrepreneur. Always remember it is a VC’s JOB DESCRIPTION to write financing documentation that will give him every possible advantage. There is no easier way to completely lose control of your venture than to sign a document drafted by a VC.  A VC will always be better in contracts than an entrepreneur is – remember an entrepreneur is generally operationally focused. A network for follow-up financing and exit partners is exactly that – a quick way to EXIT the investment and get a return. A VC will always want to exit your business in order to get returns. Remember by entering into this financing relationship you are also defining a sale of our business.

    eCFO Tips: ALWAYS make sure you understand what drives a financing partner. The average VC will have a three year fund raising cycle that means they have to go out and raise / pitch for new capital one year after closing their current fund. The VC world has become a significantly tougher place – many VCs failed to raise capital during the financial crisis. If an action that puts your venture in jeopardy but will help their fund raising comes up it will be clear what they will do. Be prepared.

    They will also have huge return expectations from their capital providers and can only use very limited leverage– so an exit is the ONLY way for them to be successful. Keep that in mind if they ever tell you that they will not push you towards an exit.

    Conclusion: VCs have a lot of money available and are highly professional, agile and focused. They will be exit-driven and push you forward as long as you generate returns. They are only in it for the money – never forget that and use it to your advantage.

    Joint Venture / Strategic Partner

    Pros: A joint venture with a strategic partner can be a great thing. A strategic partner will have deep operational experience and in most cases significant non-financial assets. Aside from capital this partner will often offer access to clients, knowledge and team members that a budding entrepreneur could never source independently. In addition, it will be a strong financing partner who is not discouraged by small bumps in the road and is in it for the long-term.  An entrepreneur can also be sure that the right exit partner has already been found. Most strategic investors will add a call-option to the financing document that allows 100% purchase of the business in the future.

    eCFO Tips: Call-options are funny things – you are giving away your company at some point in the future without having any indication, beyond wild hopes and dreams , of its value at the time of exit. Remember that in general there are some things are just as true for a strategic partner in the future as in the present– they will still have more lawyers than you do, they will hopefully still have a substantial strategic interest in your company and they will have cash.

    So try to lock in a valuation method now that rewards you for parameters you know your business can potentially reach. As an example: don’t put an EBIT based valuation into the contracts if you know that you won’t reach break even for a while or agree too easily to a “at fair market” valuation. Especially with fair market value valuations it will be hard to argue for a correct market value if this asset makes only strategic sense to your individual investor and when you have no realistic way of shopping / showing your company around to other investors when you are trying to exit. Even if you put in the popular phrase that allows for an evaluation of an independent auditor remember that this auditor will most likely be working for your strategic investor and that they will always be a more interested to work for the strategic in the future than you – magically that can influence valuations!

    Cons: Again, what is true for VCs is true here as well. Most of the pros of a strategic investor can be turned around into negatives. Most of all, be prepared to be in it for the long-term – that is true for EVERY SINGLE ASPECT of this relationship. In the beginning be aware that most strategic partners will have decision making processes that make a snail seem to move at rocket speed. From the first pitch to actual investment it can easily take 9-12 months.

    In general, strategic partners will also be huge organizations – getting to the right people at the right point of time and piercing through inter-corporate politics can keep you quite busy. In a start-up there is no time for politics and things that move you ahead in large corporations. Things like number of employees (overblown teams), budget (spending & wasting) ability and political connections (sucking up) will actually be disadvantageous for any start-up.

    You will also not be able to move in any direction you want. Certain clients, business methods and entrepreneurial shortcuts will be off the table. The strategic partner will also be sure to keep the upper hand in any contract and it will sometimes be hard to show that this is a joint venture between equals.

    Conclusion: A strategic partner can unlock assets that you couldn’t buy with money – contacts and operation experience can be right at your fingertips. It will be generally a lot nicer relationship than with your average, cut-throat financial investor but you will have to deal with a lot more politics, size and slow- moving operational structures.

    Bootstrapping

    Pros: For me this remains the true key entrepreneurial discipline. There is no better feeling than growing a company based on the strength of your team and your personal efforts. Almost nothing feels better than looking at your financials and generating substantial returns and knowing that all it took was your hard work and not somebody’s capital. You did not buy your success – you truly built it.

    Aside from this motivational aspect it also means that when it comes to making decisions you do not have to ask anyone else. Your team and you have full freedom to run the business. It also means that you can grow a business and maintain ownership of the business as long as you want. This is also true for all returns that your business generates.

    As an entrepreneur this also prepares you for making hard and fast decisions. You do not have time for waste of capital, bad employees or unprofitable clients. You have to act quickly and decisively to stay alive since there will be no capital buffer to keep you going if you run out of cash.

    Cons: Bootstrapping is hard, often prevents you from making necessary investments and always distracts from the operation side of your business. It is also only good for highly cash-generative business models such as services provider and agencies. The constant liquidity pressure will also shape you as an entrepreneur and make you hesitant to go on sometimes necessary spending sprees and/or investments.

    It will put your team into a hard place that often requires to opt for short-term cash generative measures instead of focusing on long-term value creation.

    Conclusion: Bootstrapping stands for freedom from external investors but puts severe operational restrictions on your business. It can only work for some business models and will make it almost impossible to quickly expand your business or to rapidly capture markets. For me this remains a key test of your entrepreneurial skills but most people will not be able to build a significant business without any external capital.

    …and finally

    In our business we have successfully raised capital and grown businesses using all three of the above mentioned financing methods.  That taught us that there is no perfect financing partner but depending on which venture you are trying to get funded one or the other will be a significantly better choice. Just make sure that from the get-go you understand your motivation and what motivates your financing partner. Any relationship then needs hard work, dedication and trust. Make sure that all three of these aspects are maintained throughout your financing partnership … come to that and going full circle from the beginning it might even help in private partnerships as well 🙂

    Quick Disclaimer: I have only focused on equity capital. There is a lot to be said for alternative financing or debt financing. Stay tuned for a discussion of these topics at a later stage in this blog.