DOING A START-UP

1
DOING A START-UP
2
INGREDIENTS FOR A START-UP

• The basic idea (the opportunity)menocheck/Pace
  One
• The key person - management team
• The private placement memorandum - the Package
• The (ventures) capital

3
KEY PERSON - MANAGEMENT TEAM

• One chief executive or a group?
• Characteristics of an entrepreneur
• Confidence
• And most of all, Character

4
Elements of the Basic Idea
5
Forms of Organization

• How should we organize this new venture?

6
Plan (softly) for an out

• Venture capital rule of thumb
• 10 times my money
• in
• 3-5 years
• multiple of earnings, generally
• but many other valuation methods

7
Basic Profitability

• Pricing the product/gross profit, and
• Estimating the size of the market
• Is it a pain killer.or a vitamin?
• Pricing the product by marking up the cost is the
  sign of an amateur entrepreneur reap your
  extraordinary profits now

8
Capital Intensity

• Sunk costs
• You dont have to make what you sell
• You dont have to package what you make
• You dont have to store what you sell
• You dont have to sell what you sell

9
One Product Firms

• Can be OK
• Are you losing an opportunity to sell MORE to a
  customer?
• Revenues!!!
• Commitment to a line

10
Repeat Orders vs. Single Sale
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Capable of an out

• 10 times money in 3-5 years

• Merely paying dividends or interest doesnt
  excite this type of investor

• Go Public

12
Capable of an out (cont.)

• When outside investors get involved in a deal,
  the whole situation changes for the entrepreneur

• Some entrepreneurs associate raising outside
  money as being a measure of success

13
Barriers to Entry

• Intellectual Property

• Is 1st to market desireable?

14
Tell Me Upfront

• The opportunity/idea 16 words in 16 seconds in
  terms on a 16 year old level
• Tell me what you want from me
• Tell me what youre gonna give me

15
PRIVATE PLACEMENT MEMORANDUM

• Overall appearance
• Length no more than 25 pages plus pro-forma
  financials (most likely scenario only).
• Double spaced
• No mistakes

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PRIVATE PLACEMENT MEMORANDUM

• Introduction and summaryexcite me and tell me
  what you want
• The product - What it is that you are going to
  make or sell ?
• Marketing Perhaps the most important section
• The need for market research or equivalentprove
  the market and forecasted revenues
• Management track record
• Financial summary
• Review of sales and profits
• How much money will it take?
• Pro-Forma Financials Footnote everything

17
HOW MUCH STOCK TO OFFER?

• Use the following formula for your offer
• Investment X Rate of Return desired (some
  multiple)
• Fifth year earnings X Suggested P/E ratio
• Points up the importance of the Basic
  Profitability low profit firms mean that you
  will be giving up much more equity!
• Lets look at handout-you need to internalize
  this!!!

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HOW MUCH MONEY DOES IT TAKE?

• First, you take the maximum negative cash balance
  for most likely scenario, M.
• Next, you calculate the maximum negative cash
  balance for most pessimistic scenario, A, and the
  maximum negative balance for the most optimistic
  scenario, B.
• Then you take the greater difference between M
  and A and compare that with the difference
  between M and B.

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HOW MUCH MONEY DOES IT TAKE?

• Amount of money needed M
• Plus A contingency The greater difference
  between A and M and B and M, and then round for
  cosmetic purposes.
• For example If M 850,000, A 925,000 and B
  1,050,000 then
• Amount of money needed 850,000
• Plus Contingency
  200,000
• Equals Total amount needed 1,050,000

20
GET IT WHILE ITS HOT!

• If you want to fly to financial paradise, have
  enough gas to make the trip as there are no good
  service stations on the way.
• There are exceptions, of course, but in general
  it is wise to get all the money you need up front
  because if you have to go back for more it is
  likely to be terribly expensive. Also, when you
  call for more, it may not be there.

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PRO-FORMA FINANCIALS

• Three income statements, three balance sheets and
  three cash flow statements (monthly for 2 years/
  quarterly for next 3)(Yours should probably be
  weekly)
• Where you prepare three each of these statements,
  only put the most likely in your Package.
• Footnote every item in your statements even show
  such things as the changes in A/R or Inventory.
• Remember who is going to read this Package.

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TYPES OF VENTURE CAPITAL

• Seed money - what you need to get the idea to
  the point where you can raise the venture
  capital.
• Angel money.
• Venture capital - the amount of money needed to
  do the deal.
• Second stage money- money you can use to grow
  if you have to have it , it isnt second stage
  money.