Slide1 : Innovations in Business Finance:
How To Never Say 'NO'
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Strategies for Business Innovation
Energizing Entrepreneurship in Rural Minnesota
February 15, 2005
Dileep Rao, Ph.D.
President, InterFinance Corporation
Adjunct Instructor of Entrepreneurship
Carlson School of Management (UMN) Phone: 763-588-6067
Web site: www.infinancing.com
To Develop Your Business Financing Plan 'In Under 60 Seconds'
My Background & Bias : My Background andamp; Bias 1973-1996
Venture–Based Economic Developer andamp; Financier
Financed 450 businesses/ projects
Created 13,000+ jobs
Used equity/ debt/ development finance
Turnarounds, Startups and Expansions
Manufacturing, Technology andamp; R.E.
Venture Manager
5 Turnarounds andamp; 4 Startups
1997- Present
Venture Development Consultant to:
Ventures, Financiers andamp; U.S. Government
Adjunct Instructor (Carlson School/UM)
Venture Development andamp; Finance
Author
Business Finance: 25 Keys to Raising Money (New York Times)
Handbook of Business Finance andamp; Capital Sources (American Management Assn.)
Entrepreneur: Online Business Finance Plans
Innovations in Business Financingto Never say “NO” : Innovations in Business Financing to Never say 'NO' Complete Financing Arsenal
Improved Deal Flow for Better Returns
Reduced Risk for Lower Losses
1. Complete Financing ArsenalTo Never Say “NO” : 1. Complete Financing Arsenal To Never Say 'NO'
Financing Trends : Gap Financing for Venture Growth
1950s andamp; 60s: Rich families for VC/ Banks
1970s: VC – Equity; Sub Debt w/Warrants
1980s: Gap Debt Financing: Sr. / Sub Debt without warrants
1990s: Micro – from the 3rd world.
Banks: Then SBA as too much paperwork: Now: SBA does not have enough guarantees
Then: Pick best financing opportunities; Now: Financing in search of Opportunities Financing Trends
Never Say “NO” : If business is not viable, make it feasible:
Guide/ Train/ Recruit entrepreneur (team) for success
If business is viable:
Develop the right business finance plan
Have a complete arsenal of financing tools
Never Say 'NO'
Plug the Key Financing Gaps : Plug the Key Financing Gaps By Business Type:
Manufacturing, Technology, etc. – Area Impact
By Uses of Funds
Working capital: Inventory/ Losses – Tough to Finance
A.R.: Sometimes easier to finance
Fixed Assets: Equipment andamp; Real Estate
By Types of Assets andamp; Secured Position
Senior
Subordinated/ Unsecured – Tough to Finance
By Term of Financing
Short/ Mid
Long – Tough to Finance
By Level of Risk
Equity Early Stage – Tough to Finance
Late stage equity; Debt andamp; Lease
Key Question for Development Financiers:Financing high-risk/ low-potential ventures : Key Question for Development Financiers: Financing high-risk/ low-potential ventures Risk Potential
Equity FinancingFor Economic Development : Unrestricted VC -- Seek highest returns
Go where best deals are for potential Home Runs
Look for:
High-potential industries, technology
Star management -- Track record of creating wealth
High valuations at exit: IPO/ Strategic
Often seek later stage with less risk andamp; closer to exit
Restricted VC (Restricted returns)
Restricted by:
Financing Source –SBICs
Area -- Economic development VCs
Industry – Corporate (some Area) VCs
Management -- some Specialized SBICs
Higher Risk due to Earlier Stage; Less 'Perfect' Deals (from VC perspective)
Lower Returns due to Few Home Runs
Reduce Risk : Experience in Restricted VC Equity Financing For Economic Development
Reality-Based Returns : Good Data vs. P.R. andamp; Hype
Levels of ROI possible from CDVC based on proprietary model. Should you keep your money in the bank?
Reality-Based Returns
My Key THM. : My Key THM. Know your gaps and fill the real, needed gaps by:
Evaluating your risks
Training your staff
Become the first choice of high-demand entrepreneurs
Expect realistic returns from CDVC
2. Improved Deal Flow for Better Returns : 2. Improved Deal Flow for Better Returns
Opportunity Trends & Issues : Business Retention andamp; Turnarounds
Retention – First Focus
Turnarounds: Structural defects andamp; bad management
Business/ Venture-Entrepreneur Recruitment
Then: MN to IA, WI, SD, ND/ South/ Mexico
Now: MN to Asia (Global challenge)
Venture/ Entrepreneur Recruitment: Are you recruiting those 'rejected' by others?
Venture andamp; Entrepreneurial Development
Then: Develop suppliers to U.S. manufacturers
Now: Niche manufacturing to compete vs. China
High-tech Venture Development in Minnesota
Then: MN as global tech leader – CDC, Univac…
Now: MN leading only in medical
HOT Industries
Then: PCs; Biotech; Biomedical; Internet
Now: No HOT industry – tough to find 'home-runs' (Same as 'stock market' vs. 'market of stocks') Opportunity Trends andamp; Issues
Venture Development “Philosophies” : Venture Development 'Philosophies' Gatekeepers –Venture Finance – Say 'NO'.
Venture Developer: Irresistible Force – Champions – Believe 'YES'
Grow new ventures
Grow existing businesses
Use corporate resources for corporate, venture and area benefit
Odds to Develop Successes : Number of Firms
In U.S. (2001 Census): 20,982,000
With Payroll: 5,542,000 (26.4%)
With 10+ employees: 1,121,400 (5.3%)
With 20+ employees: 505,300 (2.4%)
New firms – Startups:
In 2002 ( SBA Estimate): 550,000
Receiving V.C. in 2002 (PWC): 147 (0.03%)
With 20+ employee potential: 13,200
With 10+ employee potential: 29,150
With payroll potential: 145,200
Suggestion:
VC criteria is strict –Be more inclusive
Target opportunities with potential, or current, payroll of 10+, or 20+ employees.
SBA: Small Business Administration
PWC: PriceWaterhouse Coopers Odds to Develop Successes
Understand Risks inNew Product & Venture Development : Understand Risks in New Product andamp; Venture Development Track Record for New Products
Of 100 new products, 63 are canceled, 12 fail and 25 succeed (Booz-Allen, 1982)
Track Record for New Ventures
20%: Total failures
60%: Some loss to minimal return
18%: Reasonable return
2%: Home runs – Most from VCs in Silicon Valley andamp; Boston
Suggestion for Area Venture Success:
Home Runs are rare – Especially in Area Venture Development
Key: Reduce failure rate -- SELECT OPPORTUNITIES wisely
Select Opportunities Wisely : Select Opportunities Wisely Evaluate Management andamp; Board
Lazy (Time-Challenged) Investor’s Approach to Venture Analysis: Has anyone else with credentials already analyzed and invested?
As ADO, you may have to be the first.
Measure Benefits to Area from Industry
Area Multipliers
Market Scope
Analyze Industry andamp; Venture Risk: 4/5 ventures don’t meet goals
Level of Investment
Probability of Loss
Evaluate Value Added/ Value Protected/ Value Potential
Micro (Self-employment)
Mini (Small impact)
Mid (B2B or B2C or B2G)
Maxi (High competition for deals)
Evaluate for Value : Evaluate for Value Value Added: Competitive Advantage Impact on Market Share/ Gross Margins/ ROI
Costs, Productivity andamp; Execution: 'Race to the bottom line'
New Proprietary Product
Value Protected via:
Patent or trade secrets: Coke
Real estate location strategy: Wal-Mart
Overwhelming force: Microsoft
Execution and costs: Dell
Value Potential
Large markets builds large ventures
New industries attracts new ventures
High growth rate forgives sins and incompetence
Where to Find Diamonds : Where to Find Diamonds
Local/ Global Search to Find/Develop Diamonds : Local/ Global Search to Find/Develop Diamonds Resource (Technology)-based: Focus on what’s available in selected industries or local area (Cluster-based)
Demand (Market)-based: Focus on what’s needed in selected markets – then find locally or globally
Involve Local Corporations:How Corporations Can Benefit from Venture Development : Involve Local Corporations: How Corporations Can Benefit from Venture Development Create Markets for Local Economic Vitality
Purchasing Strategies: Minority Purchasing Councils
3M
Create Venture Opportunities from Corporate Unused Technologies -- with Buy Option
License out: Limited corporate potential – Union Carbide
Develop Corporate Ventures – when appropriate – with Area Help (subsidies):
Corporate Ownership: 100%/ Majority/ Minority:
Level of corporate bureaucracy
Corporate resources
Strategic control
Independent decision making -- Operations
Strategic Alliances to Plug the Gaps
License in: Helps corporate product line
Marketing, Operations, Finance, Randamp;D, etc.
When AreCorporate Ventures Appropriate? : When Are Corporate Ventures Appropriate? Technology is Breakthrough/ Revolutionary
Major Differences from Existing Products/ Processes
When Opportunity does not fit Corporate Culture/ Strategy/ Organization andamp; Divisions (Politics)/ Products/ Markets andamp; Channels/ Financial model
When Industry is Emerging
No rules. Need flexibility
When Potential is Uncertain
Vision Fits/ But No 'Champion'
Incentives & Infrastructure to be the First Choice for Attractive Deals : Basic:
Cost-Effective Physical Resources:
Industrial or Randamp;D Parks
Spec Buildings
Incubators
Job Training: Assistance and incentives
Financial Incentives:
Tax incentives andamp; Grants
Cheaper andamp; Riskier financing
New: Telecommunication
One world
Reduces 'rural' disadvantages
How to take advantage? Incentives andamp; Infrastructure to be the First Choice for Attractive Deals
My Key THM(Take-Home Message) : My Key THM (Take-Home Message) Successful venture financing NEEDS venture development
Use all available resources to develop opportunities – the more you have, the more 'home-runs' you are likely to have.
3. Reduced Risk for Lower LossesEnhance Your Area Entrepreneur Quotient™ : 3. Reduced Risk for Lower Losses Enhance Your Area Entrepreneur Quotient™
Management?Management?Management? : Management? Management? Management? VCs: Great Management or Great Product?
Management Needs by Type of Venture
Micro Business: Most academic/ non-profit
Small group management
Basic business advice
Small business management training
Mid-Sized:
Experienced andamp; sophisticated to manage managers and mid-sized firms
Training in opportunity evaluation andamp; business growth
Initial expert training followed by peer groups
High-Potential Ventures:
Visionary andamp; Strategic – 'World Class'
High-Potential: Stars with Track Record – Available/ Recruit to Area (San Diego vs. South Dakota)?
Entrepreneur Development Options : Entrepreneur Development Options School of hard knocks
Non-Profit/ Governmental Primarily educating new entrepreneurs with limited business/ corporate experience.
University Business Schools
Other: Online
Business School Faculty &Venture Development : Tenure-Track faculty usually have:
One-dimensional, discipline-centered Expertise: Ventures need well-rounded expertise in all areas of business Turnaround Consultant: Job descriptions when company in danger of bankruptcy due to theft
Limited practical experience
Corporate/ Investment Bank focus
VCs as Faculty:
Mainly MBA/ Investment Banker perspective – Financing and Analysis, NOT Venture Building
Focus on HR ventures – Rare in V-B ED
Entrepreneurs as Faculty
Comments based on sample size of one. Business School Faculty andamp; Venture Development
Use the Web to Train Management & Entrepreneurs : Use the Web to Train Management andamp; Entrepreneurs Education and training
Improving quality of training available
Help with analysis and assistance
Resources
Financing
Management
Buildings, etc.
Markets
Train: Steps to Develop New Businesses : Supply (Technology) Based:
Sources: Internal/ External Superior Product:
Long-Term Proprietary Advantage Segment from Heaven:
Best Segment. Size. Growth. Priority A. Opportunity: How Good?
Pricing. Proof. Profitability. Valuation Venture Options: Corporate Fit or ? Existing Division Corporate Venture (100% owned) Controlled
(51%+ ownership)
Affiliated (1-49% owned) Independent Venture:
License/ Option to buy Train: Steps to Develop New Businesses Unattractive Attractive Competitive Long-Term Advantage High-Growth Venture Options New Division Market-Trend Based:
Markets: Main/ New/ Niche Unattractive Yes No
Small or Family Business Corporate B. Business Plan
Business Strategy l Marketing l Operations l Management l Risks C. Finance
Train: Intelligent FinancingFrom Community Investment Banker™ Program : Train: Intelligent Financing From Community Investment Banker™ Program BUSINESS FINANCE NEEDS What Is Needed? Equity Debt Specialized How Much Is Needed? When Is It Needed? By Stage What Are The Uses? Operating Expenses Inventory A.R. Inventory Equipment Real Estate BUSINESS FINANCIER OPTIONS Private Lenders Banks Asset Based Lenders Leasing Cos. Factors Real Estate Lenders Investors Angels Corporations VCs Mezzanine RE Investors Development Financiers Local State Federal What Are Financiers’ Criteria Potential; Stage andamp; Risk; Cash Flow; Collateral; Job Creation
Who Should The Business Seek Cost; Terms; Risks; Covenants; Future Benefits; Exit Strategy; Amount availability; Time to raise
How to Structure the Financing Amount by stage; Types of financiers and financing; Financial instruments
Options to Obtain Financing Individual/ Institutional Private Placements; Public Offerings
My Key THM. : My Key THM. Enhance the competitiveness of your current entrepreneurs and economic developers
Final THM forVenture-BasedEconomic Development : Final THM for Venture-Based Economic Development Developers should be Independent, Unbiased, Non-obligated:
No Axes to Grind andamp; Sacred Cows to Worship: Venture vs. Tenure
Making enemies or Being political: Resorts vs. Mfg.
Compete with Private Sector: Industrial Buildings
Risk-Taking with Minimal Group-Think:
Multiple, Independent V. D. Groups –Informal VC grapevine can breed group-think
Coordinate to Develop All Venture Types for Growth/ Minimize shortcomings of each group:
VCs: Any Wart or Blemish -- Dump!
Entrepreneurs: 'Control my baby' even if still-born
Corporations: No Fit, New, Uncertain, Risky -- Out!
Control to Push Viable Opportunities -- Rare
Questions? : Questions?