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FINANCING NEW VENTURES Chapter 3 – Unique cash flow and risk dynamics of early stage ventures

FINANCING NEW VENTURES Chapter 3 – Unique cash flow and risk dynamics of early stage ventures

Could someone answer several questions of the following? Just please answer what you make sure, don’t need all of them:

 

Should base on these 3 discussions(reply these 3 threads):

 1. This case gives a great example of how a high gross margin company needs less capital to finance working capital (inventory and receivables). It also explains why companies with high return rates generally do poorly. Do not start (n or invest) in businesses with high return rates. A good example is women’s high end clothing. You’d be amazed how many wear an expensive dress one time to a fancy ball or dinner, and return it the next day, saying they didn’t like it! I know. I lost a $100k investing in a women’s high end clothing store in NYC. 

 2. Let’s talk about J curves and peak cash needs.  The J curve is the expected cumulative cash profile of a venture.  Look at page 53 in the book. You need to estimate the bottom of that J curve for your venture. Both in terms of the total cash you’ll need and the time in years when you’ll finally start to turn cash positive.  This is key to the financial viability of your idea!  Typically investors own 1/2 of a business at exit.  Typically investors invest for a 10x return  So a company should exit at ~20 times the predicted cash need (investment)  So if your idea needs $5m, then it needs to be plausibly a $100m company in 5-7 years.  Nothing else will generate the needed IRR to offset the risk that 8 times of 10 you’ll fail.  Take a look at various J curves on page 57. And also look at the J curve on page 60 with the added bonus of expectations of the various rounds of funding (amounts and years). A smart entrepreneur (hopefully you!) will have already planned this before you seek VC funding.  Remember the 12 to 24 month ticking clock (or time bomb!). Companies raise money every 1-2 years, so they face running out of cash unless they can achieve the milestone and secure new funding.  Always start fundraising 6-9 months before you run out!  So plan on 5-7 years of fundraising in 3-4 rounds. Why?  – takes 5 years to build a business to consistently profitable  – best to fund over 3-4 stages every 1-2 years  – VCs need to exit within 7-10 years and need a chance at a 10X return from the winners. (Remember the losers are -1X!)  Best companies have high gross margins of at least 50%. 

 3. The fact that VC focuses more on short-term can create some difficult moments for entrepreneurs. The strong believe that entrepreneurs have in startups fuels the desire to see their companies succeed. This means that in order to attract VCs, entrepreneurs should make sure that early stages goals are met, make sure that theirs margins forecast cash flows predictions are in line with actual early stages of the business. I wonder how many startups fail because of the fact that investors are not too keen to stick around and focus more on short-terms targets. 


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