(20 minutes presentation) Intro What is money? Equity, what is it, how does it work, where to find it, how much does it cost? Funding Where to find

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2 (20 minutes presentation) Intro What is money? Equity, what is it, how does it work, where to find it, how much does it cost? Funding Where to find equity and debt? Tips for start ups How to use equity and debt to your best advantage? Q&A (20 minutes) 2

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4 Cash ways to make money: Capital appreciation(in a sale) Dividends distribution Monetization of capital increase (mainly in public companies) Lending for margin (equity) Non-cash ways (Risk-based) to make money: NPV higer than 0 IRR, ROI higher than Cost of Capital ROE higher than Cost of Equity Lower equity risk Terminal Risk lower than Initial Risk Positive change in Valuation Model (ex, Asset-based to Cashflowbased) Terminal Valuation Multiple higher than Initial Valuation Multiple Reinvestment Policy Net Income higher than Nominal Cost of Equity Increase share price (if public company) Increase in the share premium Increase multiplier Asset ownership/control Perceived value 4

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6 Cash/accounting-based Higher EBITDA Higher Net Income Non-cash-based (intangible) Lower Risk Higher efficiency Client base Market position Market liquidity Technology/BP/BM Disruption Return Speed Good management Sustainability Good Governance IP Brand Run Rate Asset ownership/control Future monetization opportunities 6

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8 Equity = Money (cash or assets), that shareholders invest into a company Cash, assets, Sweat Equity Base of market economy 8

9 Return needed to keep the equity in the company. Opportunity Cost of investing in another company (Economic Choice) Can be affected by many variables. Can be partly market-driven, partly sector-specific, partly intrinsic. Main challenges with Equity: Not visible (not cash/accounting cost) For private companies, can only be measured after a sale 9

10 Where s the Equity? Venture Capital, Crowdfunding ~200 billion Private Equity funds ~1.3 trillion Pension Funds ~44 trillion Mercurio Capital - Financial System, Economic Strategy, Capital Budgeting, Quantitative Methods 10

11 Cost of Equity Seed Startup Early expansion Mature expansion Mercurio Capital - Financial System, Economic Strategy, Capital Budgeting, Quantitative Methods 11

12 Required Rate of Return Seed Event driven Startup Early Growth Late Expansion IPO Mature Time Mercurio Capital - Financial System, Economic Strategy, Capital Budgeting, Quantitative Methods 12

13 Sales (cash) Costs (fixed and variable) Investments Business matrix Stakeholder management Profitability Value Mercurio Capital - Financial System, Economic Strategy, Capital Budgeting, Quantitative Methods 13

14 Cash-based comparison some examples Sales versus Market Cap & Net Inc (in billion USD) Sales Market Cap Net Income Twitter Cerner Corp 3, Netflix

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16 How much does a typical start up owe its shareholders? Initial investment Revenue 100 Cost of Equity Value (end of year) Seed Year % 150 Start up Year k % 195 Early Expansion Year 3 1 million % 244 Mature expansion Year 4 10 million % 293 Sale 16

17 Initial investment 100 Cost of Equity Value (end of year) Year % 125 Year % 156 Year % 195 Sale 17

18 Debt is an obligation to pay back, in installements or in a single payment. Debt = guarantee of payment, give asset as colateral Can be also without colateral (unsecured) 18

19 1000 GBP 2 Year debt Balance Payment Interest Principal Balance Month 1 1, Month Month Month Month Total paid 1,180 1,000 19

20 Equity Loans: Equity that needs to be repaid monthly with interest (like a bank loan) Government-backed Guarantee Schemes: Can be equity-like or debt-like, regional and sector specific. 20

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22 4 F s (Founders, Family, Friends, Fools) Crowdfunding Business Angels 22

23 Banks Peer to Peer Lending Government backed schemes 23

24 8 in 10 disapears in 3 years Uncertainty: Market response Ability to generate cash flow Management ability Ability to fund further rounds of financing 24

25 Equity only In case of failure, money doesn t need to be paid back. Debt In case of failure, money needs to be paid back. (Usually the directors pay, not the shareholders). 25

26 Always test your product or service. Try to cover the 90% failure probability. Allocate ~25% of time on your weakenesses. Have a balanced and prudent approach to funding. Dont take on debt. Be a good listener. Focus on an exit. 26

27 Debt Leverage ( ) Equity Is high leverage a bad thing for start ups? Not necessarily. If you buy physical equipments, it can keep your costs low. 27

28 Day 1 Day 2 House price Bank (debt) 90 (90%) Bank get 90 Deposit (equity) 10 (10%) You get 20 (difference between 110 minus 90) 100% return in one day) Mercurio Capital - Financial System, Economic Strategy, Capital Budgeting, Quantitative Methods 28

29 Day 1 Day 2 Business value Bank debt 50 (50%) Bank gets 50 Shareholder Equity 50 (50%) You get 100 (difference between 150 minus 50) 29

30 Mercurio Capital Ltd Business Mathematics Made Simple! 30