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Upon completion of this class

Issues in Telecommunications TTMG 5003T Financial plans, startup financing January 22, 2008 John Callahan, PhD. Upon completion of this class. You will know about Financial statements Balance sheet, income statement, cash flow Pro-forma financial forecasting Startup financing

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Upon completion of this class

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  1. Issues in TelecommunicationsTTMG 5003TFinancial plans, startup financingJanuary 22, 2008John Callahan, PhD

  2. Upon completion of this class You will know about • Financial statements • Balance sheet, income statement, cash flow • Pro-forma financial forecasting • Startup financing You will be able to • Develop a financial plan for your opportunity Issues in Telecom

  3. Financial statements and cash flow • Excerpts from • Tracy, John A. (1999) How to Read a Financial Report, John Wiley & Sons • Knowledge Center (2002) • https://us.etrade.com/e/t/applogic/knowledge?gxml=Knowledge/Understanding_Financial_Statements/Introduction_to_Financial_Statements/index.html • Excerpts • http://http-server.carleton.ca/~callahan/sub/5003P/financial.htm Issues in Telecom

  4. Pro-forma financial forecasting • Targets not forecasts • You make it happen • Business plan put into financial language • Two approaches to revenue forecasting • Top down • Estimate total accessible market • Estimate percentage of total market to be captured • Bottom up • Specify revenue generating activities • Use capacity of these revenue generating activities to estimate total revenue • Top down common in high-tech because of the limitless potential of many tech-based product/service offerings • Example: Wii video game console Issues in Telecom

  5. Using a spreadsheet to create pro-forma financial forecasts • Financial template from McGraw-Hill (used for the text, Building a Dream) • “A simple Excel template is available here.” • http://highered.mcgraw-hill.com/sites/0070898103/student_view0/resources-999/financial_template.html • Example – one of your opportunities Issues in Telecom

  6. Chapter 6: Financing your opportunity –core ideas • Financing required by a startup depends on business model • Five basic sources of financing: sales revenue, government support, short-term debt, long-term debt, and equity • Debt is cheap but risky; equity financing dilutes founder ownership and diminishes founder control • Relationships between entrepreneurs and bankers and between entrepreneurs and venture capitalists are both complex but present different management challenges for the entrepreneur • Equity financing stages – seed financing, startup financing, first stage expansion and second stage expansion • Venture capital method commonly used in valuing startups • Multiples of net income (and even cash flow or number of engineers) commonly used in valuing tech-based startups. Issues in Telecom

  7. Business model determines financing required how high cumulative cash flow how fast how low time startup financing required Too much money can be a bad thing!!! Issues in Telecom

  8. There are five kinds of financing • Sales revenue – the best! • Government grants and loans • Short term debt • Bank loans, money market • Long term debt • Term loans, bonds • Equity • Can get very complicated • Preferred shares vs. common shares • Convertible preferreds and convertible debentures (bonds) Issues in Telecom

  9. Debt is cheap but risky • Debt is cheap • Interest on debt is tax deductible • Example – interest costs of 8%, tax rate of 40%, after tax cost of debt of (1 – 0.40) x 8% = 4.8% • Cost of equity is 10+%, can be as high as 40-50% • Debt is risky • Example – Table 6-2 of chapter 6, p 9 Issues in Telecom

  10. Using outside equity dilutes equity position of insiders • Example – Table 6-2, chapter 6, p 19 • This leads to the “rich vs. king” tradeoff • Wasserman (2006) • “High quality co-founders and non-founding hires will demand more equity than will lesser co-founders and hires. The same is true of investors who can add the most value, compared to lower-value investors. If the entrepreneur refuses to give up such control, he will fail to attract the best resource providers and thus will build less value.” • Figure 6-5, chapter 6, p 22 Issues in Telecom

  11. New venture financing • Founders • Family and friends • Angels • Venture capitalists • IPO or acquisition • Government • Banks Issues in Telecom

  12. Valuation – the venture capital method, an example Discount 7 years (1 / 1.40)7 $90 million $8.54 million Current time 2 4 6 8 10 years At 7 years, use multiple of 15 Profit of $6 million per year Value of 15 x $6 million = $90 million • $8.54M is post-money valuation because it is assumed that the firm uses the VC’s $3M in the valuation • VC invests $3M for 3/8.54 = 35.1% • Pre-money valuation is (8.54 – 3) = $5.54M Issues in Telecom

  13. How does all of this work for open source? • Revisit previous overheads and ask this question Issues in Telecom

  14. Next • Dynamics of technological change • The Innovator’s Solution • Chapter 2: How Can We Beat Our Most Powerful Competitors? • In class • Christensen, C.M. (2004b). Strategies for Creating Innovation-Driven Growth, Demo, http://www.innosight.com/strategies_growth.htm • At home • Christensen, C.M. (2004) The Innovation Economy: How Technology Is Transforming Existing Industries and Creating New Ones, http://mitworld.mit.edu/video/108/ Issues in Telecom

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