ACC Accounting Main Sources of Finance for A New Venture Q&A Discussion

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Business Finance

Abdill Career College

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  1. Briefly describe the main sources of finance for a new venture.
  2. Determine how much capital would be required to start your venture and the most likely source of this capital.
  3. Describe how you might use a crowdsourcing site (such as kickstarter) as part of your financing approach. Discuss the advantages and disadvantages of using this financing method.
  4. Write a brief pitch for your idea and note what pictures would enhance your message. Provide examples of rewards you might offer backers.
  5. According to Dutta and Folta (2016) what is the difference between venture capitalists and angel investors on firm innovation rates and innovation impacts? How do they explain these results?
  6. Prepare a summary three year profit and loss account and balance sheet for your enterprise (this should be embedded into your Word document as a table or a picture).
  7. List the key assumptions you have made in your plan and link to at least one external source of information to justify your assumption.
  8. Briefly describe the four possible methods of business valuation, and use one of these methods to value your business at the end of year 3

All the work must be original

Turnitin report is required

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Financing Types of financing DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 2 The Oculus Rift DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 3 The Oculus Rift • Palmer Luckey began developing VR headsets with spare parts. • In 2011 he attracted the attention of John Cormack (creator of Doom) • To fund development, they launched a Kickstarter campaign in 2012 • This raised $2 million from over 8,000 backers DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 4 Oculus on Kickstarter - small DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 5 Oculus on Kickstarter - medium DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 6 Oculus on Kickstarter - high DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 7 Oculus on Kickstarter - summary DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 8 The Oculus Rift • Kickstarter raised $2 million from over 8,000 backers • Oculus sold to Facebook for $2 billion in 2014 • Were the Kickstarter backers: • Purchasers? • Philanthropists? • Investors? • The Kickstarter backers got a free headset in 2016 DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 9 Sources of financing You Angels Family and friends Venture capital firms The web Corporations Banks Going public Incubators DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 10 You Funding sources: • Savings • Sales of assets • Credit cards • Personal loans But can you cope with the loss / debt if the business fails? DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 11 Family and friends May be willing to help you succeed But what will the impact be on the relationship? Key steps - Be selective - Warn of the financial risk - Be prepared for long-term negative consequences if the business fails DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 12 The web DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 13 Banks • Will generally focus on the financial record of the entrepreneur • Will want a personal guarantee and collateral (unless the business has a very strong record) • May be more interested in making larger loans • You may be eligible for some governmental assistance DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 14 Incubators • Businesses specifically geared to taking start-ups from inception to early-round financing • Often a short-term focus – e.g. 3-6 months • Will take on a group of start-ups each round • May have a particular industry focus • Provide office space, training and contacts • Provides seed funding in exchange for equity DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 15 Angels • Wealthy individuals who invest directly in businesses. • Usually located through a contact. • Often highly knowledgeable about your industry and understand the risk they are taking. • Expect high returns. • Often expect to influence operational decisions. • Can be tough dealmakers. DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 16 Venture capital firms • Investment businesses that invest in new ventures. • Source funds from pension funds, large corporations and wealthy individuals • Invest in relatively few ventures • Often looking for more established firms • Require a clear exit strategy • Often want to control the firms they invest in DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 17 Corporations • Companies sometimes (but rarely) make direct investment in other companies • This is usually with a view to buying the company outright • May be applicable if your product would be a natural extension of their business, or a key component in their supply chain DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 18 DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE Source: https://www.cbinsights.com/blog/mostactive-corporate-investors-artificial-intelligence/ 19 Going public • Sometimes considered the ‘holy grail’ of business objectives • Rare: out of 10 million US businesses only 17,000 are public (0.2%) • Involves much higher degrees of business transparency and compliance • Can result in a loss of control, and focus on short-term targets DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 20 Impact of financing choices Angels vs Venture Capitalists • Attracting funding is difficult and timeconsuming • Is there any difference in firm outcomes related to investment type? DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 22 Study Dutta, S. and Folta, T. (2016), "A comparison of the effect of angels and venture capitalists on innovation and value creation", Journal of Business Venturing, Vol. 31 No. 1, pp. 39-54. A comparison of 350 technology ventures vs DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 23 Why might there be a difference? • VCs tend to be more specialised and may have deeper networks and therefore a greater ‘endorsement effect’ (but Angels may have very sophisticated investors) • VCs tend to have stronger control rights than Angels (which may increase management commitment, but may also create conflict) • VCs tend to have shorter investment time horizons DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 24 Findings – VC firms DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 25 Findings – Angel firms DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 26 Conclusions • Rates of innovation (proxied by patent numbers) were the same for VC backed firms as for Angel backed firms • Impact of innovation (proxied by patent citations) were greater for VC backed firms • Possible reasons: • Portfolio of VC firms may increase citations • VC firms might be more visible • VC firms might be encouraged more to ‘swing for the fence’ • Under otherwise equal conditions, VC investment is preferable. DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 27 Financial plans Importance of financial plans • Financial plans are crucial for you, investors and business partners • Financial plans need to be honest, clear and credible • Most new businesses fail because they run out of cash, in turn because projections were too optimistic DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 29 Common components • Start-up costs / capital requirements • Income statement • Balance sheet • Cash flow statement • Debt management schedule • Returns analysis / valuation DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 30 Startup costs • Acquisition price of an existing business • Capital investment in land, building, renovations and equipment prior to starting operations • Operating losses in the startup phase DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 31 Startup costs - example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 32 Startup costs - example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 33 Revenue projections • Finding initial customers is difficult • Most projections aren’t grounded in reality and are over-optimistic Solution: • Anchor revenue projections – e.g. by supplying customer lists, using market research and/or using industry averages • Be conservative in the extreme DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 34 Operating costs • • • • DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE Key is completeness Separate into variable and fixed costs Provide justification Build in contingencies 35 P&L example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 36 P&L example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 37 P&L example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 38 P&L example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 39 Balance sheet example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 40 Balance sheet example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 41 Cash flow statement example Source: Rogoff (2007) Bankable Business Plans DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 42 Financing costs • Consider range of possible financing levels • Projections need to show repayment of both interest and principal DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 43 Financing costs - example DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 44 Equity returns • Calculate the ROI (return on investment) for your equity investors • Consider whether this return is commensurate with the level of risk DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 45 Company valuation • Provide some indication of company value at the end of your projection period • Common valuation methods are • Asset valuation • Capitalised future earnings • Earnings multiple • Comparable sales DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 46 Company valuation - Asset valuation • Example: net asset value is $100k • Ignores goodwill • If underperforming / negative goodwill then may be a reasonable valuation method DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE Source: CBA (2017) Valuing a business, available at: https://www.commbank.com.au/business/can/buyinga-business/valuing-a-business.html 47 Company valuation - Capitalised future earnings • Idea is that ownership gives a right to future earnings • Most common small business valuation method • Dependent on (arbitrary) required rate of return (think of as a risk or growth factor) DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE Source: CBA (2017) Valuing a business, available at: https://www.commbank.com.au/business/can/buyinga-business/valuing-a-business.html 48 Company valuation - Earnings multiple • Multiply the business’ earnings before interest and tax (EBIT) by your selected multiple • For example, you might value the business at twice its annual earnings – so a business with an EBIT of $200,000 might be valued at $400,000 • The multiple you choose will depend on the industry and the growth potential of the business • A service-based business might be valued at as little as one year's earnings, while an established business with sustainable profits might sell for as much as six times earnings Source: CBA (2017) Valuing a business, available at: DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE https://www.commbank.com.au/business/can/buyinga-business/valuing-a-business.html 49 Company valuation - Comparable sales • Whatever other valuation method you use, you should also look at prices for recent sales of similar businesses • Research what’s happening in the market you’re interested in • Speak to business brokers and gauge their feelings about the business’ value • A broker may know what similar operations are selling for and how the market is placed • Check business-for-sale listings in industry magazines, newspapers or websites DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE Source: CBA (2017) Valuing a business, available at: https://www.commbank.com.au/business/can/buyinga-business/valuing-a-business.html 50 Conclusion • Don’t rush producing your financial plan • Don’t worry if it turns out that your new venture isn’t viable – that’s the value of doing a financial plan! • Change your model until you have a credible plan • Highlight your key assumptions - others may have better information. DEPARTMENT OF ACCOUNTING AND CORPORATE GOVERNANCE 51
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Explanation & Answer

Hey buddy, am done with the work. I will post the turnitin report in a short while. Thanks for the opportunity, and nice time😎

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1. Main sources of finance for a new venture
a) The individual: this source of finance comes from personal savings, credit cards, sales of
assets and personal loans
b) Family and friends: this group of people offer their assistance through direct contribution
of capital for the business
c) Banks: they offer loan for the business based on financial records of the entrepreneur.
d) Incubators: this are businesses that mold ideas from inception all the way to early-round
financing.
e) Angels: these are wealthy individuals who have expansive knowledge about that
particular industry, and who are willing to risk their resources yet expect high returns in
the end.
f) Corporations: this are big companies which are willing to invest in other companies in
order to get returns.
2. Amount of capital needed for the venture
The business idea here is Nature Photography. Init...


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