Entrepreneurship & Innovation

Businnes Model Levellogic

1-We can see clearly from the table that values of cash-flow at the beginning of the year have a Ushaped form. It begins at 1 500 000, then it drops to 316970, and reaches 54620, it goes up a little bit to 129 700, and reaches it's all-time low at 19 174, and finally the cashflow skyrockets to 435 523. The main reason for this evolution may be the evolution of Net Cash by Operating Activities. As the firm is a young start-up, Net earnings go up slowly while the working capital is rapidly used. Furthermore, Investments are important during the first 5 years. Financing activities are also relevant: in fact we see that the company increases its long term debt during the second year, which explains the small rise of the cashflow from 54 620 to 129 700, but this debt is paid after and are a burden on the cashflow. The U-shaped form can then be explained by the fact that the startup starts using it capital and digging its cash-flow until revenues are generated and make cash-flow rise. During the first 3 years additional financing is needed.

2-In the Cost of Revenue sheet we see clearly the Material costs per unit and the Subcontact costs per unit decrease really fast during these five years. Thus, the Total cost per unit decline from 25 to 15, it decreases really fast between year 3 and 5. Consequently the price of the product declines from 44,99 to 39,99 between year 3 and year 5.

3-The whole 1 500 000 $ have been raised during the round A and B of the equity funding, then no more rounds are required. 1 000 000 are raised in the round A, and 500 000 are raised during round B. Total long-term debt is 200 000 after 5 years, while total Equity is 2 000 000 is a ration of 10 percent.

4-In the first year the revenues come only from Product A (service B is not launched yet), and the production is still weak (only 20 000 sales) it explains the net revenue of only 1 000 000. During year 2, the direct cost of the product A remains the same, but the sales skyrocket reach 75 000 units. Furthermore, the service B is launched and it costs a lot concerning personnel costs and salary expenses. And the huge number of customers 50 000 that are feed 30 explain the fact that the net revenue went up. To conclude, we can say that between year 1 and year 2, the company invested a lot in order to gain new customers. And this strategy worked because the net revenue went up fast, even if costs were more important.

5-A liquidity crisis is a bad financial situation when cash flow lacks, when the liquid asset are not available to meet short-term obligation, such as paying bills, salaries to employees or loans even if the company is solvent. The first solution might be to engage in a short-term debt to pay short-term obligation, but it costs a lot and may only make the liquidity crisis bigger in the future. The best solution may be to raise additional equity funding. In fact, the situations in year 2 and year 4 are not similar at all. In year 2, the company is still in the early process of entering the market, and there is no insurance of its solvency, while in year 4, the revenues of the company are already beginning to be important. In consequence, the solution of a short-term debt is a bad solution for year 4, although it seems unavoidable during year 2.

6-If the data are too optimistic, we see (if we replace 75 000 by 60000 in the sheet) that revenue of the second year is only 4 500 000 which has a direct consequence on cash flow. In fact, we read that cash flow becomes negative for year 2, 3 and 4 (at the end of the year) which is a clear liquidity crisis for the startup that may not be able to sustain this lack of liquidity that long even if the company can still go for a short-term debt for 3 years. But finally we see that the company is

solvent after 5 years. The best solution in this case may be to ask for an adittional round of equity funding by the business angel.