Finance for Generation X & Y

Edward M Erasmus, MA
September 10, 2013

LOGO
Roadmap
Finance: the science and the practice

Sources of financing

5 things to consider before seeking financing

Getting funded: what lenders look at

Creative funding alternatives

The future of startup funding in Aruba

Key takeaways
 Startup Challenges

• No financial track record

• Lack of evidence of success
• Unknown/unconvincing business concept
• Scope of risk
• Doubtful financial projections
 Finance: the science

• Funding of assets: own capital or borrowing

from third parties
• Debt can increase a company’s return on
equity
• But too much debt can take a company into
bankruptcy
• How much debt can a company carry? Debt to
equity ratio
 Finance: the science

Golden rule in financing:

• Current assets should be financed with short-
term debt
• Fixed (non-current) assets should be financed
with long-term debt
Finance…
Finance is way more than just
“showing me the money”

Scope of Corporate
Finance

Investment Financing Day-to-day

budgeting structure operations
 Three key questions in financing

1. What investments should the firm undertake?

Capital budgeting decision
2. What is the best way to finance these long-
term investments? Debt or equity?
Capital structure decision
3. How should the firm manage its short-term
assets and liabilities, such as cash?
Working capital management
 Finance: the practice

• It takes money to make money!

• Next to choosing the right products/services
(the ‘BIG’ idea), getting the right funding
might be the most important decision you’ll
ever make for your business venture
• Its a daunting task
• Risky business (high failure rate)
 Startups in Aruba
Entry Patterns of businesses in Aruba 2001-2011

Total Company registrations

1500

1450

1400

1350
amount of companies registered
1300

1250

1200

1150

1100

1050

1000
1 2 3 4 5 6 7 8 9 10 11
total company registrations 1181 1267 1216 1450 1390 1390 1245 1297 1088 1143 1124

Source: PriceWaterhouseCoopers Aruba (2012)

 Startups in Aruba

Year of
establishment Percentage of companies that still exists after
0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year
2001 93% 84% 76% 69% 61% 55% 49% 46% 42% 39% 37%
2002 94% 83% 73% 66% 59% 52% 49% 43% 41% 39%
2003 91% 79% 69% 63% 56% 52% 47% 44% 41% - -
2004 94% 82% 73% 64% 59% 53% 50% 48% - - -
2005 94% 81% 72% 66% 61% 56% 54% - - - -
2006 95% 82% 75% 68% 64% 61% - - - - -
2007 92% 82% 73% 66% 61% - - - - - -
2008 95% 84% 75% 70% - - - - - - -
2009 93% 80% 74% - - - - - - - -
2010 94% 88% - - - - - - - - -
2011 95% - - - - - - - - - -
Average 94% 83% 73% 66% 60% 55% 50% 45% 41% 39% 37%

Source: PriceWaterhouseCoopers Aruba (2012)

 Startups in Aruba
On average: seven out of ten new firms
Year of
survive at least 2 years, half of the
Percentage of companies that still exists after
companies survive at least 5 years, a
establishment

2001
third
76%
at69%least
61%
1055%years.
0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year
93% 84% 49% 46% 42% 39% 37%
2002 94% 83% 73% 66% 59% 52% 49% 43% 41% 39%
2003 91% 79% 69% 63% 56% 52% 47% 44% 41% - -
2004 94% 82% 73% 64% 59% 53% 50% 48% - - -
2005 94% 81% 72% 66% 61% 56% 54% - - - -
2006 95% 82% 75% 68% 64% 61% - - - - -
2007 92% 82% 73% 66% 61% - - - - - -
2008 95% 84% 75% 70% - - - - - - -
2009 93% 80% 74% - - - - - - - -
2010 94% 88% - - - - - - - - -
2011 95% - - - - - - - - - -
Average 94% 83% 73% 66% 60% 55% 50% 45% 41% 39% 37%

Source: PriceWaterhouseCoopers Aruba (2012)

 Finance: generally two sources…

Company

Sources of funds

Capital/Equity Debt
 Types of early stage financing

• Capital/Equity:
– Own funds (savings)
– Angel investors
– Venture capital funds
– Private equity funds

• Debt (loans):
– Bank / financial institution
 Angel investors, VC’s, PEF’s

• Wealthy • Corporate entities • Usually family-

individuals that use funds owned firms
• Includes: FFF’s from other • Small & large
• Small investment investors investment
amounts • Large investments amounts
• Little • Require seat in the • Networks
involvement in board • Some
day-to-day • Control in involvement in
operations operations operations
• Large stake in
company
 Debt: available in all ‘shapes’ and
‘sizes’

• Short-term:
– Working-capital loans (credit lines)
– Credit Cards
– Etc.

• Long-term:
– Non-revolving loans (asset-backed)
– Mortgage loans (property & building)
 A third source…?

Company

Sources of funds

Capital/Equity Debt Grants/Sponsors

 Grants/sponsors

• Crowdfunding (donations/sponsors)
• Crowdsourcing (free knowledge/
expertise/resources)
• Government grants
Crowdfunding
Crowdfunding
Crowdsourcing
 Alternative funding options

• Personal credit/Microfinance (VKB Aruba)

• Suppliers credit
• Franchise advances/loans
• Barter
• Business plan competition and other contests
• …..
 5 things to consider before
seeking financing

• Create a business plan

• Do your homework
• Shop around
• Seek advice
• Have a Plan B
 Startups funding in the U.S.

Source: U.S. Census Bureau (2012)

 The future of startup funding in
Aruba

• Most startups do not have enough funds to

launch their ideas.
• Possible funding aids:
– Innovation fund
– Venture capital funds
– Academic (venture) funds
– Crowdfunding (donation-based/investment-based)
A win-win for the capital market
(lenders)
Initial funding (Zuckerberg & Saverin):
around $20,000
Angel investor (Peter Thiel): $500,000

VC (Accel Partners): $13 million

2nd round VC’s: $28 million
Microsoft: $240 million
IPO: $16 billion
 A win-win for the capital market
(lenders)

• Enough financial track record is built

• Success of business is proven
• Established reputation
• Better understanding of operational structure
• Banks are more comfortable in providing
lending
 Key takeaways

• Know your business

• Proper funding is key to success
• Consider the broad perspective of finance
• Explore all avenues
• Additional platforms for funding is
recommended
LOGO
Edward M. Erasmus, MA
e.erasmus@fzanv.com
erasmus.bpas@gmail.com

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