Equity Financing (Part 1)

Financing – A black Box

Financing activities is often a black box for the CEO of a Small and Medium company (SME). The main activity of the Manager is not to make financial management but to manage the business, to create products and sell them. In order to demystify the thing, this article is the first of a series of several articles devoted to corporate finance.

SMEs contribute significantly to the Quebec and Canadian economy. Their launch or expansion requires a lot of efforts and especially funds. Each SME is unique and has specific financing needs which must be tailored. We hope that our articles will provide answers to your questions about this topic less often, without flooding you too much with complex information.

Equity financing (part 1)

Equity financing is an important source of money for companies at all stages of their development. This type of financing allows an SME to remain debt-free, but on the other hand, a percentage of the company or profits shall be transferred to the investor. In contrast, some entrepreneurs borrow money to finance their business; in doing so, they will go into debt, and must repay their loans with interest. This approach allows keeping the entire possession of the company; however the entrepreneur absorbs all the risk. Remember that all debt financings require a sharing of risk between the lender and the entrepreneur, either by down payment (in equity or in the form of cash advance) or by generating surpluses with operations.

Equity financing comes mostly from the entrepreneur or by reinjection of the retained earnings and surplus. Access to external financing, in the form of venture capital, is very restricted in Quebec according to some observations and studies. If the business plan is sufficiently rigorous to convince an investor, and that the entrepreneur is surrounded by an outstanding management team, accessing equity becomes possible.

Equity financing has certain peculiarities. Unlike commercial loans, equity financing does not provide a guarantee to investors. The only guarantee is that the company is profitable so that the investor can realize a return based on the future value of its shares. The return on investment sought (by the investor) is higher for than commercial loans because warranties are non-existent. It is also not surprising that the access to this type of financing is difficult for a start-up company, moreover, if it operates in a certain industry with less margins, such as, restaurants, retails, etc.

Sources of capital

• Personal investment (personal savings, pension funds, RRSP, personal loans, etc.)
• Retained earnings (re-injection to contribute to growth)
• Friendly capital (family, suppliers, partners)
• Participatory financing (crowd funding)
• Angel Investors (experienced entrepreneurs and professionals)
• Development Capital Funds (Desjardins Business Capital régional et coopératif, Fondation, Fonds FTQ, Investissement Québec and BDC)
• Formal Venture Capital (public or private companies)
• Initial public offering (IPO) (massive need for capital, monitoring by the financial markets authority) 

Major uses of funds

• Early stage / Start-Up
• Growth
• Green economy
• Information technology company
• Export and new markets
• Acquisition of the company by managers (MBO)
• Business transfer
• Development and R & D
• Bridge loan 

Advantages

• No financial charge (excluding dividends)
• Formal risk and development capital (access to strategic partners and their advice)
• Increases the cash liquidity in a great way compared to other forms of corporate finance
• Increases the borrowing capacity for the company but reduces the level of control exercised by the owner 

Disadvantages

• Dividends are not tax-deductible (for the company)
• Strict laws on securities
• Administrative burden (creation of formal committees and a Board of Directors in some cases)

 

Sources of information

We invite you to consult the directory of Réseau Capital in order to find the ideal partner for your company if you are looking for equity financing.

Réseau Capital, the Québec Venture Capital and Private Equity Association, is the only private equity association that brings together all stakeholders involved in the Quebec investment chain. Réseau Capital as more than 425 members representing private equity, tax-advantaged and public investment companies as well as banks and insurance companies, accounting and law firms, along with many professionals working in the field.

Canadian Venture Capital and Private Equity Association (CVCA) is the Canadian penchant of Réseau Capital. This association has nearly 1500 members.

If you want to share your thoughts on this blog and its contents, simply write to us at info@stage1success.com. We look forward to reading your comments and feedback.

References: Journal Les Affaires, Réseau Capital, CVCA.

8 key control performance monitoring

Eight key control performance monitoring

You’ve spent a lot of time and have worked with passion to build your business.  Now you have a solid revenue model, a written business plan, financial forecasts and you have a superb team.  You have reached a stage where you need to strategically sustain your business.

Your Financial Director or CFO (Chief Financial Officer) can be a critical figure in securing your  business plan helping your growth, and assisting in overcoming entrepreneurial and operational  challenges.

Further, and critically, your CFO is instrumental in putting good management controls in place.  These controls are designed to check the adequacy of your business strategies and the performance achieved. They are often presented in a dashboard. However, before setting up a scoreboard and expensive systems, it is important to establish the following 8 key controls:

1. Have realistic budgets
2. Provide a budget of cash flow and develop a spending control system
3. Plan for asset protection strategies IP (Intellectual Property)
4. Establish a licensing system and a register of major contracts
5. Establish an accounting and administrative management manual
6. Establish frequent management meetings and an open communication system
7. Follow up on budgets versus actual results and measure performance gaps
8. Evaluate the inefficiencies and implement corrective measures

These controls are necessary but insufficient on their own for the sustainability and growth of your company. Your CFO and the entire management team will need to keep abreast of a rapidly changing world, and may from time to time need to seek outside or third party advice and assistance.

 

 

 

 

10 steps to your stage 1 project

We are often asked “what are the top 10 best advices” you could share with us for starting up a new enterprise or launching a new project or product.

1. Get your winning business plan in motion and prepare a realistic financial forecast
2. Hire the best talents
3. Be a financial savvy with investors
4. Learn or get help navigating and negotiate with financial institutions
5. Your first clients are your best marketing tool
6. Put your stamps on everything you sell and have memorable products and services
7. Always follow through your customers and clients and build lasting relationships
8. Identify project risk and mitigate
9. Review your business stages and don’t hesitate to pivot your model
10. Identify and get the best business experts for your stage 1 enterprise or project. Do not hesitate to share with your mentor or your advisor any issues with your company.

Hard work and get the best to help and advice to enable you achieve your goals

Business Model Canvas

The business model canvas is a powerful strategic management tool. It allows you to design, challenge your ideas, deliver, and capture or event pivots your current business model. Moreover, it describes how you will make money and create wealth for your enterprise and for its shareholders.

1. WHAT IS A BUSINESS MODEL?

A business model describes how the enterprise creates, delivers and captures value for its customers and its shareholders. It is a “blue-print” of the enterprise’s strategy.

The canvas is a simple and visual way to present how an enterprise makes money. Furthermore, it is a simplified tool for analyzing the business strategy and the value creation process.

The business model differs from the business plan, the latter being much more complete (description of the enterprise and its shareholders, its market, its products / service, along with sales and marketing, human resources, operations and finance plans).

2. WHY USE SUCH A TOOL?

SME managers are often faced with strategic planning, and for some of them, it is a heavy and complex process.

The business model canvas is a simple to use tool that reduces the effort devoted to strategic planning. In addition, for the entrepreneur in the making, this tool helps in validating certain parameters or first fruits of the ecosystem, which will benefit him/her in the creation of his enterprise.

The canvas amongst other things:

• Explain the business model to stakeholders in a simple, clear and concise way; e.g. bankers, investors, employees, family, etc.;
• Identify the skills needed to implement the business plan (those that you own or those to be acquired);
• Delineate the market research and / or validate sales and marketing strategies;
• Identify the necessary resources (material, human, financial and technological);
• Prioritize objectives, monitor and, analyze progress.

3. OBJECTIVES OF THE BUSINESS MODEL CANVAS

• Describe, analyze and design 4 main dimensions of a business, i.e. customer, offer, infrastructure and financial viability. These dimensions are peeled into 9 economic aspects (building blocks) presented in a matrix.
• Allow better analysis, and above all, to have a global vision of the enterprise’s main issues.
• Facilitate dialogue and generate new ideas using creative thinking techniques.
• Identify interdependencies that connect each of the blocks and discover the strengths and weaknesses of the business.
• Develop a business model that’s makes financial sense.

4. HOW IT WORKS

The business model canvas is a visual matrix divided in 9 building blocks describing:

1. Customer Segments: serving one or several customer segments (e.g. Mass or niche market, segmented, diversified, multi-sided platforms, etc.)
2. Value Proposition – the offer – seeks to solve customers’ problems and satisfy needs
3. Channels – delivering the value proposition (communication, sales, marketing, web technologies, etc.)
4. Customer Relationships (customer acquisition, retention, boosting sales, upselling, etc.)
5. Revenue Streams (cash generated from each customer segment)
6. Key Resources (physical, intellectual, human, financial)
7. Key Activities (most important activities to generate a strong economic model)
8. Key Partners (acquired or outsourced)
9. Cost Structure (identification of all costs required to capture value)

NOTES

The Business Model Canvas is distributed under a Creative Commons License:

http://creativecommons.org/licenses/by-sa/3.0/

About the authors of the Business Model Generations:

https://strategyzer.com/

You can obtain a copy of the Canvas at the following: http://www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf

CONCLUSION

The first version of the Business Model Canvas appeared around 2002.  It is now a recognized international tool and its concept has been applied and tested with large organizations such as Desjardins, as well as government entities such as the Government Services Canada.

As per the authors of this blog, it is an innovative way of communicating and formulating the business model as well as a facilitating tool to merge ideas.  With this Canvas, you can create high performance enterprise.

ABOUT THE AUTHORS

Christiane Constantineau has a DESS in corporate finance as well as an Executive MBA. She is a member of the Ordre des administrateurs agréés du Québec. She is a financial management expert.  She participated in the financing of many SMEs and participated in the creation of startups.

Jean-François Thibault holds an Executive MBA in addition to the PMP and ITIL Foundation v3 / ISO 2000 certifications.  He is an expert in the field of IT Management with over 18 years’ experience in well-known organizations.

They are both associates of the Turbulence Consulting Group (www.6degrees-turbulence.com), a strategic partner who provides strategic, financial and IT expertise.