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Financial Management for Technology Start-ups How to power growth, track performance and drive innovation - Alnoor Bhimani

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Matheus Puppe

· 38 min read

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Here is a summary of the preface:

  • The preface introduces the book as providing practical financial management knowledge that is specifically tailored for technology startups.

  • It notes that while many books cover generic finance and accounting, this book filters that knowledge to extract just what is relevant for tech startups in terms of driving innovation and business models.

  • The preface emphasizes that now is a great time for technology startups given the massive ongoing digital transformation. It aims to equip readers with financial skills to capitalize on this environment.

  • The intended audience includes technology entrepreneurs, investors, policymakers, educators involved in startup programs, and institutions that support tech entrepreneurship.

  • The book takes a hands-on approach, using real-life examples and illustrations from companies like Amazon, Facebook, and Microsoft. It provides essential but pruned concepts directly applicable to tech startups.

  • A final chapter includes a “Tech Startup Tracker” tool to help readers monitor progress and identify areas for improvement based on key metrics and performance drivers.

  • In summary, the preface frames the book as a practical resource to provide the financial management lens needed to lead and grow technology startups in today’s digital age.

  • Financial management is essential for tech startups to determine if they are creating value by tracking revenues and costs. This allows the startup to see the economic contribution of the business.

  • Financial management is also important to compare actual performance to forecasts and targets to see if the startup is on track to achieve its aims.

  • Understanding financials allows startups to obtain funding from investors by demonstrating value creation and growth potential. Investors want to see financial plans and metrics.

  • Financial intelligence helps tech startups adapt business models to take advantage of new opportunities in the changing tech industry. Models need to reflect low costs, growth before profits, and other tech startup realities.

  • Mastering financial management enables startups to use financial tools to support growth, like budgets, metrics, contribution margin analysis, and financial projections shared with investors.

  • The book provides the financial lens and knowledge needed to power a tech startup’s growth from launch through scaling.

  • The passage discusses the need for founders to evaluate whether their startups are achieving their intended goals and using resources efficiently.

  • It suggests founders ask themselves three questions: 1) Are you creating as much value as intended? 2) Are you working smart by using fewest resources to generate most value? 3) Do you have the financial skills needed to attract investment and manage funds properly?

  • Startups often need investment to achieve their full potential, but many fail due to poor financial management. Investors will evaluate the founders’ financial literacy and ability to meet targets.

  • The passage then outlines different tech business models like freemium, advertising, experience-driven platforms, e-commerce, and how they create and capture value in novel ways compared to traditional businesses.

  • Due to these differences, tech startups require a customized approach to accounting and finance that reflects their unique business models and priorities at the early stage.

So in summary, the passage discusses the importance of founders continuously evaluating their goal achievement and efficiency, while also developing strong financial skills needed to manage funds properly and satisfy investor expectations. It contrasts traditional and tech-oriented business models to argue tech startups need tailored financial practices.

  • The passage discusses how financial management techniques for technology startups need to evolve to better suit the unique business models of today’s tech firms.

  • Traditional accounting focuses on linear value chains, but tech startups create value through multidirectional networks of users/producers. Their focus is on demand and network effects rather than scale economies.

  • Tech startups need to continuously experiment and iterate on products/features to find market fit, requiring financial tracking of experimental activities.

  • Tech firms often externalize costly activities like resources/labor by connecting independent producers/users through platforms. This lowers costs and capital needs.

  • Tech startups can quickly assemble value chains by connecting third-party products/services virtually through “insourcing.” This improves efficiency over traditional business models.

  • Emerging tech models like sharing economies can disrupt existing industries by bringing new sources of value from existing resources into the market.

  • In summary, a new approach to financial management is needed that accounts for the networked, experimental, externally-resourced and disruptive nature of modern tech business models.

  • Technology startups don’t need to make major investments to set up their business model since they leverage existing spare capacity and resources through digital platforms. This helps reduce costs.

  • Traditional businesses had to invest in building new infrastructure, but startups can unlock unused supply through their platforms. This increases overall supply and forces traditional providers to lower prices.

  • Profits get redistributed as some goes to new suppliers on the platforms, some to consumers through lower prices, and some to the platforms themselves.

  • The gig economy allows people to do temporary piecework jobs independently through platforms like Upwork and, creating new work opportunities.

  • Data collected by startups can provide valuable insights into trends, preferences and ways to expand services. This attracts investors and differentiates financial needs from traditional businesses.

  • Financial management for tech startups must consider factors like predictive analytics using big data, network effects, and the value of data itself - not just historical accounting information. A lean approach is needed.

Here is a summary of the key points from the article:

  • Tech startups operate very differently than traditional industrial businesses. They don’t follow a linear model of production, sales, delivery, etc.

  • Tech startups rely on continuous feedback loops and ongoing experimentation to develop their products and business models. They need mechanisms to react quickly to new information and customer feedback.

  • Founders of tech startups need to be contrarian strategists - willing to pivot and change their business plans based on what’s working and what’s not. Traditional business planning doesn’t work well.

  • Tech startups can leverage cloud computing and other pay-as-you-go IT services to minimize upfront costs and enable quick scaling as needed. This is different than traditional capital-intensive models.

  • The cost structures of tech firms evolve differently than other businesses. Understanding how costs change is important for financial management.

  • Technologies can trigger new market impacts and transformations that change traditional financial management approaches. New strategies are needed.

  • Successful tech startups rely on getting early customer input and constantly refining their products based on real-world testing and feedback loops. They operate more iteratively than traditional businesses.

So in summary, it highlights how the financial management, business models, and strategies of tech startups must be approached differently than traditional firms due to factors like constant experimentation, feedback loops, pivoting approaches, and leveraging new technologies. Traditional linear planning methods do not apply.

The growth-share matrix is commonly used to analyze established businesses but can also provide a useful lens for analyzing tech startups, which tend to follow different trajectories.

While many startups begin as “dogs” with low market share and growth, they should not necessarily be treated as failures like in traditional businesses. Tech startups often create new markets and can grow significantly over time.

Many startups start as “question marks” with potential innovation but uncertainty about long term prospects. These require high risk investments but could pay off big.

The goal for a successful tech startup should be to achieve “star” status with both high market share and continued growth, rather than becoming a stagnant “cash cow”.

Rather than transitioning through stages like traditional products, tech startups should strive to continuously innovate and launch new products/versions to maintain their star performance - growing both the market and their share of it.

This revised use of the growth-share matrix provides a useful framework for analyzing tech startups compared to more traditional businesses, accounting for their potential for disruption and continuous evolution.

Here is a summary of Michael Porter’s five forces model and how it applies to startups:

  • Porter’s five forces model looks at five competitive forces that affect industry profitability - the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitutes, and rivalry among existing competitors.

  • The model helped analyze industry structure and competitive dynamics. If the forces are weak, it presents opportunities for above average profitability. If forces are strong, it is harder to earn high profits.

  • For traditional businesses, Porter recommended focusing on either cost leadership or differentiation to achieve above average profits. Cost leadership means having the lowest costs, while differentiation means offering unique products/services that customers highly value.

  • For startups, Porter’s five forces model needs updating as it focuses too much on limiting competition. Startups can instead look for new ways to create and redistribute value through innovation and disruption.

  • Technology startups in particular can leverage platforms, networking effects, and lower costs/transactions through their digital business models to succeed in ways not captured by Porter’s original framework. They can achieve both cost leadership and differentiation.

  • Examples like Airbnb and Uber show how startups can unlock new capacity, distribute value away from incumbents, and achieve high growth and profitability without directly competing on costs or differentials alone.

  • Companies like Google and Newsmax generate revenue from advertisers, not from the users of their platforms. The users represent the “product” that attracts advertisers.

  • These companies’ financial management models are different from traditional companies because there is not a direct link between the resources used and revenue generated, or between costs and sales.

  • Tech startups can disrupt value creation models by making consumers distinct from customers. If users are the product, financial management needs to be based on a different premise.

  • Network effects are important, where the value of a platform grows as more users join. This can fuel rapid growth if a threshold user base is reached.

  • Costs grow linearly with user numbers but value can expand exponentially once network effects take hold.

  • Standards and familiarity can create “lock-in” that keeps users loyal to a platform even if alternatives emerge. Startups need to either complement or disrupt existing standards.

  • The goal should be to start as an underdog but gain traction rapidly to become a “star” with high growth and market share through differentiation or redefining the market. Constant innovation is needed to stay ahead.

  • Technology startups are different from traditional industrial businesses in several key ways according to Porter’s five forces model. Things like barriers to entry, supplier and buyer power, and competitive dynamics can be altered by new technologies.

  • Startups can bypass hurdles of the industrial economy through mass customization, differentiation, and becoming both a cost leader and differentiator. This changes assumptions about volumes, profits, customers vs consumers.

  • Network effects allow values to grow exponentially while costs grow linearly, changing resource management and growth strategies. Technologies also enable customer lock-in and standards changes.

  • Startups face both business risks around products, technology and markets, as well as financial risks from funding structures and cost models. Due diligence evaluates viability, uniqueness, market opportunities, and team skills.

  • Investors seek high risk/high return opportunities like startups. Risk is pegged to expected returns. Startups have high investment needs but low ongoing costs once developed, so they need a good customer base to cover initial costs and generate profits.

  • Accounting helps conventional businesses track past performance, support planning, and communicate with investors. However, for tech startups, accounting is more complex due to lack of benchmarks and high uncertainty.

  • Startups need to explore growth possibilities through experimentation rather than relying on past data and external benchmarks.

  • A “start-up financial control loop” allows startups to constantly tweak their business model based on new information, helping with planning, control, and communicating progress to investors.

  • It is important for startups to understand financial contribution, track variable vs. fixed costs, achieve break-even points, and use financial intelligence to guide strategic and operational decisions.

  • Accounting provides the necessary feedback loops and data for startups to operate in their exploratory, feedback-driven manner while still maintaining financial planning, control and communication with investors.

The passage summarizes the key aspects of a financial control loop for tech startups:

  • Planning desired pursuits (goals, activities, projects etc)
  • Acting on those plans by undertaking the activities
  • Monitoring the outcomes and results of those activities
  • Changing and refining plans and action based on learnings
  • Keeping investors informed of progress

It stresses the importance of an ongoing process of planning, doing, checking, adjusting for startups given their unstable environment and lack of precedent. The financial control loop helps formalize fundraising and then supports ongoing feedback between planning, implementing, monitoring impacts and using those learnings to continuously improve.

  • The figures shown represent different levels of units produced, from 5,000 to 20,000. As units produced increases, the fixed cost per unit decreases. This shows how fixed costs are shared over more units resulting in lower per unit costs.

  • The graph illustrates unit fixed cost behavior, showing how fixed costs per unit decrease as production volume increases due to economies of scale and cost sharing.

  • Fixed costs remain the same regardless of production volume, but are allocated across more units as volume increases. This results in the stepped decrease in fixed cost per unit shown in the graph.

  • The relationship between fixed costs, units produced, and resulting fixed cost per unit is important for determining breakeven point and understanding how costs behave at different production volumes.

  • The passage discusses using contribution margin analysis to determine the break-even point and desired profit for a business. Contribution margin is sales revenue minus variable costs.

  • It provides an example calculating the sales volume needed to achieve £200,000 profit given fixed costs of £350,000 and variable costs of 20% of sales.

  • It then discusses how contribution margin analysis can be used to evaluate whether to accept a special order or outsource certain activities to reduce costs.

  • The passage uses an example of video game companies to illustrate how digital businesses have high fixed costs but low variable costs. This allows them to pursue strategies like pricing tactics.

  • It provides a hypothetical example comparing two companies, E-Holo and Holotech, that develop similar hologram software. It analyzes their profits over multiple quarters to show how the company with the larger market share is able to achieve much higher profits due to economies of scale in a “winner takes all” digital market.

  • The key points are that contribution margin analysis can help determine break-even point and desired profit, and that digital businesses with high fixed costs can leverage low variable costs and large volumes to achieve fast profit growth if they gain significant market share.

  • The contribution margin per unit (selling price - variable cost) is high for both Photon and TechD products. This gives the companies flexibility to potentially lower prices.

  • Lowering prices can help gain market share, which is important in fast-growing tech markets where winner-takes-all dynamics exist. Getting market traction early on is vital for success.

  • E-Holo lost market share to Holotech as Holotech’s TechD product gained more sales volume. This shows the importance of constantly reviewing strategy and being proactive.

  • There are examples like VHS and QWERTY keyboard layout where an inferior but entrenched product dominated the market. This illustrates the risk of losing market control even if you develop a superior product later on.

  • Price wars and penetration pricing strategies involving prices below variable or even full costs can be worthwhile for startups to rapidly gain market share in these winner-take-all situations. The future viability of the company depends more on market control than initial profits.

  • In some cases, paying customers to adopt the product through negative prices has helped companies like and PayPal achieve fast growth needed to establish a dominant position.

  • Software companies typically incur high fixed costs upfront for research, development, coding, etc. but have very low variable costs for additional units of software.

  • Fixed costs are considered “sunk costs” that we don’t factor into pricing decisions. This incentivizes a “get big fast” strategy with low or even negative pricing to gain market share quickly.

  • The key difference between software and physical products is that software replication has near-zero costs, allowing for perfect replicability without loss of quality or function.

  • The low variable costs result in high contribution margins for each additional unit sold.

  • With sunk fixed costs not a factor and the ability to price low, software companies are well positioned to pursue rapid growth rather than focusing on early profits.

  • This “get big fast” strategy may include tactics like price wars to gain market share over competitors.

  • Both the cost structure and market characteristics of software products make fast growth through aggressive pricing an attractive strategic option.

  • A balance sheet shows a company’s assets, liabilities and equity at a particular point in time. It provides a snapshot of the company’s financial position.

  • Assets are things a company owns that have economic value. Common assets include cash, inventory, property and equipment.

  • Liabilities are amounts a company owes to others such as accounts payable, loans, etc.

  • Equity is the residual claim of a company’s owners/shareholders after deducting liabilities from assets. It represents the funds that have been invested in or retained by the business.

  • Equity consists of capital (amounts originally invested by owners) and reserves (retained earnings reinvested back into the business over time).

  • Current assets are items expected to be used or turned into cash within one year, like cash, accounts receivable, inventory.

  • A balance sheet provides information about a company’s financial position at a point in time but not how it got there or its performance over time.

Here is a summary of the key points about non-current assets and liabilities:

  • Non-current assets are assets used by a company for more than one year to generate revenues rather than being held for resale. They include long-term investments, fixed assets, and long-term receivables.

  • Long-term investments are investments held for strategic control purposes that a company intends to hold for over a year.

  • Fixed assets include tangible assets like property, plant, equipment, vehicles, and machinery that are used in business operations for over a year, as well as intangible assets like patents, copyrights, and goodwill.

  • Long-term receivables are debts owed to the business that customers will repay after more than one year.

  • Non-current liabilities are borrowings that are repayable after one year, such as bonds, mortgages, long-term loans, and long-term creditors.

  • They are distinguished from current liabilities which are debts owed within one year, like accounts payable, bank loans due shortly, wages and taxes payable, and the current portion of long-term debts.

  • The income statement shows a company’s revenues, expenses and profits/losses over a period of time, as opposed to the balance sheet which shows a snapshot at a single point in time.

  • Common elements included in the income statement are net sales/revenues, cost of goods sold, operating expenses (marketing, R&D, admin etc.), operating income, non-operating income/expenses, taxes, and net income.

  • Revenues are recorded when earned, and expenses recorded when incurred, according to the accrual basis of accounting. This differs from cash basis accounting.

  • The income statement is used by entrepreneurs, investors and lenders to analyze a company’s financial performance and compare it over time or to other companies.

  • It shows how effectively a company is generating profits from its investments and operations using the revenue-expenses=profit formula.

  • Revenue is from sales or services provided, while expenses deducted include cost of goods sold, operating costs, taxes and more depending on the business activities.

  • Net income shows overall profitability for the period and is a key metric analyzed by stakeholders.

  • The income statement shows a company’s financial performance over a period of time, usually a year. It displays revenues, expenses, and net profit/loss.

  • Major expense line items include cost of goods sold, operating expenses (e.g. salaries, rent, utilities), depreciation, and taxes.

  • Research and development expenses are also shown and are important for technology companies.

  • Depreciation expense accounts for the gradual reduction in value of fixed assets over their useful lifetimes.

  • Non-operating items include other revenues/gains, discontinued operations, extraordinary items, and changes in accounting principles.

  • Earnings per share is calculated to gauge a company’s profitability on a per-share basis.

  • The statement of cash flows shows cash inflows and outflows from operating, investing and financing activities over a period of time. It reconciles net income to the change in cash.

Here is a summary of the key cash flow information from the passage:

  • The cash flow statement shows how the company generated the cash flows it needed to finance its operations. It focuses on changes in cash over the reporting period.

  • For startups, cash flow statements are useful to understand where cash comes from and is spent. This is different than income/profits.

  • Cash flows are broken into three categories: operating, investing, and financing activities.

  • Operating cash flows come from core business transactions like collecting from customers or paying suppliers.

  • Investing cash flows relate to purchases/sales of long-term assets like property, equipment, or investments.

  • Financing cash flows include activities like issuing/repaying debt or equity.

  • The statement can be prepared using direct or indirect methods. Indirect method starts with net income and adds/deducts non-cash items.

  • Key steps involve tracking cash inflows/outflows for the three activity categories over the reporting period.

  • Non-cash transactions are disclosed in notes for full transparency around the company’s cash position.

  • Cash flow statements provide important complementary information to income statements about a company’s liquidity and ability to meet obligations.

  • There are different legal structures a startup can take, such as sole proprietorship, partnership, or corporation. Corporations have limited liability for owners/shareholders.

  • Publicly traded companies can sell shares on stock markets, while private companies have a limited number of shareholders.

  • The board of directors is responsible for running the company and protecting shareholder interests. Management runs day-to-day operations.

  • A company’s total capital is divided into shares. Shares represent ownership units and have a nominal/face value set at issuance and a market trading value.

  • Incorporating as a company provides advantages like limited liability, ability to raise capital by issuing new shares, and to pay regular dividends to shareholders from profits.

  • However, companies are also subject to double taxation, with corporate taxes on profits and personal taxes for shareholders on dividends. Overall, incorporation is beneficial for limiting risk to owners.

  • Forming a company as an incorporated entity can provide tax benefits for startups such as lower initial tax rates and deductions to encourage small businesses. However, there are also costs such as legal fees and registration costs.

  • Incorporated companies also face higher compliance requirements than other structures like partnerships in terms of regulations, accounting, and auditing. Auditing in particular can be an expensive requirement to meet.

  • An auditor’s opinion confirms or certifies the financial statements of a company. It is required for public companies and sometimes private companies if lenders/investors require it.

  • Auditors report whether the statements comply with accounting standards like IFRS or GAAP. An unqualified opinion means there are no material misstatements.

  • The auditor provides a professional judgment based on audit tests, but does not guarantee the statements are correct. Their role is to provide an independent opinion on if the statements give a true and fair view.

Here is a summary of r determination or r-squared:

  • R-squared (commonly represented by R2) is a statistical measure that represents the proportion of the variance for a dependent variable that’s explained by an independent variable or variables in a regression model.

  • R-squared always has a value between 0 and 1. An R-squared of 1 indicates that the regression line perfectly fits the data. An R-squared of 0 indicates that the model explains none of the variances in the dependent variable.

  • R-squared is a measurement of how well the regression line represents the data. The higher the R-squared, the better the model fits the data.

  • R-squared does not indicate how well the model will predict future outcomes or new data, only how well it fits the existing data used to calculate it. A high R-squared does not necessarily mean a model will have good predictive performance on unseen data.

  • R-squared is commonly used to help select the best regression model from several candidate models by choosing the one with the highest R-squared value. However, other criteria such as significance of variables should also be considered.

  • In summary, r-squared measures how close the data are to the fitted regression line and is a measure of how well the regression model predicts future outcomes. The higher the r-squared, the better the model fits the available data.

  • To calculate retained earnings for a period, take the beginning retained earnings and add net income earned during the period, then subtract any dividends distributed during the period.

  • Dividends distributed are one way companies return capital to shareholders for investing in the company. Preferred shareholders are paid dividends before common shareholders.

  • Shareholders’ equity represents capital invested by owners and can change through share issues, recognition of net income, and distribution of dividends.

  • When a company issues new shares, it records the par value (original value) as issued capital and any amount paid above par value as share premium. This increases shareholders’ equity.

  • Financial statement analysis of metrics like ratios over time and compared to competitors can help assess a start-up’s progress by identifying shifts in performance and efficiency. Both horizontal analysis (comparing figures over time) and vertical analysis (expressing figures as percentages of totals) are useful analytical tools.

  • Financial ratios can be used to assess the status of investments, compare current performance to past and planned performance, and performance against competitors. This helps identify strategies to pursue.

  • For startups, benchmarks are not fixed as the business model is new and evolving. Benchmarks will change as circumstances change in operations, market, industry, economy, regulation, and technology.

  • Ratios can be categorized to learn about specific aspects of a business’ financial performance, like liquidity, profitability, investment, efficiency, and capital structure.

  • Common liquidity ratios are current ratio and quick ratio, which indicate ability to pay short-term debts.

  • Profitability ratios like return on equity, return on assets, net profit margin, and gross profit margin indicate operational profitability.

  • The example calculates Microsoft’s current ratio, quick ratio, and compares income statement figures to examine profitability ratios. This analysis provides insights into its financial status and performance.

Here is a summary of the key financial ratios calculated for Microsoft for the year ended June 30, 2019:

  • Return on Equity (ROE): 42%

  • Return on Total Assets (ROA): 14.38%

  • Net Profit Margin: 25.512%

  • Gross Profit Margin: 65.90%

  • Dividend per Share (DPS): $1.8457

  • Dividend Yield: 0.729%

  • Dividend image:3.443

  • Earnings per Share (EPS): $5.11 (basic), $5.06 (diluted)

The summary provides the definitions and calculations of common financial ratios like ROE, ROA, profit margins, and investment ratios including DPS, dividend yield, dividend cover and EPS. All ratios are calculated using Microsoft’s financial data for fiscal year 2019 from their annual report.

  • Investors use earnings per share (EPS) to assess a company’s investment potential and compare profitability between similar companies. EPS is calculated as net income divided by weighted average shares outstanding.

  • For Microsoft, basic EPS is calculated using average outstanding shares, while diluted EPS also includes the effect of potential dilutive shares like stock options.

  • Price to earnings (P/E) ratio compares market share price to EPS and is used to compare investment opportunities. A high P/E may suggest growth potential while a low P/E could mean a company is undervalued.

  • Efficiency ratios assess how efficiently a company uses resources like working capital. Key ratios include inventory turnover, asset turnover, accounts receivable collection period, and accounts payable payment period. These can indicate management of inventory, assets, debtors and creditors.

  • Capital structure ratios examine a company’s use of debt versus equity financing. This includes debt to equity ratio and interest coverage ratio.

So in summary, these financial ratios are used by investors to analyze a company’s profitability, valuation, operational efficiency, and financial leverage.

The two main categories of capital funds for a company are:

  1. Debt capital (or liabilities): This includes loans, bonds and any other form of borrowed money that must be repaid along with interest. Debt appears on the liability side of the balance sheet.

  2. Equity capital (or shareholders’ equity): This includes common stock, preferred stock, additional paid-in capital and retained earnings. Equity represents the owners’ claims to the company’s assets and appears on the equity side of the balance sheet.

Some key points about these two categories:

  • Debt capital must be paid back on a set schedule, while equity is a long-term investment in the company.

  • Interest expenses are tax-deductible for debt, but dividend payments on equity are not deductible.

  • Debt increases financial risk as the company must make debt payments regardless of profitability. Equity is less risky for the company.

  • Companies use a mix of debt and equity to finance their operations and growth. The optimal capital structure balances cost of capital and financial risk.

  • Capital structure ratios like debt-to-equity ratio measure the relative proportion of debt versus equity used by the company.

So in summary, debt and equity are the two main categories a company uses to obtain capital funds, with different characteristics in terms of risk, payment requirements, and tax treatment. Analyzing a company’s capital structure provides insights into its financial strategy and health.

  • The passage discusses the importance of preparing a cash budget for a business. A cash budget allows a business to forecast cash inflows and outflows over a period of time.

  • It provides an example cash budget for a startup medical device company called Sciensus. The example shows Sciensus’ estimated billings, billing collection patterns, planned purchases, salaries, and other cash inflows and outflows.

  • The cash budget schedules show Sciensus’ projected cash receipts and disbursements month-by-month for a quarter. By comparing the projected receipts and disbursements, the budget determines Sciensus will need to borrow £868,750 to fund planned capital expenditures.

  • Preparing a cash budget forces a business to think through sales, costs, funding needs, and risk tolerance. It provides a clear picture of cash flow that can help secure funding from lenders or investors. Monitoring actual cash flow against the budget also allows a business to fine-tune its forecasts over time.

So in summary, the passage discusses why cash budgeting is important for businesses and provides a detailed example cash budget to illustrate the process.

  • The passage discusses various options for financing a startup, including bootstrapping, grants/contests, incubators/accelerators, and debt versus equity financing.

  • Bootstrapping involves using the founder’s own money and keeping full control, but may not provide enough capital for high-growth startups. Grants and incubators can provide some free capital but come with limitations and obligations.

  • The main sources of financing are debt and equity. Debt includes types like loans, accounts receivable financing, factoring, inventory financing, and leasing. It provides flexibility but requires interest payments.

  • Short-term debt is used for current cash needs, while intermediate and long-term debt can also fund assets. Loans require showing cash flows, profits, and meeting bank criteria. Accounts receivable financing uses accounts receivable as loan collateral.

  • Equity financing via shareholders is discussed in the next chapter. The passage analyzes the pros and cons of various financing options for startups.

  • Equity financing involves issuing shares of a startup’s stock in exchange for money. This gives up partial ownership and control over the company.

  • While founding founders may lose autonomy, equity financing provides benefits like access to more capital to grow the business.

  • Sources of equity financing include angel investors, venture capital funds, and crowdfunding. They come with varying levels of funding and strings attached.

  • Ownership share given up depends on the valuation of the startup, determined through valuation methods like discounted cash flow analysis.

  • Term sheets outline the proposed deal terms like funding amount, share price, vesting schedule. Founders should scrutinize terms to protect their interests.

  • Crowdfunding is an emerging source of early funding but comes with disclosure requirements and may dilute ownership more than traditional investors.

  • While losing some control is a downside, equity financing can provide vital capital to take a startup to the next level if the right investors and terms are found. It’s an important option for technology startups to consider.

  • Jobs disagreed with Apple’s board and vice chairman Mike Markkula about lowering the price of the Mac. Markkula sided with the board against Jobs.

  • As a result, Jobs left Apple and founded a new company called NeXT. He returned to Apple 12 years later as CEO when Apple merged with NeXT.

  • There are benefits to equity financing for startups, such as not owing money if the startup fails, not paying interest, and potentially getting guidance from investors who want the startup to succeed.

  • Angels and VCs seek high returns through startup investments to compensate for the high risk. Angels typically invest smaller amounts at earlier stages than VCs. Both want equity stakes in exchange for financing.

  • VC valuations are calculated based on the amount of funding and percentage of equity exchanged. This determines pre-money and post-money valuations as well as share prices and ownership percentages. Convertible notes can also factor into valuations.

  • An angel investor invested $16,000 in a startup and was given the option to convert the investment to equity shares.

  • The startup was valued at $1.8 million pre-Series A financing. The Series A investors valued the startup at $4 per share.

  • The angel investor was given the option to purchase shares at 80% of the Series A price, or $3.20 per share. At this price, the $16,000 investment converts to 5,000 shares.

  • Alternatively, the angel investor was given a valuation cap of $1 million. If the startup valuation exceeded $1 million, the angel would get the shares at a discounted price calculated based on the cap.

  • Other options for the angel investor included getting warrants to purchase additional shares or structuring the investment as a Simple Agreement for Future Equity (SAFE) instead of convertible debt.

  • The note could include both a discount and valuation cap to maximize the angel’s returns upon conversion. Interest accrued on the loan amount could also be converted to additional shares.

  • Future funding rounds would dilute the holdings of earlier investors like the angel, so consideration needs to be given to how their stake will be impacted over time.

  • The investor, Investix Inc, is investing $1 million in BlueTech Inc in exchange for Series A preferred stock. This values BlueTech at a pre-money valuation of $4 million.

  • The investment represents 20% of BlueTech on a fully diluted basis. The post-money valuation is $5 million.

  • The funds will be used for working capital, purchasing a CAD machine, and marketing.

  • In a liquidation event, preferred stock gets a 1x preference on their investment before common stock gets any proceeds.

  • Preferred stock can be converted to common stock at a 1:1 ratio, subject to adjustments.

  • BlueTech must provide quarterly and annual financial reports and an annual business plan to the investor. They also get annual audited reports.

  • The investor gets information rights until an exit or change of control event.

  • The investor gets protective provisions, including consent over changes that affect preferred stock rights, changes to the board, and certain major decisions.

In summary, the term sheet outlines the key business and financial terms of the investor’s Series A investment in BlueTech, including valuation, use of funds, exit preferences, information rights, and controls.

  • Equity financing involves selling shares of the company in exchange for capital from investors like angels or venture capital firms. This allows the founders to give up some ownership and control of the company in return for funds to grow the business.

  • The term sheet sets out the key terms of an equity financing, including valuation, share pricing, liquidation preferences, voting rights, vesting schedules, and protective provisions for investors. It is important for founders to understand the implications of these terms.

  • Valuation determines how much of the company founders have to give up in exchange for funds raised. It affects ownership stake and dilution for current and future shares issued. Founders want a high enough valuation to minimize dilution.

  • Crowdfunding allows raising funds from many individual investors online. It provides access to capital without giving up as much control as traditional equity funding. However, there are regulatory hurdles and costs involved, and failing to reach funding targets could damage reputation.

  • Equity funding gives up ownership but provides experienced mentors in angel investors who can advise and help open doors. Downsides include loss of control, high dilution if valuation is too low, and liquidation preferences that prioritize investors.

Here is a summary of the key points from the references:

  • Venture Capital Deal Terms by De Vries, Van Loon, and Mol provides guidance on negotiating and structuring venture capital deals, including deal terms, valuation, liquidation preferences, anti-dilution clauses, control provisions, and more.

  • Venture Deals by Feld and Mendelson offers advice for entrepreneurs on negotiating with VCs and lawyers, including understanding term sheets, valuation, IP ownership, board seats, and other key deal points.

  • The Crowdfunding Services Handbook by Rich is a guide for using crowdfunding to raise money for a business, project, or invention. It covers crowdfunding platforms, financing models, marketing a crowdfunding campaign, and fulfilling crowdfunded projects.

  • Overall, the references provide startup founders and entrepreneurs with information on different financing options (venture capital, crowdfunding), negotiating investment deals, legal considerations, valuation, and ensuring successful execution after raising funds. The guides aim to help businesses and entrepreneurs successfully structure and manage financing relationships.

  • Costing a product involves tracing the direct material, direct labor, and allocating overhead costs that cannot be tied to individual units.

  • Overhead costs are trickier to allocate as some like insurance are billed periodically and some like IT costs may support multiple products.

  • Companies allocate overhead using an overhead rate based on something that varies with production like direct labor hours or machine hours.

  • Nyzone, a heart monitor company, allocates Department A overhead at 112.5% of direct labor and Department B overhead at $15 per robot hour.

  • Using these rates, Nyzone can calculate an estimated unit cost of $24.65 for its NZ-Switch heart monitor.

  • At year-end, Nyzone finds variances between actual overhead costs and allocated amounts. Analyzing variances can provide useful insights.

  • Stilhed ApS, a phone muting plug company, finds a variance between its budgeted and actual sales and contribution margin for the month.

  • Variances show the need to develop flexible budgets that adapt to changing market conditions.

  • The company, Stilhed ApS, produced and sold fewer units than budgeted for in their iPhone plug product line. Their sales were 56,000 units actual vs 60,000 units budgeted.

  • This resulted in unfavorable variances for both revenue/sales and costs. Variable costs, fixed costs, and net income were all lower than budgeted.

  • Preparing a flexible budget that adjusts for the actual sales volume of 56,000 units provides a better analysis of variances. It shows variable costs were actually unfavorable by DKK 28,000 rather than appearing favorable by DKK 20,000 in the static budget.

  • The various cost and revenue variances combined to create a DKK 64,000 unfavorable variance in net income from the budget.

  • Analyzing variances through a flexible budget helps identify reasons for deviations from the plan and signals areas for process or model improvements. It also allows tracking performance against investor expectations.

  • Using concepts like standard costs and activity-based costing can further break down variances to pinpoint specific issues like material usage, labor rates, overhead spending, etc.

  • The passage discusses how basic costing approaches that only consider volume can distort product costs and profitability for a tech company producing different products.

  • It uses an example company, TenQ, that produces 4 types of interactive projectors in different batch sizes.

  • Using a basic approach that allocates overhead costs based only on direct labor hours leads to some incorrect conclusions about which products are most/least profitable.

  • An activity-based costing approach that considers different activities like setups and handlings as cost drivers, rather than just volume, provides a more accurate picture.

  • This reveals that some products thought to be unprofitable are actually profitable, and vice versa, due to the overheads being allocated incorrectly.

  • For tech startups with varied products, complexity rather than just volume can drive costs. A basic approach risks leading to wrong decisions about which products to drop or promote.

  • Getting an accurate view of costs and profits is important for maintaining health and avoiding a “death spiral” as wrong products are favored over time.

This passage discusses key metrics that tech startups use to communicate their growth and health to potential investors. It explains:

  • Number of users and active/growing users is important to show scale and growth potential.

  • Customer acquisition cost (CAC) measures the cost to acquire a customer. This should be lower than customer lifetime value (LTV).

  • LTV considers the total profits generated over the lifetime of a customer, factoring in recurring/future purchases.

  • Churn rate and revenue churn measure how many existing customers are lost over time.

  • Average transaction value (ATV) shows how much customers are willing to spend.

  • Monthly recurring revenue (MRR) measures repeat/ongoing revenues from subscribers.

It recommends tracking these metrics over time via a scorecard to monitor performance, identify issues, and inform strategic decisions around operations and pivoting the business model if needed. Maintaining growth signals to investors is key to continuing support for tech startups.

  • The passage discusses the importance of obtaining funding in order to ramp up existing operations and continue the growth path by reaching the next round of financing.

  • It suggests anticipating financing needs well in advance and notes that a six-month cash runway is not very long.

  • Very few startups become “unicorns” valued over $1 billion, but any growth should be valued.

  • As a startup grows, choices need to be made about whether to stay small or scale up through managing growth. An exit strategy also does not need to be decided on initially.

  • Signs that a startup has reached validation and can think about scaling up include scalable sales growth, expertise in cash management, expanded revenues/profits, growing customer base through word of mouth, positive press, etc.

  • However, scaling up may not always be the right choice - the founder may prefer to exit via an acquisition or IPO if possible and appropriately timed. Strategic and financial buyers are discussed as acquisition options.

  • It’s important to remember investors ultimately want an exit while the founder’s plans may differ. Overall growth, financing needs, scaling options and exit strategies are the main topics covered.

Here is a summary of the provided glossary terms:

  • Capital structure refers to the proportion of funds provided by owners vs creditors.

  • Contribution margin is a product’s price minus its variable costs.

  • Cost is the amount paid or given up that may become an expense.

  • Cost leadership is a low-cost strategy to compete on pricing.

  • Customer-to-customer (C2C) platforms allow users to interact.

  • Deep tech companies are founded on a scientific discovery or significant tech innovation.

  • Depreciation is the decrease in asset value over time due to use, wear, or obsolescence.

  • Differentiation is a strategy where products/services are viewed as superior to competitors.

  • Direct costs can be traced readily to specific activities or cost objects.

  • Due diligence involves measures to ensure a startup aligns with funding criteria.

  • E-commerce refers to buying and selling online.

  • Efficiency ratios analyze how a company uses its assets and liabilities.

  • Exit strategy is a plan for terminating an investment to maximize benefits.

  • Expenditure refers to a cash payment for goods/services that may become assets.

  • Experience is emphasized for crowdsourcing, user experience, and data analysis.

  • Financial risk considers a startup’s funding and cost structure.

  • Fintech applies technology to financial activities.

  • Fixed costs remain constant over a relevant activity range.

  • Focus refers to concentrating resources in a narrow market segment.

  • Freemium offers basic services free while charging for advanced features.

  • Generally Accepted Accounting Principles (GAAP) are U.S. accounting standards.

  • Gig economy involves short-term freelance projects and tasks.

  • Growth-share matrix considers product offerings to strategically support.

  • Hard science focuses on making pure research commercial.

  • Incubators nurture startups during the early period.

  • Indirect costs are not directly traced to specific activities or cost objects.

  • Initial public offering (IPO) is a company’s first public share offering.

  • International Financial Reporting Standards (IFRS) are developed by the IASB.

  • Investment ratios measure invested amounts relative to profits.

  • Lead generator models sell user information to other companies.

  • Liabilities are a company’s financial debt and obligations.

  • Liquidity refers to the ability to meet short-term debt obligations.

  • Lock-in increases user resistance to switch away from a product/service.

  • Milestones are typically targets set by investors like revenue or profits.

  • Network effects refer to increased value as more users participate.

  • Overhead costs are associated with operations but not directly linked to production.

  • Partnerships involve co-owners contributing resources and sharing profits/losses.

  • Pivoting refers to altering direction based on prior learning.

  • Platforms harness and capture value from network effects.

  • Price-per-user refers to the acquisition price paid per user.

  • Product-market fit is the extent a product satisfies its market.

  • Profit is the financial benefit when revenues exceed expenses and taxes.

  • Profitability ratios indicate the ability to generate profits.

  • Reserves are resources required for reinvestment, payments, or emergencies.

  • Restrictive covenants limit former employees like not competing.

  • Risk-averse prefers less uncertainty when options have equal expectations.

  • Runway is the time a company can operate before needing more capital.

  • Scaling up occurs when clear traction and value creation enable growth.

  • Search engine optimization (SEO) increases search result rankings.

  • Seed is initial capital from founders or others to cover startup expenses.

  • Series A is typically a startup’s first significant venture capital round.

  • Sharing economy involves sharing private assets/services for a fee or free.

  • Stockholders’ equity is capital from shareholders plus retained earnings.

  • Subscriptions refer to paying to access certain products or services.

  • Sunk costs cannot be recovered once incurred.

  • Tech startups deliver novel technology-based products, services or solutions.

  • Variable costs vary with production volume changes.

  • Variance reports identify differences between planned and actual outcomes.

  • Venture capitalists provide capital for new or expanding startups.

  • Fixed assets included intangible assets worth $79 million and tangible assets worth $79 million. Long-term investments were $78 million and long-term receivables were $79 million.

  • Key business models included business-to-consumer (B2C), customer-to-customer (C2C), and platforms with 5 examples listed.

  • Canada was listed as a location with $163 million.

  • Cash flow, balance sheets, income statements, and notes were discussed as key financial documents. The importance of monitoring cash flow and liquidity was emphasized.

  • Equity financing options included angels, early stage investors, and venture capital. Crowdfunding was discussed as an option.

  • Metrics like return on investment, contribution analysis, break-even analysis, and KPIs were covered for evaluating financial performance and progress.

  • Companies discussed included Amazon, Apple, Facebook, Microsoft, and startups like Photon, Holotech, and Sciensus.

  • The chapter discusses ratio analysis and different types of ratios, including liquidity ratios (current ratio, quick ratio), profitability ratios (gross profit margin, net profit margin, return on equity, return on assets), and vertical and horizontal analysis.

  • It provides examples of liquidity ratios for Skype, Snapchat, Slack Technologies, and Microsoft.

  • Profitability ratios are discussed from 121-130.

  • It mentions sole proprietorship versus limited/private companies.

  • Auditor’s opinion, equity issues, and changes in shareholders’ equity are covered from 105-117.

  • Different start-up structures like corporations, limited companies, and partnerships are summarized from 102-105.

  • The importance of assessing financial progress is discussed.

  • References to technology companies like Microsoft, Murphy, Spiegel, and Solovic are made in relation to the topics covered.

  • Key terms like ratio analysis, liquidity ratios, profitability ratios, sole proprietorship, corporations, shareholders, equity issues, and assessing progress are defined or discussed.

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