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Published on June 17, 2007

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Slide1:  Innovations in Business Finance: How To Never Say 'NO' All Right Reserved. Transmission or reproduction of this material, in whole or in part, in any manner or form or by any means, without the written permission of the author is prohibited. Presentation at Strategies for Business Innovation Energizing Entrepreneurship in Rural Minnesota February 15, 2005 Dileep Rao, Ph.D. President, InterFinance Corporation Adjunct Instructor of Entrepreneurship Carlson School of Management (UMN) Phone: 763-588-6067 Web site: www.infinancing.com To Develop Your Business Financing Plan 'In Under 60 Seconds' My Background & Bias:  My Background andamp; Bias 1973-1996 Venture–Based Economic Developer andamp; Financier Financed 450 businesses/ projects Created 13,000+ jobs Used equity/ debt/ development finance Turnarounds, Startups and Expansions Manufacturing, Technology andamp; R.E. Venture Manager 5 Turnarounds andamp; 4 Startups 1997- Present Venture Development Consultant to: Ventures, Financiers andamp; U.S. Government Adjunct Instructor (Carlson School/UM) Venture Development andamp; Finance Author Business Finance: 25 Keys to Raising Money (New York Times) Handbook of Business Finance andamp; Capital Sources (American Management Assn.) Entrepreneur: Online Business Finance Plans Innovations in Business Financingto Never say “NO”:  Innovations in Business Financing to Never say 'NO' Complete Financing Arsenal Improved Deal Flow for Better Returns Reduced Risk for Lower Losses 1. Complete Financing ArsenalTo Never Say “NO”:  1. Complete Financing Arsenal To Never Say 'NO' Financing Trends:  Gap Financing for Venture Growth 1950s andamp; 60s: Rich families for VC/ Banks 1970s: VC – Equity; Sub Debt w/Warrants 1980s: Gap Debt Financing: Sr. / Sub Debt without warrants 1990s: Micro – from the 3rd world. Banks: Then SBA as too much paperwork: Now: SBA does not have enough guarantees Then: Pick best financing opportunities; Now: Financing in search of Opportunities Financing Trends Never Say “NO”:  If business is not viable, make it feasible: Guide/ Train/ Recruit entrepreneur (team) for success If business is viable: Develop the right business finance plan Have a complete arsenal of financing tools Never Say 'NO' Plug the Key Financing Gaps:  Plug the Key Financing Gaps By Business Type: Manufacturing, Technology, etc. – Area Impact By Uses of Funds Working capital: Inventory/ Losses – Tough to Finance A.R.: Sometimes easier to finance Fixed Assets: Equipment andamp; Real Estate By Types of Assets andamp; Secured Position Senior Subordinated/ Unsecured – Tough to Finance By Term of Financing Short/ Mid Long – Tough to Finance By Level of Risk Equity Early Stage – Tough to Finance Late stage equity; Debt andamp; Lease Key Question for Development Financiers:Financing high-risk/ low-potential ventures:  Key Question for Development Financiers: Financing high-risk/ low-potential ventures Risk Potential Equity FinancingFor Economic Development:  Unrestricted VC -- Seek highest returns Go where best deals are for potential Home Runs Look for: High-potential industries, technology Star management -- Track record of creating wealth High valuations at exit: IPO/ Strategic Often seek later stage with less risk andamp; closer to exit Restricted VC (Restricted returns) Restricted by: Financing Source –SBICs Area -- Economic development VCs Industry – Corporate (some Area) VCs Management -- some Specialized SBICs Higher Risk due to Earlier Stage; Less 'Perfect' Deals (from VC perspective) Lower Returns due to Few Home Runs Reduce Risk : Experience in Restricted VC Equity Financing For Economic Development Reality-Based Returns :  Good Data vs. P.R. andamp; Hype Levels of ROI possible from CDVC based on proprietary model. Should you keep your money in the bank? Reality-Based Returns My Key THM. :  My Key THM. Know your gaps and fill the real, needed gaps by: Evaluating your risks Training your staff Become the first choice of high-demand entrepreneurs Expect realistic returns from CDVC 2. Improved Deal Flow for Better Returns:  2. Improved Deal Flow for Better Returns Opportunity Trends & Issues:  Business Retention andamp; Turnarounds Retention – First Focus Turnarounds: Structural defects andamp; bad management Business/ Venture-Entrepreneur Recruitment Then: MN to IA, WI, SD, ND/ South/ Mexico Now: MN to Asia (Global challenge) Venture/ Entrepreneur Recruitment: Are you recruiting those 'rejected' by others? Venture andamp; Entrepreneurial Development Then: Develop suppliers to U.S. manufacturers Now: Niche manufacturing to compete vs. China High-tech Venture Development in Minnesota Then: MN as global tech leader – CDC, Univac… Now: MN leading only in medical HOT Industries Then: PCs; Biotech; Biomedical; Internet Now: No HOT industry – tough to find 'home-runs' (Same as 'stock market' vs. 'market of stocks') Opportunity Trends andamp; Issues Venture Development “Philosophies”:  Venture Development 'Philosophies' Gatekeepers –Venture Finance – Say 'NO'. Venture Developer: Irresistible Force – Champions – Believe 'YES' Grow new ventures Grow existing businesses Use corporate resources for corporate, venture and area benefit Odds to Develop Successes:  Number of Firms In U.S. (2001 Census): 20,982,000 With Payroll: 5,542,000 (26.4%) With 10+ employees: 1,121,400 (5.3%) With 20+ employees: 505,300 (2.4%) New firms – Startups: In 2002 ( SBA Estimate): 550,000 Receiving V.C. in 2002 (PWC): 147 (0.03%) With 20+ employee potential: 13,200 With 10+ employee potential: 29,150 With payroll potential: 145,200 Suggestion: VC criteria is strict –Be more inclusive Target opportunities with potential, or current, payroll of 10+, or 20+ employees. SBA: Small Business Administration PWC: PriceWaterhouse Coopers Odds to Develop Successes Understand Risks inNew Product & Venture Development:  Understand Risks in New Product andamp; Venture Development Track Record for New Products Of 100 new products, 63 are canceled, 12 fail and 25 succeed (Booz-Allen, 1982) Track Record for New Ventures 20%: Total failures 60%: Some loss to minimal return 18%: Reasonable return 2%: Home runs – Most from VCs in Silicon Valley andamp; Boston Suggestion for Area Venture Success: Home Runs are rare – Especially in Area Venture Development Key: Reduce failure rate -- SELECT OPPORTUNITIES wisely Select Opportunities Wisely:  Select Opportunities Wisely Evaluate Management andamp; Board Lazy (Time-Challenged) Investor’s Approach to Venture Analysis: Has anyone else with credentials already analyzed and invested? As ADO, you may have to be the first. Measure Benefits to Area from Industry Area Multipliers Market Scope Analyze Industry andamp; Venture Risk: 4/5 ventures don’t meet goals Level of Investment Probability of Loss Evaluate Value Added/ Value Protected/ Value Potential Micro (Self-employment) Mini (Small impact) Mid (B2B or B2C or B2G) Maxi (High competition for deals) Evaluate for Value:  Evaluate for Value Value Added: Competitive Advantage Impact on Market Share/ Gross Margins/ ROI Costs, Productivity andamp; Execution: 'Race to the bottom line' New Proprietary Product Value Protected via: Patent or trade secrets: Coke Real estate location strategy: Wal-Mart Overwhelming force: Microsoft Execution and costs: Dell Value Potential Large markets builds large ventures New industries attracts new ventures High growth rate forgives sins and incompetence Where to Find Diamonds:  Where to Find Diamonds Local/ Global Search to Find/Develop Diamonds:  Local/ Global Search to Find/Develop Diamonds Resource (Technology)-based: Focus on what’s available in selected industries or local area (Cluster-based) Demand (Market)-based: Focus on what’s needed in selected markets – then find locally or globally Involve Local Corporations:How Corporations Can Benefit from Venture Development:  Involve Local Corporations: How Corporations Can Benefit from Venture Development Create Markets for Local Economic Vitality Purchasing Strategies: Minority Purchasing Councils 3M Create Venture Opportunities from Corporate Unused Technologies -- with Buy Option License out: Limited corporate potential – Union Carbide Develop Corporate Ventures – when appropriate – with Area Help (subsidies): Corporate Ownership: 100%/ Majority/ Minority: Level of corporate bureaucracy Corporate resources Strategic control Independent decision making -- Operations Strategic Alliances to Plug the Gaps License in: Helps corporate product line Marketing, Operations, Finance, Randamp;D, etc. When AreCorporate Ventures Appropriate?:  When Are Corporate Ventures Appropriate? Technology is Breakthrough/ Revolutionary Major Differences from Existing Products/ Processes When Opportunity does not fit Corporate Culture/ Strategy/ Organization andamp; Divisions (Politics)/ Products/ Markets andamp; Channels/ Financial model When Industry is Emerging No rules. Need flexibility When Potential is Uncertain Vision Fits/ But No 'Champion' Incentives & Infrastructure to be the First Choice for Attractive Deals:  Basic: Cost-Effective Physical Resources: Industrial or Randamp;D Parks Spec Buildings Incubators Job Training: Assistance and incentives Financial Incentives: Tax incentives andamp; Grants Cheaper andamp; Riskier financing New: Telecommunication One world Reduces 'rural' disadvantages How to take advantage? Incentives andamp; Infrastructure to be the First Choice for Attractive Deals My Key THM(Take-Home Message):  My Key THM (Take-Home Message) Successful venture financing NEEDS venture development Use all available resources to develop opportunities – the more you have, the more 'home-runs' you are likely to have. 3. Reduced Risk for Lower LossesEnhance Your Area Entrepreneur Quotient™:  3. Reduced Risk for Lower Losses Enhance Your Area Entrepreneur Quotient™ Management?Management?Management?:  Management? Management? Management? VCs: Great Management or Great Product? Management Needs by Type of Venture Micro Business: Most academic/ non-profit Small group management Basic business advice Small business management training Mid-Sized: Experienced andamp; sophisticated to manage managers and mid-sized firms Training in opportunity evaluation andamp; business growth Initial expert training followed by peer groups High-Potential Ventures: Visionary andamp; Strategic – 'World Class' High-Potential: Stars with Track Record – Available/ Recruit to Area (San Diego vs. South Dakota)? Entrepreneur Development Options:  Entrepreneur Development Options School of hard knocks Non-Profit/ Governmental Primarily educating new entrepreneurs with limited business/ corporate experience. University Business Schools Other: Online Business School Faculty &Venture Development:  Tenure-Track faculty usually have: One-dimensional, discipline-centered Expertise: Ventures need well-rounded expertise in all areas of business Turnaround Consultant: Job descriptions when company in danger of bankruptcy due to theft Limited practical experience Corporate/ Investment Bank focus VCs as Faculty: Mainly MBA/ Investment Banker perspective – Financing and Analysis, NOT Venture Building Focus on HR ventures – Rare in V-B ED Entrepreneurs as Faculty Comments based on sample size of one. Business School Faculty andamp; Venture Development Use the Web to Train Management & Entrepreneurs:  Use the Web to Train Management andamp; Entrepreneurs Education and training Improving quality of training available Help with analysis and assistance Resources Financing Management Buildings, etc. Markets Train: Steps to Develop New Businesses:  Supply (Technology) Based: Sources: Internal/ External Superior Product: Long-Term Proprietary Advantage Segment from Heaven: Best Segment. Size. Growth. Priority A. Opportunity: How Good? Pricing. Proof. Profitability. Valuation Venture Options: Corporate Fit or ? Existing Division Corporate Venture (100% owned) Controlled (51%+ ownership) Affiliated (1-49% owned) Independent Venture: License/ Option to buy Train: Steps to Develop New Businesses Unattractive Attractive Competitive Long-Term Advantage High-Growth Venture Options New Division Market-Trend Based: Markets: Main/ New/ Niche Unattractive Yes No Small or Family Business Corporate B. Business Plan Business Strategy l Marketing l Operations l Management l Risks C. Finance Train: Intelligent FinancingFrom Community Investment Banker™ Program:  Train: Intelligent Financing From Community Investment Banker™ Program BUSINESS FINANCE NEEDS What Is Needed? Equity Debt Specialized How Much Is Needed? When Is It Needed? By Stage What Are The Uses? Operating Expenses Inventory A.R. Inventory Equipment Real Estate BUSINESS FINANCIER OPTIONS Private Lenders Banks Asset Based Lenders Leasing Cos. Factors Real Estate Lenders Investors Angels Corporations VCs Mezzanine RE Investors Development Financiers Local State Federal What Are Financiers’ Criteria Potential; Stage andamp; Risk; Cash Flow; Collateral; Job Creation Who Should The Business Seek Cost; Terms; Risks; Covenants; Future Benefits; Exit Strategy; Amount availability; Time to raise How to Structure the Financing Amount by stage; Types of financiers and financing; Financial instruments Options to Obtain Financing Individual/ Institutional Private Placements; Public Offerings My Key THM. :  My Key THM. Enhance the competitiveness of your current entrepreneurs and economic developers Final THM forVenture-BasedEconomic Development:  Final THM for Venture-Based Economic Development Developers should be Independent, Unbiased, Non-obligated: No Axes to Grind andamp; Sacred Cows to Worship: Venture vs. Tenure Making enemies or Being political: Resorts vs. Mfg. Compete with Private Sector: Industrial Buildings Risk-Taking with Minimal Group-Think: Multiple, Independent V. D. Groups –Informal VC grapevine can breed group-think Coordinate to Develop All Venture Types for Growth/ Minimize shortcomings of each group: VCs: Any Wart or Blemish -- Dump! Entrepreneurs: 'Control my baby' even if still-born Corporations: No Fit, New, Uncertain, Risky -- Out! Control to Push Viable Opportunities -- Rare Questions?:  Questions?

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