TIM

Issues in Telecommunications
TTMG 5003T

Financial plans, startup financing
January 22, 2008

John Callahan, PhD
TIM
J anuary 22, 2008 Issues in Telecom Slide 2
Upon completion of this class
You will know about
Financial statements
Balance sheet, income statement, cash flow
Pro-forma financial forecasting
Startup financing
You will be able to
Develop a financial plan for your opportunity
TIM
J anuary 22, 2008 Issues in Telecom Slide 3
Financial statements and cash flow
Excerpts from
Tracy, John A. (1999) How to Read a Financial Report, John
Wiley & Sons
Knowledge Center (2002)
https://us.etrade.com/e/t/applogic/knowledge?gxml=Knowledge
/Understanding_Financial_Statements/Introduction_to_Financia
l_Statements/index.html
Excerpts
http://http-server.carleton.ca/~callahan/sub/5003P/financial.htm
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J anuary 22, 2008 Issues in Telecom Slide 4
Pro-forma financial forecasting
Targets not forecasts
You make it happen
Business plan put into financial language
Two approaches to revenue forecasting
Top down
Estimate total accessible market
Estimate percentage of total market to be captured
Bottom up
Specify revenue generating activities
Use capacity of these revenue generating activities to estimate
total revenue
Top down common in high-tech because of the limitless
potential of many tech-based product/service offerings
Example: Wii video game console
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J anuary 22, 2008 Issues in Telecom Slide 5
Using a spreadsheet to create pro-forma
financial forecasts
Financial template from McGraw-Hill (used for the
text, Building a Dream)
A simple Excel template is available here.
http://highered.mcgraw-
hill.com/sites/0070898103/student_view0/resources-
999/financial_template.html
Example one of your opportunities
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J anuary 22, 2008 Issues in Telecom Slide 6
Chapter 6: Financing your opportunity
core ideas
Financing required by a startup depends on business model
Five basic sources of financing: sales revenue, government support,
short-term debt, long-term debt, and equity
Debt is cheap but risky; equity financing dilutes founder ownership
and diminishes founder control
Relationships between entrepreneurs and bankers and between
entrepreneurs and venture capitalists are both complex but present
different management challenges for the entrepreneur
Equity financing stages seed financing, startup financing, first stage
expansion and second stage expansion
Venture capital method commonly used in valuing startups
Multiples of net income (and even cash flow or number of engineers)
commonly used in valuing tech-based startups.
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J anuary 22, 2008 Issues in Telecom Slide 7
Business model determines financing
required
time
c
u
m
u
l
a
t
i
v
e

c
a
s
h

f
l
o
w

how
low
how
high
how
fast
startup financing
required
Too much money can be a bad thing!!!
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J anuary 22, 2008 Issues in Telecom Slide 8
There are five kinds of financing
Sales revenue the best!
Government grants and loans
Short term debt
Bank loans, money market
Long term debt
Term loans, bonds
Equity
Can get very complicated
Preferred shares vs. common shares
Convertible preferreds and convertible debentures (bonds)
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J anuary 22, 2008 Issues in Telecom Slide 9
Debt is cheap but risky
Debt is cheap
Interest on debt is tax deductible
Example interest costs of 8%, tax rate of 40%, after tax cost
of debt of (1 0.40) x 8% = 4.8%
Cost of equity is 10+%, can be as high as 40-50%
Debt is risky
Example Table 6-2 of chapter 6, p 9
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J anuary 22, 2008 Issues in Telecom Slide 10
Using outside equity dilutes equity position
of insiders
Example Table 6-2, chapter 6, p 19
This leads to the rich vs. king tradeoff
Wasserman (2006)
High quality co-founders and non-founding hires will
demand more equity than will lesser co-founders and hires.
The same is true of investors who can add the most value,
compared to lower-value investors. If the entrepreneur
refuses to give up such control, he will fail to attract the best
resource providers and thus will build less value.
Figure 6-5, chapter 6, p 22
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J anuary 22, 2008 Issues in Telecom Slide 11
New venture financing
Founders
Family and friends
Angels
Venture capitalists
IPO or acquisition

Government
Banks

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J anuary 22, 2008 Issues in Telecom Slide 12
Valuation the venture capital method, an
example
Current
time
years 2 4 6 8 10
Profit of
$6 million
per year
Value of
15 x $6 million
= $90 million
$90 million
Discount 7 years
(1 / 1.40)
7
$8.54 million
At 7 years, use multiple of 15
$8.54M is post-money valuation because it is assumed that the firm
uses the VCs $3M in the valuation
VC invests $3M for 3/8.54 = 35.1%
Pre-money valuation is (8.54 3) = $5.54M
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J anuary 22, 2008 Issues in Telecom Slide 13
How does all of this work for open source?
Revisit previous overheads and ask this question
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J anuary 22, 2008 Issues in Telecom Slide 14
Next
Dynamics of technological change
The Innovators Solution
Chapter 2: How Can We Beat Our Most Powerful Competitors?
In class
Christensen, C.M. (2004b). Strategies for Creating Innovation-
Driven Growth, Demo,
http://www.innosight.com/strategies_growth.htm
At home
Christensen, C.M. (2004) The Innovation Economy: How
Technology Is Transforming Existing Industries and Creating
New Ones, http://mitworld.mit.edu/video/108/