Finance Study Seminar for Start-up Company | Onlab Study Hour
Open Network Lab (Onlab) started “Seed Accelerator Program” in Japan for the first time on April 2010. This program aims to grow world-class startup companies.
On 20th May, A seminar named “Finance Study Meeting for Startup Company” was held to input the basic knowledge of fundraising. This time, partner lawyer Mr. Hiroyuki Kurihara from Mori Hamada & Matsumoto law office,Corporate Officer & Director of Supporting Innovation Companies Department Mr.Naoto Ohitsu from Mizuho Bank, Ms. Yumi Tsuda from DG Incubation mounted on the platform. Today we would like to share their lecture! There were amazing reputations from the participants,too.
The Equity finance in the Seed Stage
Ms.Tsuda lectured about the point of equity finance in the seed stage.
There are roughly two viewpoints from the VCs.
- So… What is Great?
VCs don`t care about the poor sales so much, because it is natural for startup in the Seed stage, and it cannot be helped.They are seeing whether there is a strength which is second to nobody. It could be something like an intuition, for example, the theme of the business is based on his experience, or the person is really clinging to money or to that field.
- Does it really works as a business?
Each stage has an important wall. “Seed Stage : Will it really used by the consumers?” “Early Stage : Does it really sell well?” “After Middle Stage : Is it profitable?” As Discussing, VCs are watching whether they could give a logical explanation for their own business.
What is Fundraising?
It is really dangerous to think that fundraising are the money you don’t have to pay back. Fundraising means to transfer your stocks, to give the part of your company. Therefore it would be a deeper relationship than a contract, so you must perform your duty of consulting and reporting.These days we see some news of succeeding in raising 1 billion, but that doesn’t mean excellent. Big profit from small funds. This is far better.
Two Aspects of fundraising
- Where can you get your funds?
It is important to plan well, for instance, from whom did you raise or when can you pay back as a return. It is quite difficult to get back your stocks. Think carefully, because all history of the capital policy is irreversible.
- How do you use?
Plan your business project and calculate how much you need. The important point is not planning as a goal but simulating meaningfully to survive your company, not forgetting about the relationship with other partners. For example, how much funds and resources you need to achieve your goal. Not only the PL but also think about the cash flow considering the cycle of payment.
Step for Fundraising
As you meeting the VCs, plan the amount and the period you need. There are many choices, but if you think well, you could find your most important core.
②Meeting the VCs
Fundraising is just same as trade, it’s negotiation. What do they want? What flow would happen? Value communication. Prepare for the questions you might be asked from the VCs like the chart under below.
Especially, KPI, growth strategy and market scale would be a big point. Make a story. Which KPI has the most demand, why is it now, what can you earn from keeping that KPI and how big the business would be in the future. Many people ask the way to think about the market scale, but VCs want to know what percentages you have to share in the market or how much KPI you need until the project become large, and how large it is.
There might be some questions you couldn`t answer like “How much is the burn rate?”, “What’s the shareholder consumption?”, but if you cannot answer immediately, VCs will feel insecure. When it came to strategy questions like “How do you get your consumers?”, if you were checking your papers, also the VCs would feel insecure, so you need to be careful!!
Debt Finance Primer
Next, Mr.Kurihara from Mori Hamada & Matsumoto law office lectured about the debt finance for the startup companies.
The Feature of Equity Finance and Debt Finance
The second popular type is LLC in the other kind of companies than corporation. Both corporation and LLC could be founded quite similar, but in terms of rising from the VC, it would be better to found a corporation which issue stocks.
The items of equity finance in the figure above is an organized features of common stocks. Debt finance could be largely separated into two types, loan and bond. Bond is a valuable papers, but it won’t be issued, so actually there’s not a big difference between loan. For the liabilities, if you return in a year, it would be current liability, and the others would be fixed liability. When it comes to the right to speak at the operation of company, if you borrow money and sign a loan agreement, there might be a covenant clause. Read the contract carefully, because sometimes there is a covenant clause for running a company, for instance, if there’s no permission from the loaner, you can’t distribute.
※This chart is just an ideal type. Finance between debt and equity also exits, for example Mezzanine finance.
Basal conditions for bank loan
There are three economical conditions, “the amount of the loan”, “the loan repayment method and the repayment periods” and “the interest rate”. The typical loan repayments would be principal equal monthly repayment and bullet repayment. Principal equal monthly repayment is to pay back same capital at every periods. It is also called “Amortization”. On the other hand, bullet repayment is for example, when you pass the 3 year loan period, you have to pay back all in 3 years later. This is what we call “Bullet”.
In addition, there is a repayment method called “Balloon” which pay back equal amount at each period and pay back the left at the last time.
You must pay attention to the events of default, too. The creditor doesn’t have to return the debt until the deadline, however if something happens, you may not be able to persist in your benefits of terms.Roughly there are two patterns. First, when it is impossible to collect the loan, for example the bankruptcy. Second, when the creditor was late at the performance of obligations. Even you were late for just one part, it could be the reason of acceleration. Talk with the bank carefully before you become unable to return.
You might lose your benefits of terms, if you break the rep and warranty insurance that promises the fact, or if you break the covenant clause. When the amount of borrowing got bigger, the contract may be more than 100 pages. Then you should take legal advice.
・There are multiple patterns in debt finance.
・Talk enough with the finance institutions, then start your trade.
・Sometimes it could be better to talk with the lawyer.
About the venture finance
Mr. Ohitsu from Mizuho bank talked about how ventures should think about financing.
Relationship with the bank
If you come from startup and explain shortly, the bank may not understand. Be confident to talk the reason of the deficits (for instance, the labor cost is going ahead). If you tell the truth, the bank will understand your situation. Be honest to the bank.
Some advices to obtain the fund smoothly
As far as we see, survived startup has more than 4 board members. In the Seed stage whether CEO’s passion and business model exists, series A whether the prototype are made and embodied, series B whether it became to a team or organization. If there’s 4 people, fundraising would be much smoother. Therefore we recommend building a team to grow fast.
This time, we called VC, lawyer and banker to have a session about finance. We are planning more opportunities to study to help you.
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