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Start Up Capital

 Introduction



Start up capital isn't just cash on hand. It is, rather, a combination of all the resources you have available. So before you launch your new business, you need to assess what these resources are and what you can do with them. In doing so, we will include all the assets you have available without always differentiating between personal resources and corporate assets.

 Cash

Include personal cash that you can afford to put at risk as well as corporate cash held in your company's accounts.

 Credit

Again, include only the credit that you can afford to risk. Do not include what you could borrow against your house - it should not be put at risk.

 Personal Tangible Assets

This should include anything you have accumulated that could be liquidated to raise money for investment. Make sure the values you assign to this category are realistic. Check the true market value of each item. It is very tempting to overvalue such things as antique heirlooms, artwork, jewelry, and toys like cars, planes, boats, and such. Since this list is for your use, not some lender's, you must resist this temptation.

 An Existing Company and Its Assets

If you are fortunate enough to already own a going concern you should include its value. A good estimate of the company's value should not exceed ten times the net profit before taxes that the company made over the past year.

 Contracts

If you already have contracts with credible prospective customers of your new business, you can include the net value of these contracts minus what it will cost you to deliver on those contracts.

 Intellectual Property

Here again you must be careful not to overvalue what you have. A great idea, even a patentable idea, is of no value for the purposes of this list; but, you might make a note of the amount for which you would sell the idea to a venture capitalist or investment banker. This amount might be useful to you if you ever find yourself negotiating for start up capital with an investor who might fund your new venture.

A patent, on the other hand, even a patent applied for, may be of some real value if it is sufficiently attractive to an investor. The attractiveness of a patent, to a potential investor is subject to the credibility of your financial business plan, which I discuss further on in this article. Again, don't overvalue the patent or the patent application. In the end it is worth nothing until contracts are in place for its exploitation.

Similarly, trade marks and copy rights are only valuable if they are of proven value. How much money have they already brought you over the past year?

 Skills and Knowledge

Proven high level skills and specialized knowledge are especially valuable if they are unique - unavailable from anyone but you and the members of your team (if you have one). Place a dollar value on these assets equal to a year's salary that you would accept if you applied for a job to do the specialized work.

If the skills and knowledge that you bring to the table are not unique, list them at what it would cost an investor to recruit someone else having such skills and knowledge. Starts up capital requirement estimates of this item usually do not exceed 10% of the first year's salary of the recruited employee.

 The Action Plan

Your start up capital analysis should include three well written business plans.

  • The Action Plan,
  • The Management Plan, and
  • The Financial Plan, or as I prefer to call it, The Capital Solicitation Plan

We discussed the evolution of the Action Plan and the Critical Path elsewhere, so we needn't go over that ground again. The main thing to remember about it is that it is strictly for your own use. Keep it flexible. Keep it handy. Keep it visible.

 The Management Plan

The Management Plan is also for your use; but there is a difference. Knowledgeable equity investors will want to know all about it before giving you control of any start up capital. They will want to know who will do the managing and what is their track record in managing such a venture. It is in this plan that you will introduce your prospective investors to your management team and, hopefully, persuade them that your team and its methods are a winning combination.

Part of the content of this plan are the track records, bios, or resumes of both your in-house management team members and your back-up team of outside professionals who will be supporting your efforts. These will include your corporate attorney, your intellectual property attorney, your tax attorney, your accountant, and any other knowledgeable advisors with whom you expect to consult.

The Capital Solicitation Proposal

Obviously you will need to combine the Management Plan with portions of both the Action Plan and the Financial Plan in order to put together your formal Capital Solicitation package. The reason the management plan is listed here as separate from the other two plans is because if done well, it will be one of the strongest start up capital assets you own - even without a dollar value attached to it.

Still another fact about the Management Plan is that the prospective investor, the likely source of your start up capital, will want to see the management structure as strictly hierarchic, so that there are clearly demarked realms of responsibility and accountability. On the other hand, such hierarchic structuring doesn't lend itself to maximizing the group's creativity, which is ultimately the source of your business's success.

For this reason, it may be to your advantage to use a structure in which the accountable individuals serve at the pleasure of the group as a whole, where in effect the group delegates specific responsibilities to the individual managers - rather than the other way around. How to do this is currently beyond the scope of this website; but you can contact me if you are interested in learning more about how to do it.

 The Financial Plan

    The financial plan for the use of start up capital is at the core of what investors want to see. At a minimum it must include:

  • Initial financial statements of the company and its principals (owners, directors, and officers)
  • Pro-forma financial statements, which are projections of what you expect the company's financial statements to look like over the next twenty-four months.
  • A unique selling proposal that distinguishes what your company will sell from its competitors.
  • Analysis of what your competitors are selling, how they are doing it, and how much money they are making.
  • A summary of the legal and financial structures that you have or will put in place to manage and protect the start up capital once the investment is made.
  • An executive summary of what makes your business the best opportunity available for the investment of the investor's start up capital.

 Summary

Now that you have made a list of your existing start up capital assets, you are in a position to compare it with your



start up capital requirements, which I discuss next.

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Robert Podolsky

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