4.8 Investment Requirement

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From the course by The Chinese University of Hong Kong

Entrepreneurship

18 ratings

The Chinese University of Hong Kong

Entrepreneurship

18 ratings

Course 3 of 4 in the Specialization Doing Business in China

An entrepreneur is someone who is always on the lookout for problems that can be turned into opportunities and finds creative ways to leverage limited resources to reach their goals. In this course, learners will be introduced to the fundamental concepts, theories, and frameworks of entrepreneurship and learn how to apply them within the context of the world's largest market: China. Through cases, articles, and experiential learning, learners will gain expertise in how to identify and evaluate opportunities; interpret, analyze, and build financial models to enable high-growth ventures; practice living life as an entrepreneurial leader; and create a new product or service for the Chinese market.

From the lesson

Module 4. Startup Financing

In this module, you will learn how to get funding to support operations of your startup. You will learn about different modes of investment. Most importantly, you will learn more about the financial analysis which potential investors use to assess your startup.

4.1 Stages of Fund Raising13:01

4.2 From Pitch to Hitch – What’s on the Investor’s Mind?6:50

4.3 Startup Valuation10:02

4.4 Mode of Investment3:45

4.5 Shareholder's Agreement7:37

4.6 Investor Incentives3:50

4.7 Potential Return for Investors1:48

4.8 Investment Requirement4:29

4.9 Financial Analysis (From Investors' Perspective) - Return5:02

4.10 Financial Analysis (From Investors’ perspective) - Operation Parameters8:33

Meet the Instructors

Prof. Dominic Chan
Associate Director, EMBA Program, Associate Professor of Practice in Entrepreneurship, Project Director, Centre for Entrepreneurship
Department of Decision Sciences and Managerial Economics

So how much do you need to ask for from the investor?

Well here's a very simple calculation.

Remember the valley of death,

where the cash flow is negative for a number of months, or even years.

So, in other words, you are burning cash during that period of time.

And you need someone, some investors, to help you to finance that period of time.

So with that logic you simply think about in your projections, how many months,

or even year, would you be in negative territory for your cash flow?

And you add all these negative cash flow together

until you reach a point where you break even, and

that sum, the total amount of these negative cash flow,

would be the investment required from the investor.

In other words, they help you to finance those negative cash flow period.

But the thing is, you have to ask yourself is your projection correct?

How accurate are your projections?

What if your numbers are wrong and you actually need more money?

So you have to give yourself a buffer.

Now, how big should that buffer be?

Should it be 20%, 30%, or even 50%?

That I cannot decide for you.

You have to look really hard.

Has your projections been very conservative?

That means you typically you overestimate how much you need to invest.

If you already have done that then you probably won't need further buffer.

But have you been very, very aggressive, which means you

probably are very optimistic about your revenue and you are,

at the same time, very optimistic about your cost.

Then you are likely to have made an underestimate of

the cash flow negative that you would encounter and, therefore,

it's advisable to add a buffer for the investment ask.

So what would be the right answer, or wrong answers?

Again, it really depends on your projections and

how aggressive you have made you a numbers.

But you might also encounter another issue.

What if that number is very big?

Well that means you are either asking too much from angel

investors, and you might even look into the VC round

because the numbers seem to be too big for angel investors.

And another question that you might ask yourself is that this method of

counting all the negative cash flow, based on the assumption that you will reach

a break-even point in a near term, or not too far distance.

But what if that break-even point is still months or years away?

Then you might run into another problem

because you might actually need a multi-round of investment.

Probably no one investor would want to promise to finance

you for this period of time because it’s too far away from break-even point.

This is not actually uncommon.

If you think about the biotech company, indeed the development cycle is very long.

It will take them years before they see, possibly, a new drug coming to the market.

So how can they finance the business with such a long

period of time before they break even?

They have to break it down into multiple financing rounds.

Are you in the similar positions?

You have to decide.

Anyway, so in other words, the investment ask, investment need from the investors

are the sum of all the negative cash flow before you break-even.

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