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Financing An Incubator

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Daniel Andrew

on 12 May 2014

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Transcript of Financing An Incubator

Financing An Incubator
Component 1

Module Objectives
Identify the required financing to, at least, reach break even
Looking for various funding sources to collect sufficient funding for your business incubator
Develop fund raising strategy
Monitor the performances of your financial operation
Introduction
Financial resources are needed to:

Investment
Spreadsheet
Part 1 & 2
Establish the business incubator;
Start its activities;
Operate efficiently and in a manner that contributes to achieving the incubator’s overall goals; and
Ultimately, reach sustainability.

IDENTIFYING THE REQUIRED FINANCING TOWARDS BREAKEVEN
Pre-operating expenditures:



Feasibility Study | Legal Services | etc.
Physical Facilities




Building Construction | Modification of Space | etc.

Equipment




Furniture | Computers | Copy Machines | etc.


Human Resources

Recruitment | Consultancy Fees | etc.



General Expenditures





Implementation Expenditures | etc.



Reserves

Set aside to build up cash reserves or unexpected




Cost and Expenditure Spreadsheet

Staff



Salaries | Social Security | Training | etc.

Utilities and Fuel




Electricity| Water | Gas | Security | etc.


Information & Communication Technology




Telephone | Internet| etc.


Transportation




Rent




Insurance




Publicity, Communications and Advertising





Entertainment




Rental Equipment





Repairs & Maintenance

Business Materials


Revenue Spreadsheet

Incubator Generated




Rent from Incubatees| Consultancy Services | Royalty Agreements |etc.



Third-Party Generated





Government Grant| International Development Agency Grant |
Corporate Sponsorship |etc.




Exercise 5.1
Financing and Acquiring Necessary Items

Comparing Revenue and Cost


Comparing Revenue and Cost


Comparing both spreadsheets is important to determine financial performance.

Depreciation and Loan payments are not discussed.

What are the difficulties in projecting revenues and costs?

Exercise 5.1
Financing and Acquiring Necessary Items

Cashflow
Investments
Pre-operating Expenditures
Feasibility Study
Real Estate Agency
Legal Services
Consulting Services
Etc.

Physical Facilities
Building Purchase
Building Construction
Installation of Utilities
Building Renovation
Etc.

Equipment
Furniture
Internet Network and Installation
Telephone
Computers and Printers
Copy Machine
Software
Fax Machine
Etc.

General Expenditures
Inauguration Activities
Initial Advertising
Etc.

Reserves
Reserve Fund

Annual Operating Costs

Staff
Management Salaries
Other Salaries
Social Security Payments
Training
Outside Services
Benefits
Etc.

Utilities and Fuel
Electricity
Water
Gas
Waste Management
Etc.

Transportation

Information and Communication Technology
Telephone
Internet
Etc.

Rent

Publicity, Communications and Advertising

Entertainment
Rental Equipment

Repairs and Maintenance
Business Materials


Paper
Other stationary
"Cash flow": expenses and income causing cash movement (excluding, for example, in-kind contributions, depreciation)

"Cash flow" analysis in planning the expenses and income for future periods of time (e.g. monthly, quarterly, yearly)

Cashflow Worksheet
Income Statement and Balance sheet
The Importance of Incubator Cash Flow

The Importance of Incubator Cash Flow

Why analyze cash flow?
Cash flow is essential to all businesses.
Early detection of problems enables a manager to take corrective action.

How To Sucseed?
Monitor overall financial performance and be aware of progress towards financial sustainability.
Monitor the accounts payable (the incubator’s obligations to pay what it owes to others) and accounts receivable (amounts owed by incubatees or other entities to the incubator) on a regular basis.
Develop a strategic approach for controlling bank balances, reserves, and investing funds.
Require all operational areas to be familiar with the manager’s activities and needs.

Inject Funds from a
Reserve Account

Bring Project Forward
Postpone Commitments


Draw Up Alternative Strategies



An income statement (sometimes called a profit and loss statement) lists your revenues and expenses, and tells you the profit or loss of your business for a given period of time.

A balance sheet is a financial "snapshot" of your business at a given date in time. It includes your assets and liabilities and tells you your business's net worth.

Component 2

Initial Capital Investment: How Much and Where From?

UNDERSTANDING THE VARIOUS FINANCING SOURCES AVAILABLE TO FILL THE FUNDING GAP

Securing the Incubator’s Building

Initial Capital Investment vs. the Nature of the Business Incubator


Sources of Initial Capital Investment

Sources of Initial Capital Investment

Sources of Initial Capital Investment

The capital investment required may vary significantly based on several factors:

The overall objectives of the incubator;
The sector(s) targeted, for example agro processing incubates may require refrigeration space and outsourcing incubatees may require broadband and large server capacity;
The targeted number of incubatees; and
The location of the property.


The capital investment required may vary significantly based on several factors:
From a wide range of entities including private citizens and corporations.
Usually awarded by benefactors and philanthropists to entities perceived as valid contributors to the welfare and development of a community.


Local Private Investment
Primarily from companies or wealthy individuals interested in making a return on their investment or taking advantage of developed services or technologies.


Corporate Social Responsibility
Is the deliberate inclusion of public interest into corporate decision making.
It focuses on adherence to law, ethical standards, and international norms and includes the promotion of public interest by encouraging community growth and development, and voluntarily eliminating practices that could harm the community.
Aims at developing the business and entrepreneurial climate of the local environment in the long run.


Government Subsidies
Public funding for economic (and other) development purposes of public interest, often facilitated and distributed through local, regional, or national government agencies with an interest in creating jobs and local community development, upgrading skills, retaining human capital (stemming the tide of brain drain) and hence providing subsidies to business incubators.


Multilateral Programs
Programs supporting international or cross border development such as supporting “entrepreneurship.”
Multilateral donors are often financial institutions that provide financing for national development.
The best-known multilateral donors are development banks.



NGOs
Objective to promote and stimulate development, entrepreneurship and the creation of wealth in developing countries, while supporting their goals with financing mechanisms.


Debt Financing
The acquisition of capital by a firm that signs a promissory note requiring the repayment of principal plus payment of interest.


In-Kind Financing
Gathers all types of donations to acquire a building, furniture, equipment and the availability of services at subsidized rates such as internet, telecommunications and so on.


Grant/Donor Financing & Sponsorship

Grant/Donor Financing and Sponsorship

Debt Financing

Grant / Donations
Refer to a transfer of funds to a venture without requirement of repayment, but with conditions.
Have multiple sources: governments, foundations, and corporations.
Should be sought from donors with an interest, mission, and/or objective supported by the incubator.
Different donors/sponsors usually have different purposes and provide grants to incubators that are most-likely to benefit from their interests in the long run.


Sponsorships
Similar to grants but can last for a number of years.
Different sponsors require different approaches and justification for funding.
Are vulnerable to change, as third parties have their own agenda and may stop or reduce funding at any point.


Commercial Loans
Raise funds through debt.
Are generally offered by banks and require contracts and collateral.
Should be considered only by incubators able to afford the interest rates and monthly payments.
Higher cost than other debt financing options.


Subsidized Loans
Are usually operated by commercial banks, but with funds originating from the government.
Are used to foster political goals.
Are often a good alternative to traditional commercial loans, offering lower interest rates and more favorable maturity terms.
Require collateral. 


Alternative : incubator becomes the equity investor

Equity Financing


Theory
Equity financing raises cash in exchange for ownership in the incubator.
Requires sophisticated management.
Is not pursued as often as other financing options.


Operation
An investor buys a portion of the incubator with a cash investment.
The funds are used to develop the incubator.
Several investors can be approached simultaneously.
There is no guarantee of success.
It is not renewable.
If the incubator has a large number of onsite clients, it may generate interest from real estate investors. In this case, the incubator uses the cash generated by selling the building to expand the facilities and grow the incubator.


Incubator becomes the equity investor of prospective incubatee
Investment money could come from government scheme, international donor, and incubator owner (private)


Revenue from Incubated Enterprises


Revenue from Incubated Enterprises

Incubator Income Breakdown - Examples

Rental Fees
Can provide an incubator with steady revenue.
Average between 20 and 25% of an incubator’s total revenue in Europe. Varies elsewhere, with Russia up to 83.7%, while Chinese incubators bring in negligible amounts.
Employ less staff members (1-5), typically 1 manager for every 20-30 incubatees.
Are susceptible to the rental market’s ups and downs.
Bears the risk that incubator will act more as a leasing company rather than an incubator.


Consulting Services
Can include: bookkeeping, marketing, document processing, study tours, and traditional business consulting.
Requires managers to balance the amount of attention they give any one incubatee, as more attention may move toward incubatees paying for additional services.
Pricing of services (compared to market) and collection of the fees can be difficult.


Revenue from Incubated Enterprises

Royalty Agreements
Provide the incubator a portion of incubatee revenue.
Typically 2 to 5% of incubatee revenue and last up to 3 years.
Can take months or years to provide significant revenue.
Not easy to execute.
Not commonly used yet, but growing in number.


Brokerage Fees
The incubator receives a percentage of funding that it secures for its incubatees from outside sources.
Are based on an incubator’s ability to bring in investors for its incubatees.
Incubator managers should set goals and dedicate time to establish funding.
Not commonly used yet. Is not legal everywhere. However, growing numbers of incubators have their own investment funds to use (e.g. in India, New Zealand) capitalized by public or private sources or a combination


Equity Agreements
Provide the incubator a portion of the firms equity, usually between 2 to 10% of company’s equity.
Brings in revenue when the shares are sold, typically when investors purchase shares, or by way of an ‘exit’ event (IPO or trade sale) or by the founders buying back the shares
Can take years to provide significant revenue.
Requires specific knowledge and skills of incubator management team.
Becoming more common with technology incubation in some countries


Middle East / North Africa: Type & Financial Model

Incubator Income Breakdown - Examples



European Business & Innovation Centre Network (EBN)

Exercise 5.2 - Financing Options Match

1. Equity Financing


2. Grants


3. Sponsorship


4. Commercial Loans


5. Subsidized Loans

A

C
D
E

B
Usually operated by commercial banks and/or financing agencies, but with funds that originate from the government. Often used to foster political goals by offering advantageous financing terms.

The traditional option of raising funds through debt. Generally offered by banks, they require contracts and collateral. Incubators that are able to afford the interest rates and monthly payments that come with these should consider this option.


Refers to a transfer of funds to a venture without requirement of repayment, but with conditions, often in order to support the venture in advancing the objectives of the recipient. Usually one-time transfers of funds and can come from many sources, including government agencies, foundations, and corporations.



Refers to the financing of a venture in which the venture receives financial resources from an investor in exchange for an ownership position.




This financing option is similar to grants, though they are often carried through a number of years. Sources can be government agencies, individuals, universities, foundations, and corporations.





Component 3

Assessing Funding Challenges in Developing Countries

DEVELOPING A FUNDRAISING STRATEGY

Developing the Appropriate Fundraising Strategy

Developing the Appropriate Fundraising Strategy

Challenges Incubators Face:

Cost of Finance and Bureaucracy

Political and Economic Instability

Information Gap

Lack of Institutional Development

Corruption

Unreliability of Governmental and Donor Funding

Does the grant have effective benefits?

Developing the Appropriate Fundraising Strategy

Developing the Appropriate Fundraising Strategy

Proportion of incubatees achieving : concept or idea, business plan completion, seed funding, second stage funding, product or service testing, market testing, graduates
Number of incubatees after the grant, number of incubatees in the following years
Number of jobs created after the grant, by the incubator and the incubatee : in the profile of job category

Without the ------- grant, our organization could not
undertake our proposed activities (n=46)

Average amount your ------- grant helped to secure (n=23 to 31)

Component 4

Indicators of Successful Financial Management

MONITORING THE INCUBATOR’S FINANCIAL PERFORMANCE

Opportunities & Success Models for
Sustainability

Net Profit Margin


Exercise 5.3 - Incubator’s Finance Management

Empowering Incubator Staff to Carry Out Efficient Financial Management

Indicators of Successful Financial Management

Net Profit Margin = Net Profit / Revenues * 100%

Self-Sustainability Ratio

Self-sustainability Ratio = (Incubator Generated Revenue) /
(Third Party Generated Revenue)

Capacity for Generating Taxes
Enables a manager to determine how much the incubator generates in taxes for each monetary unit that is invested in the incubator.
Can be calculated by assessing what portion of each incubatee’s income is taxable
Taxes Generated by the Graduated Enterprises
Shows the total taxes paid each year by an incubator’s graduates.
Successful incubation should see this number grow steadily, as more graduates pay more taxes and continue to grow beyond the incubator’s program.
Cost of Employment Generation
Measures the cost required for the incubatees to create a position.
This includes costs associated to:
Employee’s Salary
Benefits
Office Space
Wishing you great success in
managing your finance !
Full transcript