Entrepreneurial Finance and Risk Management

Eco-Products was founded in 1990 by Steve and Kent. Initially the business was funded by adequate support received from family and friends till 2005. The father and son duo had great confidence in the company they had built, the target segment they were catering to and the future prospects of the business. This strong vision and ambition by the founders made Eco-Products the nation’s leading supplier of environmentally sound food service products that were being made from the renewable resources. The market was growing and the founders had missioned the success way before the other entrants in the market of biodegradable products.

The early days of the business were not a smooth ride as the founders had launched their business on the 25th anniversary of Earth Day globally. The business faced a lot of hardships in the early years of incorporation of the business as the business was stable to generate revenue from the Boulder area, the customers were not ready and slow to adopt the eco-friendly products, the profit margins on the few selected products that were available was low. The company also had handful number of employees who were hardly generating any salary from the company.

The turnaround time for the company started when Kent and Steve undertook various initiatives like Kent’s garage being the warehouse, Steve delivering the orders at the Subaru station wagon and increased focus on long term planning, a fixed customer base who would buy the products and a fiscal discipline that helped the company to continue its operations. Through all these incidents and initiatives for the survival, we can understand that the venture started by Kent and Steve was an entrepreneurial venture which saw its share of lows and highs and managed to gather confidence in its mission and landed the growth that was required for the survival in the market.

With the growth in the company’s revenue and reach of its products, Steve made new hires to the company who had the relevant experience in product development, brand strategy, introduction of new product lines, etc. Vernon’s strategic management experience and Lamancusa’s sales skills were a perfect match for the company to expand and increase their presence. After having understood the product lines and the current business model, the new hires started the process of innovating the supply chain of the business. This initiative observed in the doubling of sales of the company and a new model being introduced of distribution model along with an increase in the product lines, replacement of old products and reaching out to manufactures for producing the new products.

During the period of 2004-2008, Steve focussed on developing new products in the markets and creating a niche in the green market. Instead of focussing on production of the various biodegradable product, the company outsourced its production and became a channel which received produced goods from its manufacturer Fabri-Kal and became a distributor of these products in the market. The company built new websites for each category of its products and established its brand before anyone else could and started generating leads and order in wholesale for distribution on a business-to-business level. The company saw an increased demand for its products and resulted in a $3.6 million in revenue in the year 2005. Eco-Products was now an established brand in the market with the first movers’ advantage with a variety of products being launched during the period. The brand was built across different countries for manufacturing, distributing and creating its own eco-friendly product in the market.

The global food service disposable industry is estimated to be $30 billion annually. Biodegradable products are the fastest growing segment of the industry and are estimated to exceed $1 billion by 2008, up from $500 million in 2005. Looking at the progress made by the company, a lot of competitors started entering the market. The market saw entry of competitors like Georgia Pacific, Fabri Kal, International Paper, etc who saw the demand and the profit that could be generated through the business and started manufacturing products like that of Eco-Products in the market. Eco-products being the first mover in the market had various intellectual property rights like the design, shape, process of making the products, technology that was being used, etc. Being the owner of the intellectual property rights gave an advantage to the firm to maintain the uniqueness of its products across all the varieties, prevent the competitors from using the process or technology adopted by Eco-products and also duplication of the Eco-products in any form which had gathered the fame and increased demand for the company over the years in the different markets from various businesses.

The cash flows of a company form an integral part of the financial position of the company that would determine the cash expenditures and incomes that a firm makes during the particular year. When we observe the statement of cash flow for Eco-product for the year 2007, we can observe that during the year the financial position of the company was not good. The company had suffered a net loss of $36199 and along with that also suffered high losses in the inventory and accounts receivable which was again a bad indicator. The overall net cash from the operating cash flows was also at a loss of $2891887 which indicates that the company was in a cash burning process during the year from its operating activities

When we observe the cash flow from the investing activities, we realise that the cash flow investing activities is also in the negative at $356745 which indicates that the company is making investments and increasing their capital expenditures in purchase of different equipment, property and other intangible aspect which is a good sign as these will give good return to the company in the future and help in increasing the profits. Hence, the cash flow from investing activities is not a scenario of cash burning but of cash building for the future short term and long-term objectives of the firm.

When a business is started and it goes through the different cycles during its course of operations, it requires funding in order to grow and sustain the changing environment of the business. Likewise, Eco-Products also had different requirements for funding in its course of operations through various sources which helped the firm to grow and expand the business. In return, the firm has also provided the investors with good rate of return for the money that was pumped into the business.

During the launch of the brand in the market, the company was started by taking funds from friends and family as during the year the first money was infused by Savage family in the form of equity financing at $0.10 per share and the amount raised was $8000 which was sufficient with the revenue generated for the company till the year 1995 when the founders Kent and Steve infused personal funds of $20,000 into the company for a share price of $1 to increase their shareholding in the form of equity financing. In order to provide funds for the building of the supply division, the company again raised funds in the form of equity financing from its family, friends and employees for an amount of $1.50 per share for $18000 being raised.

The increased demand for the products in the market required funds to be raised to purchase inventory to cater to the growing need of inventory and another round of equity financing was raised through the family and friends for $5 per share with $80,000 being raised. Steve realised that they needed more capital for various purposes and the bank had failed to provide loan, as a last resort the company opted for its first debt financing in the year 2005 for $4 million and around $2,8 million was already utilised till the year 2007 when another round of equity financing was raised to meet the inventory requirement from friends and family for $10 per share and total amount being raised at $220000. They year 2017 saw many changes in the shareholding patter of the company as towards the end $2500000 amount of money was raised through 30 angel investors for meeting the working capital and inventory purposes of the company.

When the company is in operation of different businesses, it is important for it make projections of its revenue and expenditures to understand the financial feasibility of the business. In a similar manner, Eco-products had also projected a growth and revenue increase model which has been described below

Years

2007

2008

2009

2010

2011

% growth

-

139.13%

72.725

44.73%

41.81%

As we observe in the above table, the percentage of sales growth has been decreasing as we go ahead. Few of the reasons for this projection would be as the years pass by there will be more and more competitors in the market which would decrease the sales of the company.

Years

Sales Increase

Assets to be purchased

Type of financing

2008

12800

5120

Equity Financing

2009

16000

6400

Equity Financing

2010

17000

6800

Equity Financing

2011

23000

9200

Debt Financing

The above estimates are made on the following assumptions

  • Assets required would be 40% of the increase in sales
  • In the initial years (2008-2010) the company can make use of the retained earnings to finance the assets that need to be purchased for the said increase in sales.
  • As there will be high demand for the inventory and other expenditures it is advisable to opt for debt financing for the year 2011.

There are various factors that led to the development of the unexpected growth in the revenues for the company in the first half of the Eco-Products. Few of the factors that led to the growth have been discussed below

  • Expansion of the distribution network – the company managed to build a strong distribution network which helped the company in its distribution of products and also brand awareness.
  • Strong brand in the market – Eco-brands was a well-established brand today in all the leading markets for eco-friendly and biodegradable products in the market with a good reputation across the different locations of its presence.
  • Progress of the retail stores model – The strategy of opting for retail stores to distribute the product to the market gained popularity and increased sales for the company.
  • Competitive product – the products that were manufactured and sold by the company in the market had a competitive advantage over its competitors which led to the increased demand for the product
  • Credit period for the customer – the credit period system for the customer to make the payments was well accepted by the customers across the different locations.

The growth like the first half of 2008 can be sustained and continued to grow provided the company continues to introduce new products, adopt innovation across its processes and identifies new strategies across its operations to continue having the competitive advantage. The only areas where the growth in sales can be hindered is when the company does not adapt to customer demands, requirements, continue innovative its processes and maintains the same models for years to come with no change which will lead to losing of the competitive advantage which the firm enjoys over its peers.

The credit for the increase in the sales and a good share of the market is to be credited to the operational model that the company has adopted. While the model has proved to more benefiicla than posing threats it is important to understand the strengths and weaknesses of the model

Strengths

  • Quick redressal to all the challenges of the operational processes
  • Smooth operations of the different functions of the organization
  • Company has highly skilled workforce to carry out operations smoothly

Weaknesses

  • Integrated operational model will lead to major disruption if there is any interruption in ant stage of the operational processes
  • the operational model is a complex model adopted by the firm
  • Dependent on vendors located in foreign countries

As the company grows, the requirement for capital to finance the various needs also grows and then it becomes a necessity for the company to look for different sources of funds. In a similar manner, during the sudden increase in the sales of its products and at the same time facing cash, in the mid of 2008, Eco-Products raised equity funds through Greenmont Capital. Greenmont Capital was a small private equity firm which financed Eco-products for $2 million in an external financing. While, the firm was relatively small as compared to other equity financing companies in the market it brought its own set of advantages and disadvantages to Eco-Products. Below are the different advantages and disadvantages for Eco-Products

 Advantages

  • Provide more time to Eco-Products for developing its strategies
  • Leverage the network of Greenmont Capital for various decisions at the firm
  • As the firm is small, they will demand for regular updates of the progress of the firm which will help Eco-Products to be on their toes throughout

Disadvantages

  • Less experience to provide guidance and support to Eco-Products
  • More risky to take equity financing from a firm which is small
  • Being a small private equity financing firm, its reputation might not add that much brand value to Eco-Products as that of a bigger private equity firm

While, the term sheet for the investment by GreenMount in Eco-Products is quite exhaustive, there are few terms in the term sheet that can be reviewed by the management to check if a better deal could be cracked with the private equity firm

  • Price of the share to be purchased at was $1.50 which was less compared to the progress made by the company and the previous rounds of funding made by the company. This aspect in the term sheet should be modified as currently the company is being highly undervalued by Greenmount for the progress Eco-Products has shown over the years.
  • Greemount would be give 25% of warrants coverage and a right to purchase 33333 shares after three years at a price which the company is paying right now that is $1.50. Warrants are a high risk instrument and giving Greenmount 25% increases the risk for the firm as waarants performance depends upon the return of the stock which is subjected to the market conditions and volatility.
  • Dividend payout to the company on a yearly basis to be compulsory at 8% irrespective of the company paying out dividend to other dividend holders which reduced the cash reserve that the company might plan for expansion or reinvestment purposes. This term should either be deleted or modified as this would affect the company and its investments in the future.
  • Preferred shares holders can convert their shares into Common Stock at any given point of time with an initial conversion rate at 1:1

In order to protect the investment capital, it will be important for the company to rethink the clause of the dividend payout, the conversion of preferred shares to common stock and the value of the share which the company is currently planning to purchase in exchange for the stocks are important to be modified or deleted to protect the investment capital in the firm in the short and long term goals and objectives of the firm.

Eco-Products was a market leader in the sales of biodegradable and eco-friendly products in the different parts of the world either through its retail chain of stores or through the well established distribution network which catered to the business requirements of various companies. In the year 2008, Steven had forecasted a growth in the sales to $45 million from $22 million and considering the progress made by the company over the years this was not an inaccurate estimate of the possible sales that the company could make.

The valuations of the other companies would be dependent on their market share, their growth and other aspects which are subjected to their particular firm. Hence, a complete dependency on such valuation for arriving at a target venture may not always be accurate and the fair value for the firm. Greenmount valued Eco-Product was not justifiable and the company was definitely more valued with the sales forecast and the future prospects of the company.

The company today can easily be valued up to $30 million which would be based on the different rounds of fund raised, the current sales volume, the forecasted sales for the firm, market share by the company and other aspects which make Eco-Product more valuable. In order to proceed ahead for the deal with Greenmount investment the company should look at giving an equity ownership at around 3-4% for the $2 million Greenmount Capital Investment the company would invest in Eco-Products.

Hence, before going ahead with the financing deal with Greenmout Capital, the company should re-look at all the terms of the investment laid down by the company if it falls into place with the goals and objectives that has been identified by the company.

Reference for Entrepreneurial Finance and Risk Management

Joachim heel . 2005. Https://wwwmckinseycom/business-functions/strategy-and-corporate-finance/our-insights/why-some-private-equity-firms-do-better-than-others. [Online]. [30 April 2020].

Tom bradley . 2008. Https://businessfinancialpostcom/investing/investing-pro/the-pros-and-cons-of-private-equity-and-some-lingering-questions-too. [Online]. [30 April 2020].

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Risk Management Assignment Help

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