Belgrade October 14, 2011 By Lidia Varbanova, PhD

FEW BASIC TERMS IN FINANCING, FUNDRAISING AND SPONSORSHIP

Subsidy-Grant-Donation-Sponsorship-MecenatPatronage Fund-Foundation-Endowment Inputs-Outputs Resources-Products Effective-Efficient Budgeting-Financing-Accounting Incomes-Turnover-Profit-Financial surplus Expenditures-Costs Assets-Liabilities-Cash Flow

NON-PROFIT AND COMMERCIAL CULTURAL ORGANISATIONS

N0N-PROFIT ORGANIZATIONS: BUSINESS/COMMERCIAL ORGANIZATIONS:

Main aims - social,

cultural, educational The financial result (surplus) is reinvested Rely on outside funding Functioning in the third sector or state sector Primarily non-economic activities Involves volunteers

Main aim - to generate profit The profit is shared by the

owners Rely on self-generated incomes Functioning in the private sector Primarily economic activities Works with professionals

I. SOURCES OF INCOMES FOR MUSICAL ORGANISATIONS AND PROJECTS

Self-generated Core activity:

ticket & cd sale online sales subscriptions specific, focused/targeted projects

Additional activities:

catalogues, publications, educational programs Peripheral activities: shops, restaurants, cafes, other nonmusic commercial activities

Outside support Corporate/business support: sponsorship, corporate donations Bank loans and debt instruments Angel investors Venture capitalists State support: subsidy, grants, capital investment Third sector: foundations Individual donations: special events

FEW BASIC TERMS IN FINANCING, FUNDRAISING AND SPONSORSHIP

Subsidy-Grant-Donation-Sponsorship-MecenatPatronage Fund-Foundation-Endowment Inputs-Outputs Resources-Products Effective-Efficient Budgeting-Financing-Accounting Incomes-Turnover-Profit-Financial surplus Expenditures-Costs Assets-Liabilities-Cash Flow

NON-PROFIT AND COMMERCIAL CULTURAL ORGANISATIONS

NOT-FOR-PROFIT ORGANIZATIONS: BUSINESS/COMMERCIAL ORGANIZATIONS:

Main aims - social,

cultural, educational The financial result (surplus) is reinvested Rely on outside funding Functioning in the third sector or state sector Primarily non-economic activities Involves volunteers

Main aim - to generate profit The profit is shared by the

owners Rely on self-generated incomes Functioning in the private sector Primarily economic activities Works with professionals

II. The importance of capital and planning: business organisations

Raising $$$$$$ (obtaining financing) has always been a major

challenge in the venture creation process. Key document to raise financing: the Business Plan
Issues:
How much do you need during start-up and to cover the burn cash

phase? When the money will be spent? How much are you putting in? Any other partners? Their equity? What is the balance to finance? Use of debt or equity (control vs. cash conservation)? What is the timing of this process? This is generally linked to cash flow challenges / milestones
P.172
7

Financing sources Business stages: start-up

Start up business with low growth potential: Early stage (seed capital):
Used for feasibility study and

Start-up business with high growth potential:

More likely to use equity financing because an investor sees the medium-long term potential of more return.

business plan, the sources are from personal savings and family/friends, government grants.

Early stage financing:

Feasibility and business plan are

Early stage (start-up):

Used to get the business

running, again, the sources are personal savings, personal Start up: loans and credit cards and family/friends, perhaps some Usually angel investors because this trade credit, government phase can be within their capacity. programs.
8

often financed by angel investors. The business is not above the radar yet, is not seen by VC.

III. Internal vs. External funds

INTERNAL Profits (re-invest all, no matter how small).
Sale of assets, or leasing rather than buying at start-up and

buying used instead of new.

Deferring salary (also using family who will also defer salary). Using Just-in-time (JIT) inventory. Trade credit when possible. Minimal accounts receivable or, get a down payment that

covers your cost portion of the sale.

Internal vs. External funds

EXTERNAL Criteria:
1.

Length of time funds are available (example: a relative lends the entrepreneur $5,000 but then wants it back, suddenly without notice for personal reasons).

2. Cost of the funds (selling equity cheap or perhaps high

interest rates for debt).

3. Amount of control lost (how much equity is the

entrepreneur willing to relinquish?).

10

IV. External funds: overview

Family and friends

Trade credits

Raising funds

Commercial banks

Government grants and loans

Venture capital and angel capitalists

11

1. Personal Funds
Investors and lenders will want to see that the entrepreneur:
is ready to take risk; is going to succeed, not just hopes to

succeed; has burned the bridges: must go forward; invests his own money.

12

2. Chartered Banks
Common forms of financing:

Accounts Receivable loans Inventory loans (liquidity matters)

Due to factors such as obsolescence and liquidation value banks will normally only offer 50% of the value.

Equipment (commercial pledge): long-term financing

The equipment immediately depreciates; they will only offer 60% of your cost and require independent assessment.

Real estate loans (also asset-based financing)

p.184
13

Dealing with banks: lending decisions

Character : assesses the consumers

willingness and desire to repay a loan on time. know your customer concept. Capacity : measures the applicants ability to repay the loan when it is due. Capital: the net value of a consumers assets. This has a bigger impact with larger loans. Collateral : an asset pledged by a borrower to a lender to guarantee a loan. Conditions : external variables that will affect the risk of the loan, such as the economy, social and political environment, government regulations, or competition, or changes in the banks objectives.

14

Dealing with Banks (and other lenders)

Banks are not risk takers by nature. They want their interest rate no matter how well (or poorly) the business goes.
Important how and when they will get their money out be

clear on that. Show that you are taking risk in the venture as well. Dont over-promise. Be realistic with revenue projections. Cover expected objections (risk assessments). Talk their language (ratios, returns, margins, etc.). Get enough the first time: consider all costs until break even and build in a contingency cushion no one likes to do rescue financing. Establish a personal relationship with the bank. Pay your bills on time (financial history). Be prepared not to get it.

15

4. Angel Investors
Who are Angel Investors?

Informal investors Often a retired entrepreneurs in the same industry. Bring expertise + contacts as a valuable member of the team. Provide the know-how, entrepreneur provides the energy. Want an equity position. Invest about $25,000 to get the business started then they have contacts to 2nd round financing. May cash-out at second round, or stay. Look for 5-10 times return on their investment over three years (40-50% internal rate of return).
p.197-204

Flying with angel investors (Stanford University entrepreneurship corner) 2min: http://ecorner-beta.stanford.edu/authorMaterialInfo.html?mid=1917
16

5. Venture Capital

By nature, willing to take on more risk. But, VCs want some control and high returns. VCs may place controls on entrepreneurs:
Approval of large capital expenditures; Remuneration of senior management; Approval of long term lease arrangements; Approval of disposal of assets; Payment of dividends; Major borrowing or other financial decisions.

How to pick a venture partner (4min): http://ecornerbeta.stanford.edu/authorMaterialInfo.html?mid=1832

17

Venture Capital
Big players. Objective: to generate long-term capital appreciation through debt & equity investments. Typically in industries like software development, biotech, environmental (alternative sources of energy, or recycling), etc. These businesses also tend to have government money available dedicated to support R&D type activities. Invest in chunks of $500,000 and up. Sell a portion of their equity at the go public phase, recover their investment and have equity left for large

returns. Bring the $$$ and also may bring in the professional management to run the operation.
Types of VC firms in Canada: -Private VC firms -Government (BDC, EDC) -Institutional (pensions, endowments) -Corporate -Labour-sponsored (LSVCC) -Foreign

18

Dealing with VC
Prepare a business plan and a short professional letter.

Referral: approach through an intermediary, but then lead

the discussion. Develop trust. Avoid pushing the decision: too much pressure can cause problems. Avoid glib statements: We do not have competition, Our product is the best, The technology is super. Avoid too high salaries, or even talking too much about compensation.

19

V. CULTURAL ECONOMICS: A BRIEF HISTORICAL SURVEY

Mid 1950s- Ford Foundation-economic program for financing of symphonic

orchestras: Marc Blaug and Allain Peacock scientific articles on economic aspects of the arts
of cultural economic as a science)

1966- Baumol and Bowen-Performing arts-The Economic Dillema (the birth

1970s- William Hendun-establishment of Association of Cultural Economics

and the Journal of Cultural Economics

1978-The Subsidized muse-Dick Netzer 1979-David Throshby and Glen Withers-The Economic of the Performing Arts 1989-Bruno Frey and Pommerehne 1993-Helbrun and Gray

W.Baumol and W.Bowen:

Irrespectively of the type of the performing arts organization, the self-earned incomes from selling tickets are always less than the costs for making the production, and this Income Gap increases in time: - The time for production is not related with the effectiveness; - The supply is limited, as the performance can be repeated limited number of times for a limited time frame; - Computarization and mechanization of the working processes can not influence the final products.

DILLEMAS IN THE STATE SUPPORT FOR THE ARTS (national and regional)

Balancing direct and indirect support Support of state, non-profit or commercial art forms Center versus periphery (capital-regions) Contemporary versus traditional Established versus emerging Support for: products, processes, or maintenance Support for institutions or for individual artists Balancing arts education with the arts labor market How to foster creativity through policy decisions?

Economic Arguments for State support for the Arts

Arguments, related to the economic specificity of arts: High level of involvement of labor Limitation of productivity High risk and unpredictability in the process Relatively low payment for artists, need for securing working places in the arts Final results of art are subject of public evaluation Limiting possible monopoly Arguments, related to the consumers Possibility to choose between different art forms Collective indirect benefits Social and intellectual development Feeling of national prestige and proud Cultural diversity and pluralism Possibility for Innovation Increasing access to arts