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Lesson 4: Presentation Materials March 6, 2010

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Space Show Classroom Lesson 4:  How to do serious analysis, due diligence, finance, marketing, biz management, and engineering reality, March 7, 2010.

I. Presentation Material from Bruce Pittman, Guest Panelst, NASA Space Portal:

Space Entrepreneurial Overview

II.  Dr. John Jurist, Co-Host, The Space Show Classroom

Jurist’s 16 Commandments of Space Investing

 If you see any of the following, run away

1.   The principals cannot understand why the coolness factor is not enough to get capital.

2.  The principals adhere to the “build it and they will come philosophy” instead of specifically defining their market by depth and size in their business plan.

3.  The principals do not carefully adhere to securities rules and fail to give at least quarterly financial reports to their investors.

4.The principals aspire to increase capitalization by orders of magnitude, as in having raised and spent $500 Thousand, they now want to raise $50 Million without a track record or a clear implementation plan.

5.  The principals dismiss other disciplinary contributions – “We are great engineers and don’t need a finance person’s help (by the way, what does ‘present value’ mean?).”

6.  The principals casually talk about staff expansion by orders of magnitude – “There are 2 of us, but we will hire 50 engineers and technicians the month after we raise the money and fly within 2 years.”   Yet, none of the principals have ever run a group of 50 engineers and technicians.

7.  The principals display a casual attitude about angel investors and shareholders in a closely held corporation – “It is my playground, don’t bother me.”

8.  The principals don’t have adequate tracking and business systems in place – “We will implement them when we need them.”

9.  The web site uses the present tense to describe concepts without associated hardware – “We offer cheap access to LEO.”  This is akin to vaporware in the software industry.

10.  The announced corporate goals expand faster than milestone achievements.  For example, the first announced goal of achieving LEO is renounced in favor of the goal of rescuing the Hubble telescope without ever achieving LEO.

11.  Logos and logo shirts from Lands End cost more than the rockets they have built.

12.  The principals cannot convincingly demonstrate an annual ROI of at least 20 percent.

13.  The organization displays obsessive secrecy about plans, markets, progress, etc.

14.  A balance sheet with intellectual property dominating the asset list.

15.  There is no realistic budget allocation for regulatory compliance, licensing, etc.

 16.  The principals appear to be more interested in talking to CNN about future dreams than in working to make those dreams happen. 

Advanced Topics in Space Studies — Investor Concerns

 III.  Dr. David Livingston, Co-Host, The Space Show Classroom

Business Plan Outline

 Part I:  Summary

______________________________________________________________________________

 This part of the Business Plan creates the initial impression for both the company and its management.  The contents of the Business Plan are briefly summarized in this section.

Part II:  The Business and Its Future

______________________________________________________________________________

 This section contains the topics which explain the business.  Starting with this section, it is important to show why the business is unique.  Why is this business special in the world of business.  The “keys to success” are included in this section.  Some suggested topics are as follows:

        A.  General:  Start with the obvious such as where the company is located and what it does.  This is strictly general information.  Identify type of corporate structure and what changes you might be recommending for the future growth of the company.

            B.  Nature of the Business:  This is the basic synopsis of the business.  The description of what it does.  The trick is to enable the reader to understand the business using as few words as possible.

     C.  Business History:  Here you tell how it was founded, when, and any milestones which may be good or bad.  It is a chronological report of the business operations from start to present.

     D.  Future Business:  In this section, the chronological sequence plan for the company is spelled out.  This states how you move from where you are now to where you want to be in five years.  It clearly states your goals and how you intend to get there.  Indicate the changes and be prepared to support the changes you state in this section.  You can also set shorter term goals in this section, perhaps 3 and 6 months, 1 year, 3 years and five years using several intervals.  This section gives management a great deal of freedom to plan the business with effective strategies, but it also puts restraints on management in that the objectives and goals need to be supported with facts and specifics.

 E.  Uniqueness:  In this section, you detail why the company is unique and will remain unique throughout the period of the plan.  Competitive, marketing, financial and other advantages can be stated and supported in this section.

 F.  Product/Service:  This is where you describe in detail the product and service of the company and what it will be during the period of the plan.  If the plan calls for adding new products and services, they should referenced here and supported.  This section requires thoughtfulness, nothing too hasty or “too pie in the sky.”

  G.  Customers:  Here you must describe in detail your customer and who your customer will be over the period of the plan.  If it changes, discuss how you will find the new customer and grow and change to meet this customer’s needs.  You should show who purchases the product, list the purchasers and their needs, their purchasing power, what they buy, etc.  Talk about how you can improve the situation with each of them.  Name the potentially new customers.

   H.  Your Industry and the Market:  Describe the general market place for the product using total dollar volume, the rate it has grown, the overall demand for the product, etc.  A projection is needed for the future size of the marketplace and your position in it.  If you state entire industry sales, make sure you also state your market share of the entire industry stales.

    I.  Competition:  Here is where you really go into the detail of competition.  Who and what it is, the specifics of it and how you can compete and grow.  How can you get market share from them.  Know the dollar volume of sales for your competition so you will know what is achievable.  Describe and support how the competition will change during the period of the plan.

  J.  Marketing:  The details of the marketing plan are spelled out in this section.  In a sense, this is a mini-business plan.  It includes, dollars, channels of distribution and so forth.  It requires a careful analysis of the market now and for the period of your plan.

 K.  Production:  Here you describe all aspects and costs involved in the production process of the product.  Fixed and variable costs are discussed in detail.  Also discussed are the characteristics of the product’s production.  Talk about crucial components, risks, difficulties, advantages, skills.

  L.  Employees/Subcontractors:  Discuss the employment/subcontracting needs of the company in detail now and for the term of the plan.  Include general detail such as salaries, the cost of benefits to the company, potential obligations and liabilities such as healthcare and workers compensation programs (based on possible government action or modifications), their impact on the company, etc.

  M.  Suppliers:  Highlight the source of supply for the production of the products.  Identify the sources, alternate sources, cost out the sources and alternate sources and plan for using the alternates with contingency plans.  If higher priced suppliers are used, what will be the impact on the company?  What about delivery times, terms, etc.

    N.  Equipment/Governmental Regulations:  Identify the specifics about the usage of special equipment or regulations.  Attention to costs are crucial.

  O.  Property and Facilities:  Discuss the rent, the location, proximity to markets, etc.  Identify and discuss weak points and strong points for a balance.

   P.   Patents/Trademarks/Manuals:  Identify patents and trademarks if applicable.  Consider applying for such if necessary.  Make sure all formulas, etc. are detailed in a company manual stored in safekeeping.

   Q.  Litigation:  Detail the litigation history, the outcome and present situation.  Discuss any future problem areas and potential liabilities.

   R.  Conflicts of Interest:  Discuss these for the company and management.  Make sure everything is disclosed.  Give it thought for at first something might not be a conflict of interest but when examining it further, it is one.

  S.  Inventory/Backlogs:  Identify inventory and backlog problems, discuss how they are solved and avoided for the future.  What is the cost to the company of backlogs, if they exist, both in dollars and in irritation to the customers.

 T.  Insurance:  Identify insurance policies and carriers, coverage and costs/premiums.  Project what will be needed for the future growth as outlined in this plan.

 U.  Taxes:  Detail tax obligations now and in the future as goals are achieved.  Costs to the company should be part of financial statements and projections. 

  V.  Publications, Associations, Publicity:  Detail the specifics in this category if applicable.

Part 3:  Management

  A.  Identify Directors and Officers.  Discuss liabilities, obligations, functions and the availability if possible, of insurance protection.  Discuss the cost of such protection to the company if available.  Terms, compensation, equity holdings should be presented here.

 B.  Key Employees:  Identify present key employees and detail the specifics about the employment of these individuals.  Each employee should write a manual for replacing his position in case of illness, death or departure.  Terms of employment should be spelled out.  Discuss future needs in all these categories per the Business Plan.

C.  Benefits/Stock Option/Incentive Programs:  Management should create programs in this area for the present or for the future if specific performance criteria are met.  

 D.  Liabilities/Shareholders/Equity:  Detail shareholders, equity positions and liabilities.

E.  Employment Agreements:  Reference them if they exist.  Recommend and highlight them if needed.

 F.  Consultants, Accountants, Lawyers, Bankers and Others:  Be specific about the use and costs for these outside professionals.  Plan for them for the future per the plan.

Part 4:  Financing

   A.  Identify the capital structure of the company.  Identify what it should be if goals are met for the plan.

B.  Detail present financial condition of the company.  Show how this can change. Support it with footnote explanations tied to achieving the goals in sales, etc.

C.  Profits/Losses:  This entire section is where this subject is discussed in detail with all the supporting documents, figures, explanations, forecasts, projections and tables.

 D.  Outside Funding:  If the company will need additional or outside funding, this is where it is detailed.

Part 5:  Risk Factors

 A.  Identification:  This is where the risk factors are listed and identified.  They are ascertained from the contents of this plan.  Some examples are short company history, limited resources, limited management experience if applicable, market and financial uncertainties, production uncertainties, liquidation, capital shortages, dependence on key management (most likely without key man life insurance) plus other problems.

 B.  Problems and Opportunities:  Detail the problems in this section and discuss how they can be turned into opportunities for the company. 

Part 6:  Return on Investment and Exit

A.  ROI:  Show what the shareholders can make with their investment in the company.  Show its present ROI and project it out regarding meeting the goals and objectives in the Business Plan. 

  B.  Exit:  Show how the shareholders can realize their profits, returns or get their money out of the company.  Is it to be sold, financed, taken public or are investment dollars left in indefinitely.

Part 7:  Analysis and Projections

  A.  Here is where you detail your own analysis of prior history of company operations and the projections for the future of the company.  Use whatever tools are needed including ratio analysis, statistics, comparisons, charts and graphs.

 B.  Financial Information:  Discuss in detail the current financial statements.  Is the company liquid, discuss the accounts receivable and payable.

    C.  Identify and discuss any contingent liabilities the company may have.

 Part 8:  Financial Statements

  A.  Present a complete set of financial statements.  You may also want to approximate what they will look like when meeting the various goals discussed in the plan.

Part 9:  Financial Projections:

  A.  This is the section containing all the projections discussed in the Business Plan.  Three sets of projections are used, worst case, medium and superb performance.  Explain the assumptions so the reader can test them for soundness and see how they are supported.

 Part 10:  Conclusion

A.  The conclusion is similar to the summary except that it is more specific.  It does not need to be long.  It should be positive without forgetting the risks.

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Comments»

1. Kelly Starks - March 9, 2010

The topic of Reusability came up, and John J. was discussing how RLVs might not be justified for infrequent flights due to their extra development costs. I’ve looked into this and can’t find any example where the expendables were cheaper then reusable’s of similar (or greater) capacity. Generally the reusable’s turn out significantly cheaper. Orbiter being much cheaper then Apollo or Orion’s SM/CM, Atlas vrs X-15 at similar dates, etc.

Just a nit, but it seems like a constant miss assumption.

2. drspaceshow - March 12, 2010

Kelly, in business due diligence, when comparisons are made they are most effective when comparing apples with apples and oranges with oranges. When you compare items that are not that similar and then when one extrapolates to draw parallels or similarities from items lacking real similarities,, problems arise. In extrapolations, the more dissimilar the items are, the more likely one will have inaccuracies in the due diligence analysis and possibly even in the conclusions. While there might be other situations where extrapolations from one item to another that don’t have much in common are just fine, this is not the case for business due diligence. In fact, were I reviewing a business plan or consulting for a company doing such a plan and such comparisons were used re dissimilar items, there would have to be substantial disclosures about the comparison regarding problems using such comparisons, or other more useful comparisons would need to be used. Were the plan submitted to me for review, I would promptly deep six it as nothing in it would stand up to reality checks, scrutiny, and due diligence. Such comparisons would be huge red flags! As this Classroom show was about business due diligence as well as engineering due diligence, market, financial, and other business realities, it does not make much sense to compare an Atlas to an X-15, etc. If that were the case, let’s compare the X-15 to a Cessna 150. Both fly, both have reusability, both contained a pilot, an engine, landing gear, instruments, wings, and more. But we both know that is a rediculous comparison. It would serve no value in a due diligence project to make such a comparison or to try to extrapolate for a space venture using the X-15 and a Cessna 150.

A point that those of us on the this particular Classroom show wanted to make was that there are standards and ways of doing business, financial, marketing, and engineering due diligence, both as a potential investor and as the company wanting to promote their venture. Business standards are standards. What you suggest as a “nit” is outside the parameters of acceptable business standards.

Thanks for your comment and participating in the Classroom. As always your interest and support are appreciated.

David

3. Kelly Starks - March 13, 2010

Very wordy and missing the point.

A X-15 has the power to weight and delta-v of a atlas stage, and is highly reusable, and more complex, and cheaper. The shuttle Orbiter serves the same functions as the Apollo or Orion’s SM/CM (crew carry, life support, power, maneuver, reentry, etc) plus far more cargo capacity – and of course being several times the size and weight –yet its also much cheaper.

Oh and if someone was comparing a X-15 to a Cessna – if the X-15 was cheaper – would be a good counter argument that hypersonic rocket craft don’t have to be vastly more expensive then the proper craft.

Perhaps one of the things you should cover, is don’t assume when your doing business due diligence, that your a expert when your not.

4. Oldspacecadet - March 13, 2010

Atlas was designed as a missile to carry warheads to nearly orbital velocity and be operated by standard USAF crews. X-15 was an experimental vehicle with a much smaller payload, much lower Delta-V than an Atlas, and a completely different mission. Also, the loss/damage rate was relatively high over the three vehicles and roughly 200 flights. By the way, the X-15 is not reusable, it was reusable, but it is not in use today. Your use of the present tense to describe the X-15 is inaccurate and highly misleading misleading. Comparing these two sets of vehicles is not valid in any sense of the word.
Comparing the STS Orbiter to Orion is silly. There are no points of similarity for valid comparison other than both are intended to go to LEO. A generation of governmental cost escalation in between further invalidates your argument since it is common knowledge that these costs have escalated far beyond other measures of inflation. If the government were contracting for the design of a new pay toilet, it would probably cost at least $50 to get the stall door to open. That has about as much relevance as your cost comparisons.
With respect to your rather snarky last sentence, how many successful new businesses have you created that have withstood business due diligence tests?

5. Kelly Starks - March 13, 2010

> Atlas was designed as a missile to carry warheads to nearly
> orbital velocity and be operated by standard USAF crews.

Of carry astrounauts to space – but that was the capacity of al of its stages combined.

> Also, the loss/damage rate was relatively high over the
> three vehicles and roughly 200 flights.=

Actually it was very low for X-planes or modern launchers.

>== Comparing the STS Orbiter to Orion is silly. There are
> no points of similarity for valid comparison other than
> both are intended to go to LEO. ==

And both have about the same systems. Specificaly Shuttles mission is everything the Orion or Apollos did and then quite a bit more. Many of Orions systms are cut down Shuttle designs.

> == A generation of governmental cost escalation in between
> further invalidates your argument since it is common
> knowledge that these costs have escalated far beyond other
> measures of inflation. ==

Incorrect. Orions a little more expensive the the Apollo CM/SM – but its also far larger adn designed to cary twice as many people for longer duration.

>== With respect to your rather snarky last sentence, how many
> successful new businesses have you created that have withstood
> business due diligence tests?

And how many engineering or space ship design programs do you get called into as a senior engineer on? So why do you keep lecturing me on tech stuff like this?

6. Space Truth Master - March 13, 2010

Kelly, Kelly, Kelly:

Its clear you know very little about real business planning, due diligence and probably everything else. I see your posts on lots of space related blogs but this time you are really showing your ignorance. I work in the VC business in Silicon Valley and review plus analyze tech oriented business plans all the time. Were I to ever see a plan come in with comparisons, extrapolations, and an analysis as you have posted in your comments here, I would immediately trash the plan and that would be the end of it. You may think you know what you are talking about but you don’t and I would venture to say whatever real or practical experience you have had with business plans, due diligence, and real business analysis, if any, has gotten you nowhere.

As I understand The Space Show Classroom from hearing the three co-hosts talk about why they are doing this series, its to provide a serious, well founded and grounded education in some basics applicable to space development and related matters. The co-hosts plus their guest panelist clearly did this with the due diligence program. I think you are their targeted audience given the lack of anything realistic or credible coming through from your posts. I would suggest you listen to the show several times and actually listen, not write or post something. It appears you could benefit from this and probably many other lessens. Additionally, I suggest you find a community college basic business planning class that teaches business plan writing and analysis and take the course. If you pay attention and avoid expressing yourself in the mistaken belief that you actually know something, you might actually learn and know something by the end of the class.

In seeing your posts on other blogs, I know very well you are obsessed with the need to have the last word, so go for it if you want. But know that I have said my thing and I have no reason to reply to any more of your nonsense comments. So if you are true to your form, you will post again to have the last word but you will likely be posting to empty space unless someone else wants to pick up the ball and engage you in this absurd discussion. As I said, I have said what I needed to say. I also wanted readers of this blog to know the facts and that includes an understanding that you don’t know what you are talking about in your posts on this particular blog and subject.

Space Truth Master

7. Oldspacecadet - March 14, 2010

Your personal attack on Dr. Livingston that started this thread seems out of character for you given his courteous and respectful response. To answer your later attack on my experience, it largely speaks for itself and my experience is largely available to the public with a little digging. More specifically, while a young physicist, I worked on numerous tasks that many would call engineering. During the time I worked up to the position of Senior Research Engineer in a Department of Mechanical and Aerospace Engineering at a large state university, I did more. When I held a professorship in Space Science and Engineering at the University of Wisconsin before I went full time into the orthopedic surgical faculty at the medical school, I participated/led a number of design reviews in various space-related projects. While I ran the MS program in Biomedical Engineering at Wisconsin, a significant amount of my work involved medical instrumentation design and development. Currently, my consulting gigs are about 50-50 biomedical issues versus straight physics/engineering. I have now answered your second snarky question and you have yet to answer my question about your business planning experience. Are you still afraid to answer my question to you or did you fail to comprehend it? As far as “lecturing you on tech stuff,” I will continue to do so when three criteria are met: (1) It amuses me, (2) it may be instructive to others, and (3) it appears that you are using invalid reasoning or comparisons. Your typical response on the third criterion is to randomly change the parameters of the initial issue and attack the resulting straw man. P.S. I generally find it easier these days to buy engineering expertise whenever appropriate than to do the grunt work myself. P.P.S., please check your grammar — doing so would make your communications more effective. JMJ


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