© finance tree ltd, 2010 introduction to finance for start-ups 12 october 2010 jonathan gold...
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© Finance Tree ltd, 2010
Introduction to Finance for start-ups12 October 2010
Jonathan Gold
Confidentiality Statement: Please note that this document or presentation is and remains the property of Finance Tree. We will enforce our copyright to all material. Reproduction or use of this material is only permitted with prior written consent of Finance Tree ltd.
© Finance Tree ltd, 2010
Finance Tree works with businesses to help them understand the needs of investors and find the right investment.
2005 NStar Corporate Finance established
2006 Finance and Business launched
2008 (April) Management Buyout and creation of Finance Tree
2009 (April) created Rivers Capital Partners
2010 Managers of the £7.5m North East Angel Fund
2011 15 investments 4 follow-on £1.8m <£700,000 additional cash
www.riverscap.com
© Finance Tree ltd, 2010
3
Qi3
AEA Technology
SAT
Imperial CollegeLCL
ISIS (Oxford University)
Cascade Seed Fund
Rainbow Seed Fund
North East POC
North East Co-IFNorthStar E
quity
Finance Tree Rivers Capital
DTI
SET 2
NStar
E-Synergy
AngelNet
3-Pillars Fund
DCF
POC Pilot
Southampton University
University of Bath
Bristol University
© Finance Tree ltd, 2010
No free lunch…money costs
BanksGrants
Other lenders (ie: UK Steel Enterprise… NESTA)
FFFVenture Capital / Business Angels
Sales !!
© Finance Tree ltd, 2010
Money costs money … part 2
Accountants CORPORATE FINANCE SPECIALISTS
Legal advisors
Non-exec directors
Brokers, banks…
© Finance Tree ltd, 2010
Venture Capital / Private Equity…
“Private Equity is medium to long-term finance
provided in return for an equity stake in potentially
high growth unquoted companies”.
Source: British Venture Capital Association (BVCA) 2005
NB: Almost all are… FSA regulated collective investment schemes…
© Finance Tree ltd, 2010
Sources of capital of capital
ResearchGrant
GRANTS….
Business Angel...
North East Finance for Business (£125m)
“Familymoney”
Commercialloan
Strategic development partners
SEED FINANCE
~ £250,000
Concept Finance
~ £100,000
Early Stage
£500,000to ~ £1m-2m
VentureCapital
© Finance Tree ltd, 2010
Venture capital is often a crucial element in…
Getting a new business goingStart-up
Funding a step-change in the businessRapid organic growth or M&A
Effecting a change of management or controlBuy-in / buy-out / public-to-private
Funding long-term development pre-revenueTypically high technology – eg: biotechnology, electronics
© Finance Tree ltd, 2010
Finance for Business North East Funds
£25m
£15m
£7.5m
£20m
£20m
£20m
© Finance Tree ltd, 2010
The investment model
Time … since investment
Investment in…
Generating £ cash…
Sale of company… or “exit “
Development & early sales (losses…)
…10x return in 5 yrs
© Finance Tree ltd, 2010
Statistics of VC portfolios…
10 Investments
4 Fail
4 Living dead
2 Stars
© Finance Tree ltd, 2010
Why bother?
VC should add real value to your business
• Recruitment of the senior team and suitable NXDs
• Extending your contact base of customers/partners
• Assisting the business to enter new markets
• Providing support on complex deals (eg: acquisitions)
• Acting as a friendly outsider in strategy debates
• Securing additional funding & negotiation of exits
© Finance Tree ltd, 2010
So is there a downside?
Lose some control – – there will be another owner of your business
VC will normally want a seat on your Board
Full transparency in terms of information & business
Typically look to agree a growth and exit strategy up front.
© Finance Tree ltd, 2010
Applying…process
2 pageproforma
FundManager
Reject orresubmit
Eligibility Screen(against POC)
Duediligence
InvestmentCommittee
Professionaladvisors
Term sheet(signed)
Draw downfunds
Monitor
Referral(sponsor)
Project proposalprepared with Sponsor
and Fund Manager
Mentor or NXDappointed
FundManager
Next stageof finance
1
2
3
© Finance Tree ltd, 2010
1 2 3 4 5 6 7
1x 0 0 0 0 0 0 0
2x 100 41 26 18 14 12 10
3x 200 73 44 31 24 20 17
4x 300 100 58 41 32 26 21
5x 400 123 71 49 38 30 25
6x 500 144 81 58 43 34 29
7x 600 164 91 62 47 38 32
8x 700 182 100 68 51 41 34
9x 800 200 108 73 55 44 36
10x 900 216 115 77 58 46 38
Value & IRR
Ultimately its what an investor will pay !
Investment required
• Time to a given return
• Return the investor needs
• RISK
Valuation
• Pre-investment
• Post-investment
• % ownership to give return
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IRR (Internal Rate of Return)
1 2 3 4 5 6 7
1x 0 0 0 0 0 0 0
2x 100 41 26 18 14 12 10
3x 200 73 44 31 24 20 17
4x 300 100 58 41 32 26 21
5x 400 123 71 49 38 30 25
6x 500 144 81 58 43 34 29
7x 600 164 91 62 47 38 32
8x 700 182 100 68 51 41 34
9x 800 200 108 73 55 44 36
10x 900 216 115 77 58 46 38
YEARS
Multiple
© Finance Tree ltd, 2010
Indicative timeline…end game
Task Timeline(months)
1 2 3 4 5 6
Initial planning meetingsPlan/offer developmentModeling & ValuationInformation memorandumTax planningInvestor identifiedPresentations to investorsConsideration of offersPreparation for due diligenceNegotiations with investorsInternal due diligenceLegal document prep.Final offersInvestor due diligenceExclusivity period Completion
BLUE internal RED externally driven
© Finance Tree ltd, 201018
Part I. The Investors Perspective
© Finance Tree ltd, 2010
Lessons from Venture capital…What are investors looking for
1 Leadership potential of lead entrepreneur 2 Leadership potential of management team 3 Industry expertise in management team 4 Track record of lead entrepreneur 5 Track record of management team 6 Sustained share position 7 Marketing and sales expertise of team 8 Organisational abilities of team 9 Ability to get cash out of the investment 10 Degree of product-market understanding 11 Expected rate of return on investment 12 Time to breakeven 13 Finance and accounting expertise of team 14 Ability to create post-entry barriers 15 Business meets funding constraints
16 Process/production capabilities of team 17 Uniqueness of product/technology 18 Market growth and attractiveness 19 Degree of market already established 20 Time required to payback investment 21 Ability to influence nature of the business 22 Importance of unclear assumptions 23 Stage of investment required 24 Ease of market entry 25 Strength of suppliers and distributors 26 Nature and degree of competition 27 Location of business 28 Business and product fit with VC portfolio 29 Projected market size 30 Sensitivity to economic cycles 31 Ability to syndicate 32 Seasonally of product market 33 Scale and chance of later financing rounds 34 Location of business relative to fund.
Source: Tradeoffs in the investment decisions of European Venture Capitalists. (Authors: Daniel F. Muzyka and Sue Birley) Journal of Business Venturing Vol 11 No.4 July 2000
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The Management Team
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Innovative Defensible Products
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Market size
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Scalable Business Models
© Finance Tree ltd, 2010
POC stories25
NE POC (venture capital)£10m 4yrs
194 Investments£15.2m Leveraged private investment
Scottish Enterprise (grant)£41m ~10yrs
230 projects47 new tech companies£241m leveraged private investment
West Midlands (APoC) (loan/grant)£6.32m 2yrs
283 grants143 businesses supported£2m leveraged private investment
© Finance Tree ltd, 2010
Last but not least…EXITS…
PLANNED from day one
Fund Manager will want a well defined EXIT
Investment Return to the fund from growth of company…
Common exits
Further investment round (someone else buys out fund)
Listing on a stock exchange (IPO)
Trade sale, sold to another corporation.
© Finance Tree ltd, 2010
Theinvestment
process
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Investment Process8-
12 w
eeks
8-12
wee
ks
• Initial enquiry
• Basic questions (eligibility, type of business, stage, investment need)
• Business plan submitted
• Review and initial due diligence
• Rivers Investment Meeting
• Investment Committee
• Offer letter
• Due diligence
• Agreements
• Completion
• Post deal support and monitoring until exit
© Finance Tree ltd, 2010
Contact to Exit
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Enquiry
Eligibility Business plan submitted
Meetings…ReviewInvestment Committee
Due diligence Offer Letter (term sheet)
Legals Completion
Post deal….. monitoring….exit
© Finance Tree ltd, 2010
Business plan
• No right answer• No set format• No right length
• Communicate• Concise• Clear assumptions• Back up evidence• Team• Financials• Risk
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Business Plan: It is Simple!But so many people don’t cover the basics
Idea• What is it?• Applications explored• Key Markets• Users/ Benefits• Environment / competitionStrategy• What is your goal• By When? • What type of business are you?• How do you make money (sales) ?• Revenue model• Delivery / production• Team and systems• Risks / risks managedFinance• Cash flow forecast (cumulative)• Breakeven• Investment needed• Investment return
1. Exec Summary2. Business Model3. Mission4. Ownership5. Governance6. Management7. Risks8. Key Personnel9. Resources10. QA11. Marketing12. Products13. Financial Model14. Investment Offering
© Finance Tree ltd, 201032
Please Include
• Proposition
• People
• Potential
• Path to market
• Proven
• Funding needed - enough to grow
• Financial return
• Forecasts and exit
Company Address and your Contact Details!
Company Address and your Contact Details!
How much £££?
How much £££?
© Finance Tree ltd, 2010
Assessment
Carried out on…
You
Your plan
Your references …….others you don’t know
By the Fund manager, external advisors, experts
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© Finance Tree ltd, 2010
Due diligence… going behind the plan
Be prepared you will have to answer questions on everything about the business and your team:
• Directors (disclosures)• Share agreements• Other investors• Finances• Contracts (staff and customers)• Orders, claims• Patents, other IP….• …. And more
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© Finance Tree ltd, 2010
Deal or no Deal
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© Finance Tree ltd, 2010
Too often forgotten
• Need to inform and stimulate… too many myths
• Need for advice… experience matters here
• Legal agreements… be aware, most are not
• Deal Costs… factor in and limit
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Offer
Simple offer letter…not term sheet
Due diligence… forms are simple
BUT…Be prepared
• Value implied by offer
• Time limited…normally 7-10 working days
• Exclusive for around 10 weeks
© Finance Tree ltd, 2010
Financial Instruments
• Loan• Equity• Convertible
• Kickers…. Uplift
• Mezzanine
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© Finance Tree ltd, 2010
Types of shares
• Ordinary• “A” Ordinary• Prefs
• Different right and incentives / restrictions apply
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Fees
• Costs money to raise money• 10% capital raised• More on small deals
• Ours Fees 2.9% arrangement• No annual monitoring• Non-exec directors
© Finance Tree ltd, 2010
Indicative timeline…end game
Task Timeline(months)
1 2 3 4 5 6
Initial planning meetingsPlan/offer developmentModeling & ValuationInformation memorandumTax planningInvestor identifiedPresentations to investorsConsideration of offersPreparation for due diligenceNegotiations with investorsInternal due diligenceLegal document prep.Final offersInvestor due diligenceExclusivity period Completion
BLUE internal RED externally driven
© Finance Tree ltd, 201042
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• The Importance of the Management Team
• Innovative products/services
• Market size
• Scalable Business Models
The Investors Perspective:
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Why Bother?
A good VC should add real value to your business over and above the money providing help with:
• Recruitment of the senior team and suitable non-exec Directors
• Extending your contact base of customers/partners
• Assisting the business to enter new markets
• Providing support on complex deals (e.g. acquisitions)
• Acting as a friendly outsider in strategy debates
• Securing additional funding and negotiation of exits
© Finance Tree ltd, 201044
So is there a Downside?
• Lose some control – there will be another owner of your business
• VC will normally want a seat on your Board
• Will want full transparency in terms of information about the business
• Typically look to agree a growth and exit strategy up front
© Finance Tree ltd, 201045
Things to Remember about VCs
• Investors in FUND are their ultimate ‘client’
• Funds normally operate within a fixed timeframe – this is why an exit so
critical
• Investment will almost always involve ownership
• VC managers only make money if their portfolio businesses are
successful
• Objectives defined by annual rate of return over a hurdle rate set by the
investors
© Finance Tree ltd, 201046
Part III. Post-Investment
© Finance Tree ltd, 2010
The EXIT
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© Finance Tree ltd, 2010
The only ways out
• Trade sale
• Buy-back
• IPO or other stock market listing
• Sale on to other investors.
• And the only other “Exit” is….?
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© Finance Tree ltd, 2010
EXITS…
At some point the Fund Manager agrees to EXIT the investment…
…and (hopefully) return any profit to the fund from the growth of the company or its value…
Common exits are:• Further investment round (someone else buys out fund)• List on a stock exchange• Trade sale, sold to another corporation.
© Finance Tree ltd, 2010
Investment in UK Technology companies… 2009 (BVCA performance Survey)
50
£394m in technology-related businesses (2008: £619m)
Of this, three areas received the most amounts Communications – £51m (2008… £81m)Computer software – £46m (2008... £310m)Medical / Pharma – £36m (2008… £73m)
Of the total amount invested
Early stage – 33% (2008… 43%)Expansion – 41% (2008… 31%)MBO/I – 20% (2008… 3%)
© Finance Tree ltd, 2010
AIM… new listings
Month UK International Total
January 08 11 1 12
February 08
April 2010
May 2010
6
4
1
3
0
0
9
4 (£74m)
1 (£5.8m)
Source: LSE
NB: listings in April 2010.. 2 in mining 1 in industrial metal
© Finance Tree ltd, 2010
Thank you…
Jonathan [email protected]
Follow us on TWITTER www.twitter.com/financetree
© Finance Tree ltd, 201053
Jonathan Gold [email protected] 0191 230 6370
16-18 Hood StreetNewcastle-upon-Tyne NE1 6JQ
0191 230 6370
www.riverscap.com
Pictures by J.GoldCopyright 2011
www.goldsplace.comwww.twitter.com/financetree