42629 lecture 11 pt 3
TRANSCRIPT
Funding sources and strategies- Who has the money and how/when you should talk to them.
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Why you need funding
• A mature company grows organically:
– Reinvests share of earnings.– Often loan financed.
R&D (-$)
PRODUCE (-$)
OTHER COSTS
(-$)
SELL! (+$
$$$)
$
• A startup is immature: – The viability of the cycle has
not been proven.– (Several) investments are
needed to establish a sustainable cycle.
R&D (-$$$)
PRODUCE (-$$$)
OTHER COSTS
(-$$)
SELL? (+$$)
Investment
(+$$$$$$)
Mature
Company
Startup
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Who to go to at different stages
Pre-se
edSeed
Startu
p
1st ro
und
2nd round
3rd ro
und
Pre-public
Public offerin
g
Stage
FFF (Friends, Fools and Family)
Crowd funding
Business angels
Private / corporate investors
Innovation environments
Public funds
Venture Capitalists
Pension funds
Banks
Stock investments
IMPORTANT TASKS
INVESTOR TYPE
Validate idea
Proof of concept
Visualize idea
Describe market
Identify customers
Sell to pilot customer(s)
Proof of market
Test prototype Build production
Estimate cost Formulate business model
Produce product Validate costs
Optimize production
1st segment sales
2nd segment sales
Proof of traction
Continued expansion
Formulate marketing strategy Ongoing marketing efforts
R&D
Optimize sourcing strategies
Idea
INVESTMENT SIZE (DKK)20.000 - 5 million 3 - 20 million 10-100 million >50 million
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Pre-seed / Seed stage• Pretty much everything needs to be described
– The risk of failure is very high (66% according to litterature).– The value of the company is low.
• Typical funding sources– FFF, Crowd funding, Business Angels, Public funds and innovation
environments.
• Investment criteria– The idea has great value.– The team is key.– Investors expect a high potential
return on investment (ROI).
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Pre-seed / Seed stage II• Typical characteristics for the phase:
– Each task aims to validate critical points in the business plan.– Validation of technology and market means reduced risk.– Often, one critical factor can kill off the business.
VALUE OF COMPANY
LEVEL OF RISK
COSTS
Time
Market insights
Prototype works!
Pilot customer
signs
• Investors are likely to invest between DKK 0.5-5 million.
• Crowd funding and the FFF are typically in provide smaller investments.
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Startup Phase• Important factors have been validated
– Concept has been thoroughly tested.– Cost estimates have been validated or detailed.– Business plans have been validated with partners/customers.– First customer(s) have signed... something.
• Typical funding sources– Private investors, Venture Capitalists (for high growth ventures),
public funds.
• Investment criteria– Market validated, ”the customers are waiting”.– The team is key.
• The investor is likely to take an active roll in daily operations.– Sales and marketing are important issues.
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Startup phase II• Typical characteristics for the phase:
– Focus on getting to break even.– Sales, not written letters of intent.– Initial costs are high.– Through optimization, costs are reduced. VALUE OF
COMPANY
LEVEL OF RISK
COSTS
EARNINGS(!)Pilot customer signings
First ”Real”
sales
Large Production
costs
Break even!
• Typical investment of between DKK 3 and 20 million
Time
ED
GE
FL
OW
EDGEFLOWRevisited (slides courtesy of EdgeFlow Aps)
ED
GE
FL
OWEdgeFlow’s ”Catch 22”
A startup in the seed phase or a seed venture in the startup phase?
• We are in dialogue with several investors who are saying:
• ”We need letters of intent from customers!”
• The customers are saying:
• ”Interesting, but we need more hours of operation”
• And EDGEFLOW is saying:
• ”We need money to create a product that can run for long periods”
• We have a proof of concept and a good understanding of the market and costs involved in producing. Several customers have shown an interest.
ED
GE
FL
OWExercise 3
Help your lecturer.
• In your groups:
• Spend 5 minutes discussing how Jakob should handle his predicament.• Ask Jakob for clarification if needed.
• Be ready to share your conclusions!
(Thank you in advance!)
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Growth phase (1st round -> pre-public)
• ”Traction” has been shown in first segment(s)– The rollout strategy works – now it should be replicated.– Going into new segments requires significant investments.– Risk is much lower (cultural differences and such).
• Typical funding sources– Private investors, Venture Capitalists (later stage),
Banks, Pension funds.
• Investment criteria– Medium yield, low risk investment.
1
2
2
3
3
4
4
4
3 1
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Growth phase (1st round -> pre-public) II• Typical characteristics for the phase:
– ”Hockey stick” time!– Growing from national/regional organisation til international.– Less need for entrepreneurs and more need for operational
savvy.
Investments in new segments
VALUE OF COMPANY
LEVEL OF RISK
COSTS
EARNINGS
Time
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Different investors – different termsType Risk Profile Expected return Equity
shareholderReturn multiple /
timing
FFF High Risk May vary Perhaps None
Business angel High Risk Cash return Yes 10x / 5 yrs out
Innovation env. High Risk Cash return + reports
Yes 10x / 5 yrs out
Private investor Medium-High Cash return + knowhow/tech
Yes 5x / 5 yrs out
Venture Capitalist
Medium Risk Cash return Yes 5-10x / 5 yrs out
Pension Fund Medium-Low Cash return Yes 2-4x / 5 yrs out
Public fund High Risk Reports, knowledge
(public)
No None
Banks* Low Risk Cash return No 1-3x / 5-10 yrs
Shareholders Medium-Low Cash return Yes 2-6x / 5 yrs out
Crowd funder High Product/perk No None
* Note that banks usually require collateral from the founders or board
!
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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”Gearing” an investment• Investors tend to want as much as possible for as little as
possible (good ”mileage”).• Also, an investor is often interested in sharing the
investors with others (syndicating the investment).• A bigger investment means your company has to give
away a larger share...
• ... Unless you are able to establish some gearing for the investment:
• Gearing can be created through public funds* that typically invest a max. of 40-60% of the total funds required.
* See www.innovationsradar.dk
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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For each group:
Spend five minutes searching www.innovationsradar.dk:
Find at least one fund that is suitable for your business.
When is the deadline for applying?
Share your result with the class.
Exercise 4:
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Additional notes on traditional investors• Modern equity taking investors tend to provide funding
and knowhow.– A ”knowledge” investor is a very strong asset.
• A single investor is rarely interested in getting a majority in the company
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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A quick note on ”Why Crowd Funding rules”• As established earlier, investors are necessary to get the
wheels rolling.• To invest, they have to see a potential for sales and
earnings.
• Crowd Funding does just that:
It gets the wheels rolling AND
it validates the market
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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Introducing: Vaeksthus Greater Copenhagen• The Vaeksthus provides a host of useful services to
entrepreneurs.• Kristian Lund (Project Consultant) will introduce some of
these services right after the break.
• See more on: http://www.startvaekst.dk/vhhr.dk
2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark
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