Inmaculada Martínez, Partner, OPUS Corporate Finance LLP, London, U.K.@inma_martinezwww.deviatingfromthenorm.com

Startup: A Bold Journey Into An Intangible WorldAsset Finance for early stage companies: how to identify and finance your intangible assets and prepare for an exit from day one.

Intangible Assets“Identifiable non-monetary assets that cannot be seen, touched or physically measured. Created through time and effort and classified as a separate asset”

‘Break it down for me, please’

✤ Legal Intangibles (trade secrets, copyrights, patents, trademarks) Translation: Intellectual Property

✤ Competitive Intangibles (knowledge, collaboration, leverage, structural activities) Translation: All that you are when you are a startup

‘Even in pre-revenue days’

✤ IP + Intangibles = Competitive Advantage

Competitive IntangiblesDirectly impact effectiveness, productivity, wastage, and opportunity costs within an organisation. Translation: it affects your costs, revenues, customer service, satisfaction, market value, and share price.

http://www.gearthblog.com/blog/archives/2007/05/google_acquiring_pan.html

http://en.wikipedia.org/wiki/Human_capital

It’s All About Human Capitalsocial capital, social cohesion, social resilience, celebrity, fame, leadership, legacy

Social CapitalThe expected collective or economic benefits derived from the treatment, training and cooperation between the employees. It is ‘social’ because it is all about ‘relationships’ and ‘interactions’

Social CohesionThe bonds that bind people together in a company. The ‘material conditions’ and corporate culture nurture and preserve it.

LeadershipA process of social influence over employees, clients and industry in which a founder enlists the aid and support of others in the accomplishment of a common task.

Translation: will others join the founding team with the same passion and commitment?

LegacyHow will the founders be remembered? What corporate culture will they create for future employees?

Funding Asset no. 1: The Team

✤ Your human capital increases as your competence, intelligence and skills increase. Translation: your thinking ability and sector-specific know-how are your attraction points. ‘Passion’ is your ignition.

✤ Much attention is paid to factors that lead to success vs. failure where human management is concerned. Translation: leadership, talent, and even celebrity creates real pull from investors.

✤ Human capital is the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labour so as to produce economic value. Translation: you, your skills, your team, your vision and attitude is what ‘gets funded’, above and beyond the product.

For real: What is Competitive Advantage?

✤ Strategic advantage one business entity has over rival entities within its competitive industry.

✤ It stands on two pillars:

✤ use of know-how to develop the means to remain in the lead.

✤ ability to compete

Ability to compete

✤ The market place is a petri dish of unfair competition: make this your mantra. Others have either more money than you, more developed markets, or superior intangibles. Fight, fight, fight.

✤ True competitiveness is the ability and performance of a company to supply goods and services in a given market. Sell, sell, sell.

✤ Resources (capital, labour, technology) and talent tend to concentrate geographically. Break this mould:

* Establish networks of suppliers, buyers and even competitors internationally.

* Create “clusters of self-benefits”, “unbreakable value-chains”, “borderless industrial districts”

Use of know-how

✤ Competitiveness is not about Know-What (facts), Know-Why (science), or Know-Who (networking).

✤ It’s about tacit knowledge: you know more than you can tell.

✤ The key to acquire tacit knowledge is through experience.

✤ Embodied-knowledge is characteristic of experts, who act, make judgments, etc. without explicitly reflecting on rules or deliberation.

“Investors loved Steve Jobs because he turned Apple’s market capitalisation without Extreme valuations or speculative ways”

Satisfying investors’ exit needsAnd making some cash for yourself along the way

Angelsmotivated by intangibles

incentivised by the beta product

looking for a personal opportunity to add value

looking for higher return (typically 25% or more) than the money markets

invest <150k or in syndicates;

a clear path to exit for their long-term investment:- sale of their shares to the company’s principals;

- sale/merger of the company

Early Stage Fundsa solid management team

a solid business plan

a business structured for investment: convincing and complete

potentially considering earlier exits around the $30 million valuation range (USA) or $10m-$18m in Europe;

invest >200k to 1 million;

a clear path to exit even if it’s over a short time span (3 years);

VCsthey are risk-adverse: look for high return and a 3-7 years exit strategy;

the startup must perform as an investment vehicle, not a ‘lifestyle choice’ for the founders;

the sector competitiveness and worthiness must be crystal clear;

Invest for around 25% of the equity in a series A because they need to keep the founders motivated and the valuation HIGH for further rounds;

Investments range from €2m to €5m for a first round (EU) and should continue for ‘follow-ons’ rounds;

Need to see a clear path to exit from day 1;

Private EquityThe size of their funds allows them to enter 50 million plus funding round deals

If a VC cannot IPO you, or trade-sale you, they’ll try to sell their shares to a PE fund and exit.

Funding Requirements

WHAT YOU NEED

WHAT YOU

HAVE

AngelsEarly Stage

VCs

IPOBought by larger corporation

Raising for funds from VCs and PEs

Raising Debt‘Doing an Apple’= selling products like hot cakes

worldwide

The Exit Roadmap

YOUR BEDROOM PROJECT

YOUR INVESTORS

EXIT

YOUR SHARES SALE

to the institutional investors (IPO)to a company (Acquisition)to individuals or entities (Sale)to join with an existing company (Merger)

to one or more stockholders buying out the company shares (Buy-Out)

to sell the business concept to others to replicate (Franchise)

Trade-Sale exits

CHALLENGERSExecute well today or may dominate a large segment, but do not demonstrate an understanding of market direction

NICHE PLAYERSFocus successfully on a small segment, or are unfocused and do not out-innovate or outperform others

VISIONARIESUnderstand where the

market is going or have a vision for changing market

rules, but do not execute well yet.

LEADERSExecute well against their

current vision and are well positioned for tomorrow.

COMPLETENESS OF VISION

AB

ILIT

Y T

O E

XE

CU

TEFOCUS ON TOMORROW

FO

CU

S O

N T

OD

AY

Successful Trade-Sales Are usually executed within the players of a Magic Quadrant

An exit strategy is a value creation planYou company’s competitive advantage is someone else’s differentiation

Acquisitions are strategic actions✤ Google bought a startup

every two weeks in 2011 (25 companies or 79, if one counts firms acquired for patents and IP)

✤ Facebook has acquired 10 companies post IPO (purchasing Instagram for $1bn or just head-hunting two talented employees “Acrylic Software” 20/07/12)

✤ Microsoft, Apple and Amazon each bought three.

Ask yourself each day for whom you create strategic valueYour IP are the patents that will make their share value justified;

Your team are the innovators that they cannot recruit;

Your products are the building blocks that will help them remain competitive;

40 years on, still working hard for my social capital. Life is harder when you no longer sit on the “lap of kings”

Oh, and “One More Thing...”

“Big things often have small beginnings”

Prometheus - (2012) Ridley Scott

Thank you!@inma_martinez www.deviatingfromthenorm.com about.me/inmaculadamartinez

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