how to close an investment deal (2015)
TRANSCRIPT
How to close an investment deal
An introduction from an entrepreneurial perspective
Benno Groosman MScBAwww.groosman.info
July 20, 2015LaunchBase in Maastricht
IntroductionBenno Groosman MScBA• MSc Entrepreneurship & New Business Venturing
• 10 years entrepreneur
• Involved in multiple startups and experience in multiple incubators and accelerators
• Award winning health care company with 3 international patents and multiple products, €1.4M funding and… a bankruptcy
Now:
• Director Base pre-incubation programme at Maastricht University
• Cofounder Surge-on Medical: patented innovations for (knee) surgery www.groosman.info
IntroductionScope
• This presentation is based on investor studies in USA, UK, Germany, Israel and The Netherlands.
• Combined with my own experience in my company in The Netherlands:• ~25 informal investors• ~15 VC funds• 3 term sheet negotiations• 1 participation contract
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IntroductionAgenda1. Types of investors
2. Stage and size of investment
3. Multiple series of investments
4. Valuation
5. Deal making process
6. After the investment
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1. Types of investors
•What type of investors do you know?•How do they differ from each other?
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1. Types of investorsA selection
• Friends, family and fools
• Governments, universities, larger companies
• Private equity
We will talk about:
• Business angels (informal investors)
• Venture capital funds www.groosman.info
1. Types of investors Business angel / informal investor
Individual with personal capital and experience in entrepreneurship or a certain branche available.
Typically wants to use his money AND time for your company: “smart capital”.
Indication of investment range $10-100k.
Can make syndicates with other investors to expand network and make bigger total investments.
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1. Types of investors Venture capital fund
Fund collects money from companies, governments, investors, pension funds, etc.
Funds typically have a 5-7 year investment range and do multiple investments in that time. $500k and more per investment.
Fund managers and investor managers are responsible for ROI on the fund capital. Investors in the fund want to monitor this, so there’s more “paper work”.
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1. Types of investors Other funds
• Investing pension funds;
• Corporate venture capital;
• Government seed and growth capital;
• Equity funds ($10M and up)
And many more, but usually for the high-growth stage of a company (for example: after 3 years, $10M+ in revenues).
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2. Stage and size of investmentStartup financing cycle
2. Stage and size of investmentStage and type of money
2. Stage and size of investmentHow much money do you ask for?
Ask the money that you really need to reach your next milestone, not too little, and about 15-25% extra for unforeseen expenses.
Informal investors don’t like to pay for marketing, big office space and high salaries. They want to build the business by investing in prototypes, production, sales, patents, strategic positions etc.
Use the money to grow the value of your company. www.groosman.info
2. Stage and size of investment
•How much money do you need to go to the market?•Which types of funding are you aiming at?
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2. Stage and size of investmentTiming of investment
Best position to negotiate is when you don’t really need the money yet.
Investors can delay the dealmaking, so make sure you have a financial buffer.
Informal investors / business angels: 3 months.
VC funds: 6 to 12 months.
+ time you need to get to get them in your network!
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2. Stage and size of investmentPostpone an investment
Get money from:
• Selling your test product
• Make customers pay in advance
• Use governmental subsidies and grants
• Consultancy (but don’t loose your focus!)
... TO BE ABLE TO MAKE A BETTER DEAL. www.groosman.info
2. Stage and size of investmentInvestment and the bank
In later stages you could use the investment as a multiplier to get bank a bank loan.
Example:
€300k investment could enable a €600k bank loan.
Banks don’t like risks. Investor money reduces their risk. Banks finance working and growth capital, not marketing, salaries and research and development.
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2. Stage and size of investmentMilestone based funding
• Define the milestones in your startup plan
• Determine the amount of money you need to reach each milestone
• Match (combined) milestones with available funding sources
• Try to secure the funding of different milestones by combining the commitment of different (types of) funding sources: you could capture these in one investment contract
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2. Stage and size of investmentMilestone based funding: DIY
• Define the milestones in your startup plan
• Determine the amount of money you need to reach each milestone
• Which funding sources and types of investors could match each milestone?
• Can you combine the milestones for funding?
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3. Multiple series of investments
You might need more investments to start, grow, expand your company.
First investment deal is considered to be the most important,
as the terms determine the ease of acces for future investments,
and the dilution of shares starts here.
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3. Multiple series of investmentsAn example on equity dilution
3. Multiple series of investmentsHow many shares do you want to keep?
• Do you want to own 100% of a small pie?
• Or a part of a huge pie?
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3. Multiple series of investmentsCap table
Find more info and and Excel sheet at:
• http://venturehacks.com/articles/cap-table
• http://venturehacks.wpengine.com/wp-content/uploads/2009/10/Venture-Hacks-Cap-Table.xls
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4. Startup valuation
• Valuation of startups is not just a numbers game. It’s more about expectations, feelings, investment limits etc.
• But, start to quantify your value by:• Real option pricing;• Discounted cash flow;• Comparing to other startups.
• Science, art or random?www.groosman.info
4. Startup valuationReal option pricing / net present value
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4. Startup valuationOther methods
• Investor policy, e.g. “the maximum post-money valuation for seed money is €2M”
• Profit times 5, revenue times 2 (or any number), industry multipliers, β
• Tens of other methods
• Investor divides the numbers the entrepreneur provides by 10; entrepreneur knows, so multiplies by 10, etc. www.groosman.info
5. Deal making processWhat do investors want to get?
• Control
• Preference rights for future rounds
• Big percentage of shares
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5. Deal making processWhat does the founder wants to give?
• No control
• No preference rights
• Only a small percentage of shares
So… a negotiating process is needed to make the deal.
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5. Deal making processGO / NO GO decision after every stage
• First contact, pitch
• Personal connection
• Business plan and/or presentation
• Negotiations (ongoing)
• Term sheet
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5. Deal making processGO / NO GO decision after every stage
• Signing term sheet (exclusivity phase investor)
• Due diligence
• Participation contract
• Deposit of money and changes of legal structure
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5. Deal making processKey negotiation points (1)
Valuation
• With VCs it’s easier to ask more money than give away less shares, with informal investors it’s the other way around.
• Investment in multiple stages (one contract) can lead to better valuation. E.g., $200k at once will come at lower valuation than $100k upfront and $100k after first customer.
• More risk for you: what if the customer comes too late? www.groosman.info
5. Deal making processKey negotiation points (2)
Preferred stock and influence rights
• Tag-Along right• If big shareholders sell, small shareholders are forced to sell too
• Pre-emption right• Before another shareholder comes in, the existing shareholders can buy shares at the same price
• Right of first refusal• Like the previous, but with pre-specified terms
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5. Deal making processKey negotiation points (3)
Preference rights, exit options, and penalties
• What if it goes very good?
• More important: what if it goes bad?• Will you lose your shares?• Will you lose your management position?
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5. Deal making processTake control of the process (1)• It is your business
• Don’t get controlled and sucked up by the game
• Be hard on the content, but soft on the relationship
• Don’t get intimidated by negotiating tactics
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5. Deal making processTake control of the process (2)• If you don’t like the deal, take time to negotiate
• Use an experienced and trusted advisor/mentor/lawyer
• … and dare to walk away and cease the deal. Be nice though, it gives you credits.
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6. After the investment
• Keep working on the relationship with your investor
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely
• Financial results matter
• Keep working on followup investmentswww.groosman.info
Thanks for your attention!Please feel free to contact me
Benno Groosman MScBA
Phone: +31 6 1253 2039
Email: [email protected]
Website: www.groosman.info
Twitter:www.twitter.com/Benno_Groosman
Slideshare:www.slideshare.net/benno_groosman