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BUSINESS OVERVIEW & FINANCING-WITH DR ANIL LAMBA

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Important reflections before you start

A big undertaking

• Starting a business is a big commitment– Energy & Passion– Time– Financial resources (yours and your

investors)• Before thinking of financing, is worth

taking a deep breath …

Key questions about you

• Why am doing this–Make money– Lifestyle– “Change the world”

• How long do you want to commit?• What level of financial risk are you

prepared to take?

Key questions about the business

• Be honest with yourself about the risks / unknowns– Do customers want the product /

service?– Do you have the competence to build

the product and the team– Can you monetise the product /

service?– How competitive is / will the space be?– How big can the overall market

become?

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Important reflections before you start

The BUSINESS BESTSELLER “Romancing the Balance Sheet” at the cheapest price

The Author explains the financial concepts in the most lucid manner. Must for every business owner.

Overview of financing options

Angel Financing

Venture Capital

Private Equity

PublicStock Markets

Self Finance / Bootstrapping

Debt / Bank Finance

Equity FinancingNon-Equity Financing

Self financing / bootstrapping

• Financing growth from previous cashflow and personal funds

• Obviously need to have cashflows…• Most good bootstrapped companies emerge from a service

or consulting companies that are productising their offering• Pros

– Bootstrapped companies almost always spend cash more effectively than equity financed companies

– Already being close to existing customers, give excellent ability to understand problems and define good solutions

• Cons– Resources for product and market dev constrained by

cashflows– May miss a big opportunity if other players raise finance and

invest heavily

Debt / bank finance

• Relatively limited funds will be available ; likely to want security anyway

• Banks only lend to predictable businesses they can understand

• If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance

• Not particularly useful web or high growth tech industries

Large PotentialMarket

OpportunityUnique Product

Or ConceptPassionate

Founding Team

Pre-requisites

Intensecompetition

likelyNeed to move

rapidly

Implications…

Hiring

Infrastructure

VC funding supports

Rapid Product Development

Internationalisation

Partnerships

Commercialisation

Good reasons to raise equity finance

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Important reflections before you start

Venture Capital – How the VC makes money

• Raise fund every 2-4 years– Pension funds, financial institutions and specialist “fund of

fund” investors

• Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money

• Very small management fee on funds managed~ 1-2.5% pa

• Carry~ 20-25%x (Total Return – Total Amount Invested)

What does an investor look for?

Technology Traction

• Can evaluate each as– Exceptional– Good / credible– Mediocre / incomplete

• Misconception that being good / credible across the board is what VCs look for– Can always add credible attributes to the mix later

• We focus on finding opportunities which rate as exceptional in one attribute

Team

Identifying relevant VC partners

Has funds to invest

Match of Size/Stage/Geography

RelevantPortfolio

No directlycompetitiveinvestments

Excellenttrack record

Shortlist

• Do create a shortlist• Rifle is a better weapon

than a shotgun

• Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Important reflections before you start

Types of investment

• Ordinary Share investment– Simplest form, often used by angels– All shareholders have similar rights– Company Board composed according to

• Convertible Loan– Sometimes used by both Angels and VCs– Typically when another financing is anticipated soon– Loan will convert (with a discount ~25%) into the next

financing round

• Preferred Share Investment– Typical Structure used by VCs and occasionally larger Angels

investing as a group

• Board Representation• Liquidation Preference• Participation rights• Anti-dilution rights• Element of reverse vesting• Certain control and veto rights• Period of exclusivity to close legals

but that’s so unfair…

Venture Capital – “Typical Deal Terms”

Value at exit

Probability of getting there

% share of business at exit

Entrepreneur’s Equation • Revenues / Profitability• Growth rate• Team quality• Strategic fit with buyer community• Well managed exit process

• Fewest strategic errors made• Hiring (quality & speed)• Partnerships• Product development

• Valuation at initial round• Valuation and dilution at

subsequent rounds• Option grants

Choosing the right VC - Valuation should not be the decisive factor

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