show me the money!

SHOW ME THE MONEY!

JOSEPH J. NAJEMAC&E INTERNATIONALMANAGING DIRECTOR & CEO

© Copyright AC&E International Pty Limited 2010. All Rights Reserved

Today’s Objectives• Discuss potential sources of funding to

enable a business’s growth plan

• Consider the key requirements of equity and debt providers

• Identify some alternative funding techniques and important factors that a business must consider when raising money

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1. State of the Market

2. The Funding Spectrum

3. Securing equity investment

4. Alternative sources of funding

5. The Private Equity play book and Business Valuation

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Agenda

© Copyright AC&E International Pty Limited 2010. All Rights Reserved 5

So what’s the current state of the market?


GlobalFinancialCrisis


What about the

Chinese

economy?

What if the property bubble bursts (or is deliberately deflated) and economic growth slows in China?


How far can you see ahead?


How far can you see ahead?You have three choices:

1. Get off the road because you might crash2. Drive extremely slowly due to low visibility3. Accelerate at full throttle (safely, because

you have some secret ability and line of sight)

How do you negotiate the current market conditions without getting injured, or badly hurt?... and/or how do you take advantage of the storm?


Raising funds is fun.

(that’s why funds hasthe word ‘fun’ in it)

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There is a wide range of funding sources that a

business can use

Not just cash injections

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Term loan or line of credit

Asset based lending and Inventory finance

Bonds and Debentures

Caveat or PG backed loans

Cash (equity)

Equity swap (scrip)

Joint venture

“Securitisation”

Equity Debt

Structured finance arrangements (including software leasing)

Earn-out arrangements

Licenses and Royalties

Asset sale/ spin off

Collateralised Debt Obligations (CDO)

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THE FUNDING SPECTRUM


The investor assessment

What are the 5 key questions an investor asks

about your business?

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1. The Market - size, appeal and potential

2. Market Niche

3. Business Model

4. Management Team

5. How the business will make Money

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The 5 M’s


1. Attractive and believable business valuation

2. Multiple sources of income from the business

3. The type and size of business partners and affiliates

4. Track record of the management team in terms of delivery and meeting estimates/ forecasts

5. Personal equity and commitment in the business (founder equity and “pain factor”)

6. Identity of the lead angel and seed Investor(s)

What characteristics is an investor looking for in an investment?

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7. Level of business debt and serviceability

8. Monthly burn rate and CAPEX estimates

9. Investment structure and if it provides liquidity, anti-dilution and asset protection

10. Risk mitigation tactics and strategies (project staging)

11. Time horizon of the development and potential for slippage, and the resulting Internal Rate of Return (IIR) and Return on Equity (ROE)

12. Exit strategy and if there are identifiable exit buyers

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What characteristics is an investor looking for in an investment?


If private equity decides to invest in your business,

what are the typical terms and conditions?

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• Board representation and special decision veto• Active or passive operational involvement by the

investor• Financial, budget and cash management controls• Performance, ratchet and earn-out clauses• Anti-dilution protection and drag-along/ tag-along

provisions• Restrictive covenants• Preference shares and voting structures• Convertible debt and equity arrangements• Restrictions on trade if leaving the company and

anti-competitive employment agreements for key people

• Mandated Investor signoffs on major stipulated changes

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A few important questions before proceeding with equity investment into your business

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• Investor and Investee goals are different – are you aligned and congruent?

• Do you really need that money? All in one tranche? Or is it a nice to have?

• Investor will get involved in your decision making – are you prepared for that? Are you ready to share or give up control?

• Are you capable of stepping aside and appointing a new executive or executive team if needed?

• Take less money if you can – don’t solicit too much money, the more money you take on the more issues you have to deal with.

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Bank debt facilities are a viable source if the

business is mature and stable enough to secure and service bank loan

facilities

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Bank Considerations Lending Determinants

• Adequate interest cover

• Principal take out source

• Disposal value of the business and assets

• Viable charge over the company

• Management team• Track record of the

business• Normalised earnings and

resulting free cash flow• Assets – debtors,

equipment and stock• PGs and security offered


What about otherfunding structures?

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• Contract Finance• Structured finance using ‘other’ asset based collateral or

CDOs• Software Leasing for Software plus Services business models• Joint venture funding arrangements (potentially with buy-

back provisions)• Performance based funding arrangements (eg. earn-out

structures)• Rights, royalties and license structures• Securitising cash flows (invite investors to contribute cash to

underwrite development, marketing or operating costs through an SPV)


plug


www.aceinternational.com.au ... and go to the Ideas section


end of plug


A piece of advice regardless of whether you are raising

equity, debt of some form of hybrid finance …

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get yourElevator

Pitchright


The Private Equity and Venture Capital approach

to growingand expanding a

business

… and how a business is valued

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Growing your business – how do PE and VC firms do it ?

• Define the full potential – the target is increased equity value (share price)

• Focus on growing cash flow by pursuing a few core initiatives only (not everything on the project list)

• Develop a roadmap to reach the full potential - not a pipe dream, emphasise measurable outcomes

• Accelerate performance in every way possible with tools, talent, discipline and monitoring (and get the metrics right because you get what you measure, and what you incentivise)

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Growing your business – how

do PE and VC firms do it ?• Harness the talent with the right incentives to recruit,

retain and motivate the best talent (get them to think and act like owners of the business, not employees working for wages)

• Make equity sweat by using debt and leverage, disciplined capex control, and aggressive management of working capital and the balance sheet

• Create a results oriented mind set aligned to the vision and the roadmap – and focus on creating genuine and sustainable value, and real assets that build a balance sheet (and valuation will follow)

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Dollar Limit Never invest greater than a specified amount

Stage Based Illustrative example is the total investment value ranges from

$1-$6 M, starting with $200K and adding $1 M each for asound idea, a prototype, a quality board, or any roll-out

sales,and adding $1-2M for a quality management team

Rule of Thirds 1/3 to the founders, 1/3 to the capital providers, and

1/3 to management Angel Standard Asking for less than $2M often implies the venture lacks

progress and greater than $5 M means the entrepreneur is

overvaluing the company or is ready for VC investment

Multiplier Method Multiply a key number in the business plan times an industry

standard (eg. Multiple of EBITDA)34

Valuation is highly negotiable in early stage investing - examples of methods:


DCF Method Identifying a potential value for the company in the future,

by discounting cash flows at a specified rate recognising

the risk of achieving those cash flow forecasts/ targets

VC Method Uses multiplier and DCF methods to determine how much

of a company to own to achieve a predetermined ROE

requirement hurdle

Value Add Method Giving support to a company in exchange for equity

(sweat equity)

Pre-VC Method Angel invests cash in a startup with no shares exchanging

hands and no set price, understanding that the angel’s

terms will be the same as those in the coming capitalraising round at a discount to that round

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Valuation is highly negotiable in early stage investing - examples of methods:


Contact Details

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