© finance tree ltd, 2013 raising investment 16 october 2013 jonathan gold
TRANSCRIPT
© Finance Tree ltd, 2013
Raising investment 16 October 2013
Jonathan Gold www.financetree.bizwww.riverscap.com
© Finance Tree ltd, 2013
Finance Tree works with businesses to help them understand the needs of investors and find the right investment.
2005 NStar Corporate Finance established
2006 Finance and Business launched
2008 (April) Management Buyout and creation of Finance Tree
2009 (April) created Rivers Capital Partners
2010 Managers of the £7.5m North East Angel Fund
2012 Invested in 40 businesses and total 80 investments
www.riverscap.com
© Finance Tree ltd, 2013
No free lunch…money costs
BanksGrants
Other lenders (ie: UK Steel Enterprise… NESTA)
FFFVenture Capital / Business Angels
Sales !!
© Finance Tree ltd, 2013
Unreasonable risk for an unreasonable return
© Finance Tree ltd, 2013
Venture Capital / Private Equity…
“Private Equity is medium to long-term finance
provided in return for an equity stake in potentially
high growth unquoted companies”.
Source: British Venture Capital Association (BVCA) 2005
NB: Almost all are… FSA regulated collective investment schemes…
© Finance Tree ltd, 2013
Are you 1 in 100
Most VCs probably invest in 1 in 10 they look into
But at least another 90 have tried
So what makes you stand out ?
How can you blow everyone else away
1.Displace the competition?2.Convince people to buy-in and buy?3.Do more than collect hits on a website4.MAKE A RETURN…
© Finance Tree ltd, 2013
Sources of capital of capital
ResearchGrant
GRANTS….
Business Angel...
North East Finance for Business (£125m)
“Familymoney”
Commercialloan
Strategic development partners
SEED FINANCE
~ £250,000
Concept Finance
~ £100,000
Early Stage
£500,000to ~ £1m-2m
VentureCapital
© Finance Tree ltd, 2013
Venture capital is often a
crucial element in…
Getting a new business going
Start-up
Funding a step-change in the business
Rapid organic growth or M&A
Effecting a change of management or control
Buy-in / buy-out / public-to-private
Funding long-term development pre-revenue
Typically high technology
© Finance Tree ltd, 2013
The investment model
Time … since investment
Investment in…
Generating £ cash…
Sale of company… or “exit “
Development & early sales (losses…)
…10x return in 5 yrs
© Finance Tree ltd, 2013
Finance for Business North East Funds
© Finance Tree ltd, 2013
Statistics of VC portfolios…
10 Investments
4 Fail
4 Living dead
2 Stars
© Finance Tree ltd, 2013
Why bother?
VC should add real value to your business
• Recruitment of the senior team and suitable NXDs
• Extending your contact base of customers/partners
• Assisting the business to enter new markets
• Providing support on complex deals (eg: acquisitions)
• Acting as a friendly outsider in strategy debates
• Securing additional funding & negotiation of exits
© Finance Tree ltd, 2013
So is there a downside?
Lose some control – – there will be another owner of your business
VC will normally want a seat on your Board
Full transparency in terms of information & business
Typically look to agree a growth and exit strategy up front.
© Finance Tree ltd, 2013
Applying…process
2 pageproforma
FundManager
Reject orresubmit
Eligibility Screen(against POC)
Duediligence
InvestmentCommittee
Professionaladvisors
Term sheet(signed)
Draw downfunds
Monitor
Referral(sponsor)
Project proposalprepared with Sponsor
and Fund Manager
Mentor or NXDappointed
FundManager
Next stageof finance
1
2
3
© Finance Tree ltd, 2013
© Finance Tree ltd, 2013
16
Financial value drivers
SALES
Cash margin
WorkingCapital
Fixed Assets
CashTax rate
Cost ofcapital
© Finance Tree ltd, 2013
1 2 3 4 5 6 7
1x 0 0 0 0 0 0 0
2x 100 41 26 18 14 12 10
3x 200 73 44 31 24 20 17
4x 300 100 58 41 32 26 21
5x 400 123 71 49 38 30 25
6x 500 144 81 58 43 34 29
7x 600 164 91 62 47 38 32
8x 700 182 100 68 51 41 34
9x 800 200 108 73 55 44 36
10x 900 216 115 77 58 46 38
Value & IRR
Ultimately its what an investor will pay !
Investment required
• Time to a given return
• Return the investor needs
• RISK
Valuation
• Pre-investment
• Post-investment
• % ownership to give return
© Finance Tree ltd, 2013
IRR… internal rate of return
1 2 3 4 5 6 7
1x 0 0 0 0 0 0 0
2x 100 41 26 18 14 12 10
3x 200 73 44 31 24 20 17
4x 300 100 58 41 32 26 21
5x 400 123 71 49 38 30 25
6x 500 144 81 58 43 34 29
7x 600 164 91 62 47 38 32
8x 700 182 100 68 51 41 34
9x 800 200 108 73 55 44 36
10x 900 216 115 77 58 46 38
YEARS
Multiple
© Finance Tree ltd, 2013
Indicative timeline…end game
Task Timeline(months)
1 2 3 4 5 6
Initial planning meetingsPlan/offer developmentModeling & ValuationInformation memorandumTax planningInvestor identifiedPresentations to investorsConsideration of offersPreparation for due diligenceNegotiations with investorsInternal due diligenceLegal document prep.Final offersInvestor due diligenceExclusivity period Completion
BLUE internal RED externally driven
© Finance Tree ltd, 2013
What do investors look for ?
© J.Gold, 2011 all pictures by J.Gold rights reserved
© Finance Tree ltd, 2013
Lessons from Venture capital…What are investors looking for
1 Leadership potential of lead entrepreneur 2 Leadership potential of management team 3 Industry expertise in management team 4 Track record of lead entrepreneur 5 Track record of management team 6 Sustained share position 7 Marketing and sales expertise of team 8 Organisational abilities of team 9 Ability to get cash out of the investment 10 Degree of product-market understanding 11 Expected rate of return on investment 12 Time to breakeven 13 Finance and accounting expertise of team 14 Ability to create post-entry barriers 15 Business meets funding constraints
16 Process/production capabilities of team 17 Uniqueness of product/technology 18 Market growth and attractiveness 19 Degree of market already established 20 Time required to payback investment 21 Ability to influence nature of the business 22 Importance of unclear assumptions 23 Stage of investment required 24 Ease of market entry 25 Strength of suppliers and distributors 26 Nature and degree of competition 27 Location of business 28 Business and product fit with VC portfolio 29 Projected market size 30 Sensitivity to economic cycles 31 Ability to syndicate 32 Seasonally of product market 33 Scale and chance of later financing rounds 34 Location of business relative to fund.
Source: Tradeoffs in the investment decisions of European Venture Capitalists. (Authors: Daniel F. Muzyka and Sue Birley) Journal of Business Venturing Vol 11 No.4 July 2000
© Finance Tree ltd, 2013
Business models not Business plans...
VALUE PROPOSITION
Market positionOFFERING
Delivery/resourceSYSTEM
FINANCIAL model
· Choice of Target Segment· Development of customer benefit· Competitive position (or USP)
· Actual product / scope FEATURES / BENEFITS· How its delivered... Is on-line the product or means to an end... How does delivery matter· Customer decision process· MAP the PRODUCT OFFER to the CUSTOMER BUYING process
· Aligning internal SYSTEMS, delivery PARTNERS, PLATFORMS· Ensure these meet the PRODUCT delivery benefits
· REVENUE to generate SHAREHOLDER value· GROWTH model· · Advertising· Product Service or information sale· Transaction / facilitator· Subscription
© FinanceTree ltd, 2011
…and EXITS/returns !
© Finance Tree ltd, 2013
© Finance Tree ltd, 2013
Last but not least…EXITS…
PLANNED from day one
Fund Manager will want a well defined EXIT
Investment Return to the fund from growth of company…
Common exits
Further investment round (someone else buys out fund)
Listing on a stock exchange (IPO)
Trade sale, sold to another corporation.
© Finance Tree ltd, 201325
Thank you 16-18 Hood Street
Newcastle-upon-Tyne NE1 6JQ0191 230 6370
www.riverscap.comwww.financetree.biz
www.twitter.com/financetree