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Access to Finance TOOLKITfor R&D ICT Innovations and early stage ICT SMEs

The “ICT Finance MarketPlace” is an initiative delivered by 3 EU funded projects with the aim of improving access to fi nance for innovating ICT SMEs across Europe.

ACCESS-ICT is a member of ICT Finance Market Place,an initiative supported by DG Information Society and Media

Written and designed by ACCESS-ICTon behalf of the ICT Finance Marketplace

©THIS TOOLKIT IS ACCESS-ICT COPYRIGHT Cannot be reproduced or distributed In part or in whole without prior permission

Table of Contents

Foreword ........................................................................................................................ 4

Introducing ICT Finance Marketplace ..................................................................... 6

Policy Agenda ............................................................................................................... 8

Introduction ................................................................................................................... 9

Glossary ..................................................................................................................... 10

Prototype to Market ................................................................................................. 11

Business Plans ......................................................................................................... 17

Financials ................................................................................................................... 34

Build a Financial Model ............................................................................................... 34

Valuation ................................................................................................................... 36

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ICT Finance Marketplace Access to Finance Toolkit for R&D ICT Innovations and early stage ICT SMEs

Fundraising ................................................................................................................ 38

Business Angel Investment .......................................................................................... 42

Venture Capital ........................................................................................................... 46

The realities of raising equity fi nance from Business Angels or Venture Capital Investors ....... 49

Cross-border private equity investment ......................................................................... 51

Is your ICT proposition Investment Ready? ........................................................ 53

What do Investors look for in an ICT investment proposition? ......................56

How to successfully present and pitch your ICT Business to Investors ..... 61

Developing your PowerPoint Presentation ..................................................................... 61

Delivering your pitch to investors. ................................................................................ 64

The steps of the investment process, both legal and technical requirements ... 66

Deal Formalities in the investment process .................................................................. 67

Due Diligence Overview............................................................................................... 69

Protecting your Intellectual Property (IP) ....................................................................... 70

Key Legal Documents .................................................................................................. 75

What are the legal areas where specifi c attention is required in a cross-bordersyndicated Investment? .............................................................................................. 78

Legal Costs ............................................................................................................... 78

Exits ............................................................................................................................81

Other Sources of Finance for your ICT Business ...............................................83

Acknowledgements .................................................................................................. 85

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Table of Contents

Foreword

The European Commission, through its R&D ICT framework programmes, is supporting research and development into ICT. The ICT framework covers a range of different areas from digital content to programming; network and telecom services; smart devices and mobile apps; robotics; distribution and ICT services etc.

Yet out of the vast range of R&D projects supported by EU fi nance, only a small number of projects and research teams go on to successfully attract external fi nance to successfully commercialise the results and capitalize on the EC investment. This means that many potentially very exciting new technologies, products and services never get to the market place- and never get to the equity community.

A key issue for these research projects is how to become investment ready and to understand the investor requirements. Do the R&D results offer the potential for creating a scalable business in the market place? Does the research team have the capacity to become a business management team with capacity for running a growth business focused on marketing the innovative products and services? Is the IP protected and ownership clear? What is the strategy to approach the investment community and how to be investor attractive?

On behalf of the European Investment community and as a member of ACCESS-ICT Project Steering group, I am delighted to present this information resource and tool kit to enable entrepreneurs and research teams to more fully understand how to become investment ready, the various steps to be taken and what changes may need to be taken to attract investment fortheir ICT R&D results.

It’s a tough and challenging road for entrepreneurs and research teams to commercialise ICT R&D results, but I feel sure that the European investment community will welcome the opportunity to see more innovative investment ready propositions coming forward from theEU R&D framework programmes. So I strongly recommend you to use this guide and relevant online tools to strengthen your capacity for investment readiness and to increase your odds to successfully attract equity investment.

I should also like to thank all of the private sector investors and expert organisations that have kindly offered their experience and expertise to provide key content for this guidebook.

I wish you all success with bringing your innovations to market and accessing relevant investment.

Kind regards,

ANTHONY CLARKE,

Director, Angel Capital GroupChair Emeritus EBAN Member of the ACCESS-ICT Steering group

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Notes

5

Introducing ICT Finance Marketplace

The PartnersICT Finance Marketplace is supported by a partnership between the ACCESS-ICT, ICT VENTUREGATE and YMIR projects which are all funded under the Information and Communication Technologies thematic programme of the European Commission 7th Framework Programme. For further information on the partners visit: www.ict-fi nance-marketplace.com

Bridging the gap between technology and businessThe ICT Finance Marketplace consortium, directly responds to The European Commission‘s stated policy objectives and recognition of the importance of increased growth and competitiveness in Research and Development in the ICT sector across Europe. While technology advances at an ever growing pace, opening global markets to big industrial players, SMEs are often faced with important barriers to their fl ourishing and market access. In this light the ICT Finance Marketplace aims to facilitate the link between SME’s research results and the investors’ world.

Notably, in its Communication and working paper “Raising the Game”, the Commission identifi ed the need to facilitate access for ICT innovators to venture capital, private equity and loans. It also recognises the opportunity to set up platforms for more intense dialogues between investors and ICT innovators across Europe.

The ICT Finance Market Place consortium is therefore responding to these objectives through the establishment of a new pan-European platform to create access to knowledge about fi nancing opportunities and direct access to investment for ICT SMEs. This platform will also support the link between access to fi nance and access to new markets for areas such as health, energy and transport.


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http://www.ict-finance-marketplace.com

The ICT Finance Marketplace is a single entry point for.•• SMEs and Research Teams involved in ICT R&D Framework Programmes seeking to

become investment ready and to meet venture capital investors

•• Business angels and other venture capital investors interested in accessing investment ready deal fl ow from innovative ICT projects

ICT Finance Marketplace will provide the following services:

Services to ICT SMEs and Research Teams

• Awareness raising• Training support material• Access to Finance Manual for SMEs• E-training tools including webinars• One to one coaching/mentoring• Venture Academies for SMEs (coaching)• Pitching & matchmaking at investment events• Virtual Agency • Knowledge platform

Services to ICT Investors

• Awareness raising• Selection and coaching of “deal fl ow” from ICT SME pool(having benefi ted

from FP6 and FP7 support for their R&D)• Presentation of companies at investment events• Information about ICT technology trends across Europe• Opportunity to coach and mentor ICT SMEs• Sustainable network of ICT investors at pan-European level

To fi nd out more about ICT Finance Marketplace visit the website at:www.ict-fi nance-marketplace.com/site

Introducing ICT Finance Marketplace

7

http://www.ict-finance-marketplace.com/site

Policy Agenda

Formulating recommendations addressed to European policy makers is an important objective of the ACCESS ICT project and the ICT Finance Marketplace initiative.

The need to leverage more private investments in Research and Development and Innovation is one of the key actions of the Digital Agenda for Europe and of the Innovation Union fl agship. With the new EU fi nancial instruments being put in place by 2014, we are keen to encourage more business angel and venture capital investments into innovations in the ICT sectors.

ACCESS-ICT, representing a voice for the European ICT investor community, has formulated a number of recommendations for possible actions that could be taken by the European Commission:

Awareness raising and capacity building for investment• Increasing capacity building of research projects and SMEs to strategically plan for investment

and increase investment readiness for ICT research teams

• Raise awareness Europe-wide concerning the role of angel and venture capital investors.

Streamlining the road to market and contact with investors• Involving investors in selection panels for R&D projects

• Ensuring that proposals include more focus on commercialization and investment potential

Leverage private sector involvement in the marketStimulate the growth of more early stage equity investments in ICT SMEs through new business angel-led co-investment funds including cross border to leverage both angel fi nance and business building skills.

Building an entrepreneurial and fi nancing ecosystemThe EU can help facilitate, where appropriate, the collaboration between credit, equity and R&D support instruments across Europe - and lower the barriers to entrepreneurship and business growth across the Member States (regulatory environment; taxation; government procurement etc).

ResourcesRead policy recommendations proposed by EBAN: http://tiny.cc/ict-fm-policy

Read the Green paper: http://ec.europa.eu/research/csfri/pdf/com_2011_0048_csf_green_paper_en.pdf


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http://ec.europa.eu/research/csfri/pdf/com_2011_0048_csf_green_paper_en.pdf

http://tiny.cc/ict-fm-policy

Introduction

This toolkit is targeted at R&D Innovations or SMEs in the ICT sector that have participated in the European Commission Framework Programmes (under relevant ICT strands) who are seeking sources of external funding to commercialise the results of their R&D activities.

Whilst there are different sources of fi nance available, this toolkit is especially focusing on equity capital for early stage ICT businesses that have completed their main R&D phase, who may have accessed EU Framework funding, proved their concept and who may now be seeking to grow their business.

The aim of this toolkit is to provide information and advice on how to become investment ready and notably, how to make your business proposition attractive to different types of early stage investors across Europe.

The toolkit will guide you through the main steps that you will need to take in order to become investment ready.

It reviews the specifi c challenges and opportunities that you face as an early stage ICT business, including advice and information from investors and industry experts.

You will also fi nd links to a large number of relevant resources and tools.

The toolkit draws upon the good practice and experience of ACCESS-ICT in collaboration with the other partners in the ICT Finance Marketplace project, namely VENTUREGATE and YMIR.

It also draws on the results of a mapping exercise leb by ACCESS-ICT in 2010 under the ICT Finance Marketplace partnership across 21 European countries, which examined the needs of SMEs engaged in the EU R&D framework programmes and gained the views of investors engaged in ICT investment across Europe.

Additional information, resources and tools can be accessed at:http://tiny.cc/ict-fm-toolkit

Look out for a specifi c link given at the end of each chapter of thistoolkit to enable you to easily access these resources and to getmore detail on a topic.

This toolkit will signifi cantly improve your chances of accessing relevant

sources of fi nance.

I t d ti

Thy

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http://tiny.cc/ict-fm-toolkit

Glossary

Seed - Financing provided to research, assess and develop an initial concept before a business has reached start-up phase.

Start-up - Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially.

Other early stage - Financing to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They will not yet generate a profi t.

Expansion - Financing provided for the growth and expansion of an operating company, which may or may not be breaking even or trading profi tably. Capital may be used to fi nance increased production capacity, market or product development, and/or to provide additional working capital.

Venture capital - Provision of equity for generally young, unquoted companies with high growth potential and high commercial uncertainty – ranges from seed to late stage investment with key feature of being “hands-on” involvement by the fi nance provider.

Equity - Ownership interest in a company or corporation that is represented by the shares of common of preferred stock held by the investors.

Equity stake - An equity ownership position in the company that is provided to a funding source, usually lenders or other investors, as compensation for providing management consulting, fi nancing, or miscellaneous services.

Mezzanine - Finance used, mainly in larger deals in profi table companies, which combines a small amount of equity with loans secured, where possible, on the company’s assets. Often used as expansion capital.

Business angel (BA) - A business angel is as a private individual who invests part of his personal assets in a start-up and also shares his personal business management experience with the entrepreneur.

Business angels network (BAN) or angel portal - An organisation whose aim is to facilitate the matching of entrepreneurs (looking for venture capital) with business angels. BANs tend to remain neutral and generally refrain from formally evaluating business plans or angels. BANs make a market place for matching services.

Investment readiness - A privileged moment in time when entrepreneurs are ready to meet and negotiate with business angels, as they understand what the prerequisites of the involvement of the business angel in a company are. (Also applies to other types of investors when the entrepreneur knows what is expected from the different types of fi nancing bodies.

Exit route - The ways in which business angels sell their stake in an investee business. Possible exit routes include management buyouts, sale of stock to another business angel or a formal venture capital fi rm and–in few cases–listing on the stock market.

SOURCE: http://www.eban.org/interactive/share-a-document/doc_download/58-ebantookkit-2009


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http://www.eban.org/interactive/share-a-document/doc_download/58-ebantookkit-2009

Prototype to MarketNow you are reaching the stage of wanting to commercialise the results of your Researchand Development (R&D). You need to defi ne your deployment and rollout plans for getting your technology to market through discussions with your business partners (if you have any).You will need to clearly defi ne the preferred outcome or use of your technology and then focus on the aspect which offers the greatest opportunity for commercial development.

Turning Ideas into Reality

Purposes of PrototypingIncremental vs. Radical Innovation Projects

1. Incremental innovation projects: The purpose of a prototype is to iron out wrinkles near the end of the design phase.

2. Radical innovation projects: A prototype is a source of inspiration and accidental discoveries through experimentation, a mechanism for teaching the market, both internal and external, about the new technology/product and selling your ideas to others, and an instrument for learning from the markets how valuable that technology/product is in that application arena.

SOURCE: www.1000ventures.com

“Whether the prototype is a model in cardboard and string or a software

application consisting of a few skeleton screens with nothing behind them,

it presents a framework for refi nement and extension of the idea.”

PAUL SLOANE, www.1000ventures.com

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Five Ways to get Fast Feedback

1. Show your prototype to potential buyers

Show a prototype of your product or service and show it to as many people as possible, especially to potential buyers. This will give you fast feedback that can be very helpful to you.

In order to gauge initial interest and to make early improvements where necessary.

2. Determine the Correct Prices

Second is to get accurate prices and delivery dates from your suppliers. If you’re going to show the prototype or sample, if a person says how much is it, or how long will it take to get it, be sure that you have the answers.

3. Ask a Buyer

Number three is to get a buyer’s personal opinion. In other words, go to somebody who you will want to buy the product or service and get their personal opinion. Say, would you buy this? And at what price could you sell it? And always call on the individual who makes the buying decisions. Always call on the person who can sign the cheque.

4. Compare Your Products with Others

Number four, look at all of the other competing products or services on the market and be very clear why someone would buy from you rather than continuing to buy from someone else. This can be the most important question you ask and answer.

And be sure to ask this question, “Why would an investor invest in you instead of someone else?”.

5. Take it to a Trade Show

A fi fth way to test market a product or service is take it to a trade show. There are tens of thousands of trade shows per annum all over Europe. Sophisticated buyers go to trade shows and they will tell you rapidly whether or not you have a winner.

SOURCE: http://www.1000ventures.com/products/bec_mc_customers_winning.html


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http://www.1000ventures.com/products/bec_mc_customers_winning.html

Keys to Successful Market Learning:

Defy TraditionDon’t expect much from traditional market research. It tells you what exists, not what could be or should be

Probe and learnExperiment, pursue opportunities with early prototypes,get into the game quickly, learn and adapt

Train team membersTraditional market research people are not trained to operate in the radical innovation environment- so better not to outsource

Maximise rapid learningFocus on those that stand to benefi t the most from the innovation and place high values on it

Test multiple applications

Dead ends are likely, so test multiple applications simultaneously to hit the real opportunity quickly

Select customer alliesSelect early customer allies who have powerful reasonsfor exploring with you

Be prepared for surprisesDon’t allow yourself to think that you’ve totally fi gured it out and be ready to end up with a different product

SOURCE: adapted from “Radical Innovation”, Harvard Business School

The 7 Tests of an Entrepreneurial OpportunityIt is essential that you consider the following questions regarding the commercial potential of your technology.

1. Does the opportunity match my experience, skills and interests?

You have completed your R&D and have produced an innovative ICT technology.

It’s important to be clear therefore on why the opportunity is ‘yours’

- What is it that makes me uniquely well placed to exploit this opportunity?

- Do I have a clear vision as to how I can realise the opportunity?

- Do I have the right team around me to help me to pursue this venture

2. Can I recruit and lead the team needed to exploit the opportunity?

- High potential ventures require a strong lead entrepreneur, plus a fi rst class management team

Even where there’s a good fi t between you and the opportunity there will be gaps: knowledge, skills, contacts

Prototype to Market

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The ability to recruit and lead a balanced, complete team is therefore critical

- Do I have the right network of contacts, for now and the future?

- Can I ‘sell’ the idea and my vision of the opportunity to others?

- Have I demonstrated my ability to lead others?

- Why would people want to work with me?

Strong entrepreneurial teams are characterised by:

- Proven, relevant experience in the industry, market or technology

- Track record in achieving results, particularly P&L (Profi t and Loss)

- Diversity of personal qualities, styles and perspectives

- Completeness and balance in terms of skills and expertise

- Mutual trust, commitment and ability to manage confl ict

The team qualities that an investor looks for are...

- The effectiveness of the group’s decision making

- The ability of the team to lead the organisation

- Previous profi table track record

- Previous success in managing business related confl icts

- Trust within the team

3. Do the resource needs of the opportunity reduce the chances of success?

- What do I need apart from people: space, capital equipment, facilities, materials, etc?

- What is the timing and phasing of resource build-up?

- Can I use other people’s resources?

- How frugal can I be in assembling the resources?

4. Is the timing of the opportunity right?

Think of opportunity time in three dimensions:-

1. Personal time

2. Industry or market time

3. Investor time

It is essential that you understand fully the temporal dimensions of your opportunity.

5. Is the opportunity scalable (and saleable)?

It is important to be clear on the following from the outset:

- How big could the business become?

- How will you leverage the business?

- Can you achieve scale without proportionately adding to overhead?

- What makes this a potentially BIG business?


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Address the question of exit at the outset:

The existence of demonstrable exit avenues is a key determinant of the attractivenessof an opportunity.

- How are you going to create value in your business?

- Who else will recognise the value that you have created?

- How might you realise this value: licensing, trade sale, IPO (Initial Public Offering)?

- What valuations are being achieved by comparable businesses exiting via different routes?

� For more on Exits see p81.

6. Does the opportunity offer good margin potential?

Don’t underestimate the importance of your gross margin - and its sustainability

- Good gross margins reduce the time to break even

- Gross margin provides a buffer against early stage shocks and mistakes

- Gross margins usually erode as competition develops - the issue of sustainability is therefore key

So you need to be clear about...

- Prevailing levels of gross margin in your target market

- The gross margin that you can achieve

- The key determinants of your target margin

- The likely evolution of competition and its impact on margin

- The robustness and durability of the margin

7. Am I developing an opportunity or simply an idea?

Consider the following essential criteria...

- Timeliness

- Fit with personal experience and expertise

- Tangible value proposition that creates real customer benefi t

- A way of creating customer value that is appealing to many customers

Experience, skills and other resources that can be brought to bear. So you need to understand fully.

- Who will buy?

- Why will they buy?

- How many will they buy?

- Why will they continue to buy over time?

- Why will they buy from you rather than someone else?

- What value are you really delivering to the customer?

With a gross margin of 75% by how much do you need to increase sales to offset a v1 cost increase – and at 50% or 25%?

Prototype to Market

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DO’S and DON’T of a Successful Innovator

EXPERT ADVICE:When does an innovation become a product?

NELSON GRAY,serial angel investor and coach/mentor to numerous companies in the fi eld of investment readiness, advocates the following:

• The product solves a real problem in a real market

• The market is willing to pay enough to generate good margins

• The concept is well developed

• It is an enabling or platform technology

• There is strong intellectual property in place or likely

JERRY ENNIS,VC fund manager, highly successful serial multinational ICT entrepreneur and COO of Flirtomatic

Planning your route to market

“The key thing to assess is whether there is a real addressable market opportunity for what you are offering.

So many start-up or small companies in the ICT sector set out thinking that they could sell their innovation to a large company when they are planning their route to market. This is totally unrealistic, as those companies will always want to buy from larger well-established companies. Not a new unknown small company despite how good the idea is.

Instead they need to fi rst fi nd ways of giving life to the product in the outside world. You’ve got to do a lot of work in identifying those very few people who will be the early adopters of your product- to introduce them to it.

Early stage ICT entrepreneurs need to work out how their product fi ts into the market that they have identifi ed. So many make the mistake of focusing too much on what the product is and not what the commercial realism is”.

For more information, resources and tools on getting your prototype to market go to:http://tiny.cc/ict-fm-toolkit

DOs - Analyze the opportunities

- Go out to look, to ask, to listen

- Keep it simple, keep it focused

- Start small – try to do one specifi c thing

- Think big – aim at market leadership

DON’Ts - Don’t try to be too clever

- Don’t diversify, don’t splinter, don’t try to do too many things at once

- Don’t undershoot, or you will simply create an opportunity for competition

- Don’t try to innovate for the futureSOURCE: Managing for Results by Peter Drucker


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Business Plans

IntroductionBusiness Plans are a key tool in helping you to raise investment fi nance.

In seeking to commercialise the results of your ICT R&D and in approaching equity investment, you will need to have an effective and compelling business plan. The following information will help you to put together the right ingredients for your business plan in a way which is both informative and appealing to potential investors.

Even if you already have a business plan you may fi nd the following useful in reviewing it to ensure that this offers a clear investment proposal.

A business plan is the principal element used by a potential investor to evaluate the prospects of your company. It is the fi rst point of contact that you will usually have with the investors- hence it is vital to get right!

Your business plan is also a vital marketing tool for your business. Therefore you need to use it to engage the reader (i.e. the investor), by making it exciting, colourful and interesting. You also need to show how yours is a much better proposition than the hundreds of other business plans that investors are sent. Don’t make it boring!

It must be written and understood by you (rather than getting consultants to write it for you). You will be expected to know the contents of your business plan inside and out when you are faced with investors’ questions as part of the due diligence process . Although it is always helpful to get someone else who is not close to the business to review it for you.

B i Pl

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Writing your business plan

Writing your business plan fulfi ls two main functions:

ONE - INTERNAL: It forces the management team of a company to set their objectives for their business. You will have to carefully consider how you will develop your business, what it is that your technology offers in terms of a product or service and how your team will work together to achieve this (as discussed in the previous section). In order to put together a good business plan it is necessary for the management team to have a very clear vision of their planned activities, business model, strategic direction and plan for market rollout.

• Focus

• Alignment

• Commitment

TWO - EXTERNAL: The business plan acts as your marketing tool and point of contact with all of the investors that you approach. Therefore it is vital that your business plan expresses the essence of your business that is new, different or unique compared to your competitors. You need to stimulate the interest among the investors and convince them that your business merits serious attention.

The business plan should be short and concise- it should be 20-40 pages long in total (plus appendices). However, make sure that it is long enough to do justice to your business while being concise enough to keep the reader interested. If an investor is interested they will ask for more information.

• Get funding

• Set expectations

• Alliances/partnerships/mergers

Simple Logical Flow for thinking out your Business Plan


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Founders’ values, goals, skills, interests and assets

Entrepreneurial Marketing:

Target customersProduct Defi nitionValue PropositionsBusiness Model

Sales:ProspectsCustomersCustomizeFeedback

New Opportunities

Engineering:

Build itIP

FeedbackNew Opportunities

Finance:Measure and TrackResource Allocation

ProductivityPlan & Analysis

Feedback

These are the basic questions that it will need to answer in your business plan:

1. What are you are selling?

2. Who is the team behind it?

3. What is the market opportunity?

4. Who will buy it?

5. Who are your competitors and why is your product/service better (Unique Selling Point)?

6. How much will it cost and what will it sell for?

7. How will it be promoted and distributed? Can you illustrate a strong potential for growth?

8. What are the risks and threats? (Be honest)

9. If you are developing a product, is it patented/protected?

10. How much funding do you need to raise and how would you like to use the funds?

11. What are your projections and milestones for the business?

12. How and when will the investors get their money back? (Exit route)

13. Financials

Main structure of the Business Plan:

• Executive summary

• Management Team and Organisation

• Product or service

• The Market and Competition

• Operational details

• Implementation schedule

• Financial Planning

• Financing

• Exit plan

• Supporting Documents- appendices

N.B. Executive Summary will be written last!

Business Plans

19

1. Management Team and Organisation

Where is your company now?

At the outset investors need to know a bit about your company.

The Management Team = the fi rst question for investors!!

Who are the people behind the business idea and running the business/project?

Describe the members of your team

- Founders- are the research team/Academics still involved ? Or have you brought in new team members to set up and run the business

- Employees- full and part-time

- Consultants /Outsourcers

- Advisory Board

- Key supporters

You must describe your team’s...

- Directly relevant experience and skills - technical and business

- Accomplishments and track record

- Range, depth and quality of relevant contacts: customers, suppliers, key personnel, etc.

- Experience of working together

- Skills and Commitment

- Other key recruits still to be found - (such as CEO, CTO, CFO; Marking Director etc)

What will investors look for in a management team?

• Experience and competence

• Ability to listen and to take on board advice

• Ethics and transparency

• Understanding of the market

• Vision and character of the founder

• Commitment in time and/or money

• Leadership inside the team

• Ambition for the project

Your Organisational Model:

You need to state whether you have set up your business

• As a spin-out or license model?

• Has your business been incorporated or in some other legal framework? -give details of this


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Evaluating Team Section

BAD

- Individual

- Not willing to acknowledge what they don’t know or have

- All technical

- Lack of marketing, sale or general management expertise

- Paying themselves too much

GOOD

- Team

- Passionate about the new venture’s mission and goals

- Clear about personal goals- with alignment

- Experience

- Track records of success

- Right match for stage of company

- Scalable

COMMON MISTAKES MADE:

DO NOT cover up relevant information

The due diligence process will quickly uncover this. Do not conceal gaps in the portfolio of skills and expertise and show that you’ve assembled and assigned people to roles for which they do have adequate experience or skills

2. What is your technology/product/service?

Focus on your fi rst technology, product or service

• Begin with a succinct description of the technology, product or service.

• Describe in simple terms what it is and what it does

• What is your Intellectual Property (IP) who owns it and what protections do you have (see section on IP for more detail of this on page X ) ?

• What is the state of your technology? Is there still technology risk?

• What are the technical benefi ts over alternatives?

• What is the source of your competitive advantage and how do you intend to continue to develop and protect it?

• How do you intend to achieve sustainable competitive advantage over the current and future suppliers?

SOURCE: ‘Business Plans that Raise Money and Generate Success’, Financing for Growth Workshop, The Saïd Business School, Oxford, 21-22nd March 2011

Business Plans

21

Then outline...

- How the proposition is rooted in a real market opportunity

- The specifi c benefi ts and value that a customer will derive from using your product- why will a customer want to buy or use it?

- The way in which these benefi ts can be demonstrated and measured

- Why the customer will purchase on an ongoing basis

- The distinctive advantages of your product compared to other comparables?

- Barriers to entry

Once you have succeeded with this product, what could it lead you onto next?

AVOID…

- Giving excessive product/technical detail – this can follow later

- Not describing the product clearly enough for someone who is not knowledgeable about the sector

- Assuming customer benefi ts are obvious- they may only be so to you.

- Failing to assess the sustainability of your market/product advantage - how easily might others replicate it?

- Not demonstrating how your skills and those of the team enable you to exploitthe opportunity

So very early on you need to convey a clear picture...

This is the market opportunity

This is my product

These are the key benefi ts: the value proposition

This is the evidence that substantiates the value proposition

And these are the people who’ll make it happen - and why

SOURCE: Michael Anderson, Creative Bizplan Toolbox, Nov 2006


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3. Market and Competition

What is your market?

You need to provide the reader with a clear picture of your market...

• Focus on your fi rst target market

• Size the overall market

• Explain rationale for target market segment

• Describe key characteristics of target customers/market

• Richly describe your target customer base/market in all dimensions

• Market segmentation and niches

• Actual and projected growth rates in target market

• Geographic breadth and variation

• Market context - relevant environmental, regulatory, technological, demographic/social changes

• The ease or diffi culty of gaining market entry

• Name the fi rst 10 target customers

• Name the ones that you have specifi cally spoken to who have this pain/opportunity

• Key buying factors

• The purchasing process: who buys and over what time period?

• What is the compelling factor/event that will make them buy?

• Who are the other entrenched players?

• The margin opportunity - current and future

• If successful, what would be your next logical market?

Market Section of Business Plan

BAD

- Lead with technology

- Addressing many markets

- No solid economic value proposition

- No competition

OK TO GOOD

- Understand Customers

- List Customers

- Top down and bottom up sizing of market including growth rates

- Reasonable addressable market and market penetration assumptions

GREAT

- Spoke to lots of specifi c customers - includes testimonials and listed contact info

- Identifi ed champion(s) and committed user advisory board

- Compelling and proven value proposition validated

- Demonstrated that target customers are well funded and have compelling reason to buy

- Target customer is proven to be well connected community with strong WOM (Word of Mouth referrals)

- Deeply understand existing suppliers and vulnerabilities

SOURCE: ‘Business Plans that Raise Money and Generate Success’, Financing for Growth Workshop,The Saïd Business School, Oxford, 21-22nd March 201

Business Plans

23

Where will you compete in the market?

You need to carry out some basic competitor analysis to tell you.

What is your competition?

- Basis of competition - price, differentiation, range, discount structure, etc.

- Nature and number of available substitutes

Who you will be competing against?

- Number

- Size and market share

- Technology and likely product roadmap

- Identity, size, fi nancial results, etc.

- Product range and performance

- Market reputation - quality, service, image

- Market positioning - price, support, selling methods

- Who has an analogous business model to yours?

What is your competitive advantage over the alternatives?

How you’ll compete…

- How are you choosing to compete - product, product innovation or customer intimacy?

- Short term and longer term

- Product positioning in the market: performance, image, quality, etc

- Projection on who will win in the scenarios and potential alliances that could be formed

- Pricing and discount structure

- Product support and service

- Customer retention strategy

- Scope for follow-on sales

Describe emerging or potential competitors

- What new products do you anticipate coming on the market and how will you hold a sustainable competitive advantage over them?

- Stage and backing

- Company and product position

- Technology and likely roadmap


24

Evaluating Competition Section

BAD

- No competition

- Emotional hatred of a competitor

- Naïve perception of competition

- All focus on technology

- Lack of understanding of strengths and weaknesses

- Lack of scenario planning

GOOD

- Deep understanding of competitors’ business strategies and how they compete

- Deep understanding of competitors’ vulnerabilities

- Precise focus on high infl uence, fast growing key baseline customers which enable you to capitalise on competitors’ weaknesses

- Strategies to utilise weak competitors

- Multi-stage view of how market will evolve

- Flexibility to move quickly as new scenarios unfold in the future

- Competitive streak evident, but remains rational in approach and attitude

Route to Market

How will you reach the market?

• Business Model

• Sales model

• Marketing lead generation plan

• Corporate partnering

Marketing and Promotion

How will you make your product known and create an interest?

You need to cover the following 3 Key aspects:

• Promoting: Getting an interest

• Selling: Converting interest into sales

• Distribution: Delivering to the customer

SOURCE: ‘Business Plans that Raise Money and Generate Success’, Financing for Growth Workshop,The Saïd Business School, Oxford, 21-22nd March 2011

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25

4. Operations - Product or Service

In this section you should set out:

• What’s involved in producing the product or delivering the service?

• Resources required to do this: personnel, labour, materials, facilities, etc.

• Timetable

• Capital expenditure - amount and phasing

• Which activities will be controlled in-house (e.g. design or assembly) and which you’ll subcontract

• What it will take to gear up production post start-up

• Status of any agreements with suppliers

In describing productions and operations be careful NOT TO:

- Overburden the reader with excessive detail

- Assume the reader’s technological knowledge

- Use technical terms without explanation

- Imagine that the reader fi nds the operational process as fascinating as you do

- Ignore the risks associated with operations, particularly as volumes build up

Evaluating Operations Section

BAD

- Not credible

- No Dates

- Unclear milestones

- Lack of understanding of sales model to make money

- Lack of fl exibility relative to delays in market adoption or product development

- Too long

GREAT

- Good detail

- Understand the need to develop and have contingency plans - optimistic yet realistic

- Creating demand for new product through indirect channel

- Not too much marketing expense before product is proven

- Understand what you don’t have yet



26

5. Financial Projections

Setting out the Financials in your Business Plan: You must have clear and realistic fi nancial forecasts, perhaps with a ‘Target’ version (assuming all goes well) and a ‘Survival’ version (if things don’t quite go to plan). If fi nancial modelling is not your strength, it’s best to seek external advice.

This part of the plan should focus on…

- Core assumptions behind the fi nancial model

- Link between assumptions and your market data

- Key fi nancial indicators

- Estimated fi nancial projections and the rationale for it

- The potential downside (what happens if everything goes wrong) and upside

- Valuation of your company

You will need to include:

• A Profi t and Loss (P&L) Statement

• Modifi ed Cash Flow Statement

• Top Line Growth - Explain total revenue in more detail

• Monthly Burn rate

• Gross Margin and Operation Margin Percentages

• Show the following costs as a percentage of sales: Marketing & Sales, R&D,General and Administrative costs

• Bookings

• Headcount

• Cash in bank

• Valuation

TOP TIPS

• Get the top line right with assumptions clear (units, price, etc.) Separate revenue streams ( one time, recurring, product, service, government funding)

• Get costs of goods sold right with assumptions clear - include Gross Margin

• While doing the P & L is fi ne, Cash Flow is much more important

• Balance sheet is good to have but Cash Position is most important by far and that should be put in summary 5 year Cash Flow Chart

• Make different sources of funding clear

Business Plans

27

Common mistakes:

- Too many spreadsheets

- Masses of indigestible fi nancial data

- Endless sensitivity analyses

- Disproportionate time devoted to the fi nancials

Evaluating the Financial Section

“When you can measure what you are speaking about, and express it in

numbers, you know something about it. When you cannot measure it…

your knowledge is meager and unsatisfactory”.

LORD KELVIN, Mathematical Physicist and Engineer (1824-1907)


BAD

• Showing lack of credibility- e.g. missing cash consumed in working capital when growing

• Too much detail

• Low growth

• Low gross margin

• High spending on General and Administration costs

GOOD

• Credible and justifi able high top line growth

• Credible and justifi able high margin

• Good development expense ratio early on

• Marketing and Sales expense coming on after offering validate

• Flexibility to survive delays in development or market adoption - and presence to have this built in

• Ability to understand and adjust assumptions - sensitivity analysis in other areas as well

� For more on Financials see p34.


28

6. Funding

How much money do you need?

You will need to continue from your fi nancials section with a well researched budget to demonstrate how you will be using the funding that you have acquired already or pledged yourself and how you intend to use the investment sought.

This section needs to be detailed and specifi c.

Do NOT just allocate the money to broad headers such as ‘Marketing’.

Remember that you have several funding options ahead of you:

- Bootstrapping (credit cards )

- Grants

- Founders, family, friends

- Loans/debt

- Customers

- Equity investment

For more information on other sources of funding go to page

If you are going to be contributing some money yourself (investors prefer this as it shows your commitment) or from one of the above sources, you need to include this in your budget.

For an investor the key issues are:

- How much money is needed

- What it’s needed for

- When and in what stages it’s required

- Key milestones against which funds will be drawn down

- The form in which the fi nance is required (debt, equity, a mix of both)

7. Exit Strategy

When and how could the investor get his/her money back?

What range of returns can be expected if the plan is successfully executed?

What are the comparables?

What are the options?

• • IPO

• • Acquired

•• Next round

•• Cash fl ow is strong

Business Plans

29

Venture capitalists want IPO or Sale of Company

Who are the possible acquirers/ what is the plan to keep those options alive and lines of communication open?

Why uniquely would they buy your venture?

You need to outline…

- The projected timetable for the business to get underway

- Target time to break even, generate positive cash and profi t

- Most likely exit route

- Valuations achieved by comparable businesses

Evaluating Exit Strategy Section

BAD

• No Exit strategy proposed

• Lack of credibility

• No estimates of return

• Too long term

• Too few options

• Only built to be sold and not a sustainable business

GOOD

• Demonstrates understanding of funders needs/wants

• Includes thoughtful analysis

• Quantifi ed

• Business grows to be cash fl ow positive and sustainable

• Clear plan for differentiation and fi lls gap in potential buyer’s strategy

• Realistic numbers with examples

• If IPO, need to have enough size



8. Risks

Risk is inherent in starting a business.

Your aim is to identify and minimize all potential risks....

- List all risks relevant to key aspects of the business: product/service, market, technology, management team

- Identify those risks that are more/less critical

- Work out precisely what you can do to mitigate key risks


30

Businesses rarely spend as much or as fast as you predicted.

9. The Executive Summary

Last of all - The First Page

Your summary needs to cover all the key issues. It is useful to have a 250-word, one-page and a three-page version to cater to the specifi c needs of different investors.

A good Executive Summary...

- Captures the reader’s interest

- Provides a clear picture of your idea and what you’re trying to do

- Highlights the most important features of your business proposition

- Establishes the management team’s credentials at the outset

- Summarises the fi nancial opportunity and key projections

- Conveys your VISION

- Persuades the reader to keep reading!

TOP TIPSfrom the experts on writing your Business Plan

FRANCOIS TISON,360° Capital Partners, a Venture Capital fi rm investing in Innovation at full scale, in Europe and more particularly in France and Italy.

“ Business plans are usually a big source of anxiety. The plan should be a refl ection of an execution plan detailing expenses, time, business model, correctly sizing the cash needed and the various milestones. A clear picture of how you will use the money and what you will use it for and when. Give confi dence to the VC that you know where you’re going. Don’t have infl ated salaries. Show how big the opportunity can be - show the economics.”

• The plan should be a refl ection of an execution plan detailing expenses, time, business model, correctly size the cash needed and the various milestones.

• A clear picture of how you will use the money and what you will use it for and when.Give confi dence to the VC that you know where you’re going.

• Don’t have infl ated salaries.

• Show how big the opportunity can be - show the economics.

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31

JEAN MARC BALLY,Aster Capital, Leading VC fund investing in cross stage cleantech companies.

“ PowerPoint’s are good. I’m not so keen on word documents. We like numbers so that we can judge whether these are credible. Tell me what you want to do? Customer pain? Market trends? What trend to you want to catch? Adjectives and superlatives are not good. Numbers must be used to quantify size of the market etc.”

MICHAEL BLAKEY,experienced angel investor and Director of Avonmore Developments Ltd

“ Within the business plans I’m looking for: The ’pain’, I’m looking for the market size, I’m looking for exactly what they’re spending their cash on... What problem are they solving? Is the product a must have or nice to have?”

“What is the management background? - Do they have the relevant background in this sector?

Do they actually understand the market that they are entering into? We need to know that other companies have been acquisitive in that sector to be sure that your company is going to make money.

When they give me the numbers - I don’t want to hear that they are entering into a market worth v3 billion when they are actually only targeting a very small part of that. If it’s actually a v100 million market - that’s big enough in itself but it makes me question whether they actually know what they’re going for. The cash fl ow is the important one.. Sales targets should be realistic. But they’ve got to understand that it’s going to be ripped to shreds by the investor during due diligence. As no angel investor ever believes any of the numbers that the entrepreneurs put in their business plan

In terms of the investment - How much money do you need to raise? How are you going to use the money? Do you understand how long you expect that money to last for? There’s got to be a reasonable timescale for fundraising.

How is the investor going to make money? EXIT!! This is so important and therefore should not just be a small paragraph in the business plan or an afterthought. Make it realistic- by saying that the IPO (Initial Public Offering) will be for v100m this is very unlikely. Better to think and plan carefully for the possible exit, being more realistic - such as planning to be bought out by a larger company after several funding rounds.

You’ve also got to understand when writing your business plans is that it will have to be constantly changed and updated. So there’s no point wasting your time writing overly detailed plans.

Simple is better. It can be done in 10 pages. Getting the point across about what you’re going to do and how you’re going to do it. Don’t go into too much detail - That should be saved for the due diligence process.”


32

What not to say in your business plan?

• • ‘This is a wonderful and exciting opportunity.’ They all are. Just give the facts and let people make up their own minds.

• • ‘There is no competition.’ If there really isn’t you have to persuade the investors that there is a suffi cient market.

• • ‘Can you afford not to invest?’ On most occasions, investors feel that they can.

• • ‘The product will sell itself.’

• • ‘Our target market is X million’ – We only need 1% of an X million market. When on closer scrutiny it is much smaller.

• • ‘We will achieve a return of v Xm for the investor after 5 years.’ You cannot give guarantees of returns.

For further resources go to ICT Finance MarketPlace website:http://tiny.cc/ict-fm-toolkit

Customer ‘pain’ = What is the challenge that your productor service will address

Business Plans

33


Financials

Build a Financial ModelBuilding out a fi nancial model gives you the chance to really think about the details of how you are going to make money out of the ICT technology or product, looking at issues such as budgeting, costs, revenues, etc. It will also help set expectations, brainstorm new product ideas, and set milestones and goals.

You’re not going to show investors your fi nancial model, but it serves as the backdrop for making your fi nancial plan and presenting this clearly.

Set a Revenue TargetEven if you are at a pre-revneue stage its important to develop a revenue target and identify when you think you will create revenues. The timescale has to be realistic and you can only estimate so far ahead since it is basically a “black hole”, except that you hope revenues will ultimately skyrocket!

Don’t tell them it’s extremely conservative. Don’t tell them you only need 1% of the market.

Explain Your AssumptionsYou’ve set your revenue targets. Now it’s time to explain how you’re going to get there. And this is really the key. It’s at this point where you’re going to justify your revenue target and your business model.

Try breaking down your revenue targets into smaller and smaller chunks. Ask yourself questions like:

• To hit our revenue target, how many clients do we need?

• To get that many clients, how many prospects will we have to reach?

• What will our conversion rate be from the free beta to paying system?

• What will our retention rate be for customers from year to year?

Fi i l


34

The questions you ask will depend on your product/service and business model, but the goal is to get deeper and deeper into the details, as if you’re peeling an onion. The inside of the onion is really the heart of things and it reveals a lot.

You don’t have to present all of these numbers ad infi nitum to the venture capitalists, but going through this exercise of taking a single revenue number and breaking it down will help.

Show that You’re Thinking About The Right ThingsVenture capitalists don’t expect you to have all the answers. They know you don’t. But they do want to see that you’re thinking about a few critical things, namely: Business Model, Sales and Marketing.

Going through the steps above will help you demonstrate to VCs that you are thinking about these things. If you have a solid assumption for your conversion rate from free beta to paying customer, and you know how many paying customers you need, you know how many beta customers you need. Once you know how many beta customers you need, you can start to build a plan for getting them. Maybe that involves direct sales; contacting targeted customers to get them signed-up. If that’s the case, you can fi gure out what your conversion rate will be on sales calls and fi gure out how many people you have to call to sign up the right number of beta customers to convert to paying customers to hit your revenue targets. Phew.

Lots of technology companies have a “build it and they will come” approach. It can work and it’s still working today. But I wouldn’t count on it. And if you go to VCs with that model they have much less information and foundation on which to judge your pitch.

Remember: Presenting fi nancials is hard. If you can bring in more experienced entrepreneurs and advisors to help you- then do it. First-time entrepreneurs will have little or no experience with fi nancial modeling or even tackling tough questions on how they’re going to market and sell their product. But the more time and effort that you put into tackling the fi nancials at the outset- the better your pitch (and business) will be.

REFERENCES: Ben Yoskovitz, http://www.instigatorblog.com/presenting-fi nancials-to-venture-capitalists/2007/05/16/

Financials

35

ValuationThis is one of the most important aspects of the investment process.

How can I get the right valuation for my business proposition?

• Know your sector: Research the public and private companies in your sector that compete with you and are similar to you. Understand their valuations, what drives their performance and price, how both the IPO and trade sale markets value these companies;

• Know your metrics: from public company fi lings, industry reports, press releases of competing companies and industry associations, understand how companies like yours are measured. What metrics are used to measure and signal performance? What are some industry averages and ranges? How does your company compare? If the metrics currently used don’t really apply to your company, which ones are you suggesting that will signal performance, and why?

• Develop a valuation range: you want to begin to develop a range of valuations, based on both the sector and metric information you’ve evaluated so far. You will also need to educate yourself about what the “going rate” valuations are in your market. Talk with other entrepreneurs and advisors about current valuations, and keep up with IPO and acquisition valuations in your local market. You should decide where within that range you would feel like you got a good valuation. This helps you have a number in your head when you meet with the investor.

• Build your case: Conduct your own valuation analysis and be ready to present a well researched and factual argument about your company valuation. Incorporate specifi c comparable valuations and performance metrics into your case, as well as company-specifi c factors that can justify a higher valuation, including:

- A strong and experienced management team (most important)

- The existence of other investors who are interested in / bidding on the deal

- Being in a “hot” sector or market

- Strong IPO or trade sale markets with high valuations

- Having paying customers

- A strong sale pipeline to support revenue and growth projections

- Intellectual property ownership or other competitive advantage/barrier to entry

- Value killers are all the opposite.

- Other common value depressors are:

- A hairy deal

- An over-priced earlier round

- Diffi cult early investors and board members.


36

• Negotiate: While the old adage “you get what you negotiate” applies here, there are factors beyond your negotiating skill that will infl uence your ability to obtain higher valuation. There are several factors that can increase your negotiating leverage:

- General interest from more than one investor

- General interest from more than one investor

- General interest from more than one investor (it is hard to emphasis this enough)

- If you are a serial entrepreneur, your credibility is your currency and you will have better negotiating outcomes than a fi rst-time founder

- Raising capital early, before you need it, give you negotiating leverage, since you have the advantage and ability to walk away from a mediocre deal and the time to create other alternatives.

No matter how strong, compelling and airtight your case is, you will ultimately only get a valuation that an investor is willing to pay. In general, equity investing is, and will remain, a buyer’s market. Nonetheless, doing your homework and preparing to argue for the best valuation you can justify will help you avoid you can justify will help you avoid a mis-priced round, impress investors, and contribute to your fi nancing strategy.

For more information, resources and tools on fi nancial management and presenting your fi nancials to investors go to: http://tiny.cc/ict-fm-toolkit

SOURCE: Mulcahy Diane, “Venturing forward – A practical guide to raising equity capital in Ireland”,Oak Tree Press, 2005 , p.38-10.

Financials

37


Fundraising

What are your options for Raising Finance to successfullycommercialise your ICT project?You need to establish which source and type of funding is most appropriate to suit your commercialisation objectives. To do this you need to have a clear understanding of what stage your project has reached, what kind of capital you need and from whom.

As you will see from the chart below, different kinds of fi nance are associated with different stages of the commercialisation process and different levels of risk for the investors. If you have only just completed your R&D phase and proved your concept, you are ready for seed funds or Business Angel fi nance. However, you may also be able to access early stage VC funds.

If you have already fully commercialised the results of your R&D, have gained sales and good traction in the market place, and are now looking to expand your business, then you may be ready to seek more conventional VC funds (including corporate investment).

If you have achieved signifi cant growth in the market and can show real value to share holders then you may even be ready to go to the public stock markets or be acquired by a major corporate!

Ladder of Finance

F d i i

CAPITAL NEEDS

PRE-SEED SEED START-UP EARLY GROWTH SUSTAINED GROWTH

HIGH RISK

LOW RISKSelf, Friends, Family

R&D Grant Funding

BusinessAngels

Co-investment Fundsand early stage VC funds

Venture Capital

Exit IPO/TradeSale etc


38

Stages of Your Business and corresponding sources of fi nance

Stage Defi nitionTypical amounts

Sources of fi nance

R&D

Pre-Proof of Concept

Seed capital

(Pre-start)

You have a great ICT innovation and have carried out the initial research/ reaching the latter phase of your research project

You require fi nance for additional research or to produce a prototype.

Or to carry out an initial demonstrator

You have not yet established the business model

Up to v50,000

• ‘Ideas’ are quite diffi cult to get funded, because so many people have them. Start-ups are marginally easier.

• Attracting fi nance from ‘business angels’ (private investors) is possible, although you will need to have a convincing proposal backed by a strong management team. It helps if you are also putting in some fi nance yourself.

• Further grants and awards may be available, but depend upon your sector, personal circumstances and location.

• Specialist seed funds and incubators with their own funding.

• In certain circumstances, corporate venturing may be appropriate.

• The most likely source of fi nance is from contacts, friends and family. Bank debt is generally not suitable if you are pre-revenue, in most circumstances it will need to be secured against your personal assets.

Post Proof of Concept

Start-up

You have researched the market and established a working prototype or set of processes for the business model

You have not generated any sales yet and need fi nance for working capital e.g. initial marketing, salaries or product development and testing.

Up to v500,000

Fundraising

39

Stages of Your Business and corresponding sources of fi nance

Stage Defi nitionTypical amounts

Sources of fi nance

Early-stage You have completed the product and have generated sales. Finance is required to further develop the business for further marketing and operations.

v500,000 to v1m

• Most of the forms of equity fi nance outlined below couldbe suitable.

• However, remember these people see hundreds of business plans a month and only invest in a handful. For this reason, it is best not to take a scattergun approach, but to do some research to see who is investing the sort of amount you need in your sector.

• Other sources such as bank debt may also be appropriate.

Growth & Expansion

You have an established ICT business which is generating profi ts and needs funding to develop new products or explore new markets.

You are now ready to scale the business both nationally and internationally.

v750k upwards

• This could be further business angel fi nance (syndication) or more conventional VC funds.

• Arguably, it is easier to raise equity fi nance for businesses or management teams with a track record. However, you still need to prove you have a strong proposition with signifi cant profi t potential.

• Most of the sources of fi nance outlined below may be appropriate. With regard to private equity, the key is to fi nd investors who specialisein your sector.


40

Equity Capital - an Overview

Equity Investment can provide invaluable support to enable ICT companies to grow and improve performance. For the purposes of this toolkit, we will be focusing on Business Angel investment and VC Funds (including seed funds and corporate venture investment).

Is Equity Capital Right for you?

When approaching Business Angels or VCs for equity capital it is important to understand that you will be surrendering a signifi cant part of your company’s profi t and ownership to the external investors.

If you are not prepared to do this then you need to seek alternative sources of fi nance.

Before seeking Equity Finance you need to ask yourself the following:

- Are you prepared to give up part of your company’s shares to a private investor?

- Are you suffi ciently ambitious and committed to achieve a high growth business?

- Are you prepared to spend time and resources in seeking investment and in responding to the investment requirements?

- Are you prepared to share strategic decisions about your company with shareholders?

- Are you prepared to exit your business and realise the value for your shareholders?

Equity Investment = the provision of capital by fi nancial investors in return for shares in the business - over the medium and the long

term - top companies with high growth potential. The capital is usually provided after a process of negotiation between the investors and the entrepreneurs with the aim of developing the business, creating value

and returns on the investment.

Fundraising

41

Business Angel InvestmentIn the ladder of fi nance you will see that Business Angel investing can be sought atpost - proof of concept stage and generally after you have received a grant (such EU R&D funding) or used your own fi nance to develop your business.

Some well known businesses that grew thanks to business angel investment include:Amazon, Apple, Google, Starbucks, Facebook, Twitter, Skype and many more!

Who are business angels?

Business angels are high net worth (wealthy) individuals, who are private investors operating either alone or in groups (known as ‘syndicates’ or ‘networks’), who are prepared to make high-risk investments (traditionally between v25,000 and v1m) into start-up and early-stage companies.

They all have various and differing investment criteria and can contribute a lot more by way of support to early stage SMEs than just capital (money)

A defi nition of a Business Angel: Business angels (BAs) are private individuals who invest part of their personal assets in companies (often early stage ones) to become shareholders in the business, but also provide considerable support, share their personal business management expertise and network of contacts with the entrepreneur.

Business Angels...

• Are prepared to invest early – and take a higher risk

• Invest in different sectors

• They are generally more fl exible and reactive than other investors

• Bring “Smart Money” to a business – Risk Capital and Business Building skills

• Bring Investment and Business expertise

• Provide mentoring and coaching to entrepreneurs

• Generally bring useful contacts, potential customers and market links

Some of the benefi ts of having business angels on board a company are:

• They provide capital

• They act as an ambassador for the business thus increasing your credibility

• The provide openings to useful contacts and customers

• They make it easier to raise follow-on funding


42

But in return for the risks that they take by investing in an early stage business, they seek high Capital Returns and an Exit in the medium term.

Intervention by one or more business angels in a company generally takes the form of active involvement as...

• An advisor

• A member of the Board of Directors

• Part of the management team

The Ideal Investor (Nelson Gray 2008)

- Has knowledge of your technology area

- Market expertise

- Good track record

- Good connections with skilled executives

- Connections with future sources of funding

- Can provide auxiliary business services (IP, purchasing, etc)

- “Easy” to work with

How do I fi nd a Business Angel?

Business angels can be found through local, regional, national and cross border business angel networks.

Business Angel Networks (BANs) play a prominent role in matching the demand (entrepreneurs) and supply (business angels) sides of private equity capital. In order to fi nd a suitable business angel the fi rst step for an entrepreneur is to email your business plan or executive summary to the Gatekeeper (or ‘Network Manager’) from the business angel network. Once the relevant Gatekeeper receives your business plan they will assess the suitability of the proposition for angel investment by the members of their network.

Some networks will offer you ‘investment readiness training’ to get you to the point where they feel that you are ready to pitch your business proposition to investors. Others will turn you away and ask you to get back in touch when your business is deemed to be more viable for investment from their angels.

Fundraising

43

If they decide that your business is suitable, then most networks would invite you to present your proposition to the angel network at a ‘pitch presentation’ event. Prior to the event, a good Business Angel Network (BAN) will provide you with advice, support and training with preparing your pitch and how to approach the investors.

Once you have been prepared, you will then normally pitch at a special event where a number of angels from the network will attend to hear the pitch and meet the businesses, before entering into negotiations.

It is important to know that networks can receive up to 1000 business plans per year and generally select only about 50 of these proposals to put before the investors. Fewer than 5% of the projects presented to business angels actually receive investment.

It is a very competitive process reserved for high growth and innovative businesses, as illustrated in the “chances of raising equity” chart below.

Tax Incentives - Eligibility Criteria:

In some countries, Business Angels benefi t from fi scal incentives when investing in early stage unquoted businesses such as in the UK and France and also Portugal. You should have assured that your business is eligible for the specifi c scheme to facilitate investor intervention, although this is not an obligation.

Adapted from Jacueline Fendt 2008

100 DEALS

1-4 INVESTMENTS

Business Plans received

Pre-screening

Screening

Due diligence

Investment


44

Syndication

Often business angels will invest as a group or syndicate. This is especially common when they are investing in very early stage technology businesses so as to share the risk of their investment.

Sometimes the investment level is so high that it renders syndication almost compulsory, as Business Angels are unable fi nance projects in this type of high-level fi nance sectors on an individual basis. It is also a leveraging mechanism for business angels and a way to share network contacts and investment expertise.

What are the benefi ts of syndication?

A grouping of several business angels can:

• Increase the level of fi nancing of a project (usually up to v2m) and provide follow-on fi nance for subsequent rounds

• Dilute the risks for individual investors

• Increase the breadth of experience and support available to the entrepreneurs

• Attract virgin angels to invest alongside experienced angels.

• In some countries syndication allows for eligibility to a fi scal regime equivalent to that of formal risk capital investors which encourages more BAs to invest.

Syndication can also present some disadvantages:

•• More time being spent in fi nalising the deal and in coming to agreements on critical decisions

•• More hassle in closing a deal if one person falls out at the last minute

• Less direct involvement in the investment

• Frustration if the syndicate is poorly led.

CAUTION: ON-LINE MATCHINGThere are an increasing number of organisations offering on-line matching services between entrepreneurs and investors. But the majority of these have yet to be fully evaluated as to their effectiveness and they will often charge companies a high fee. They often do not facilitate face to face pitching and do not give much advice and support to the entrepreneur (or the investors) in the preparation for (or during) the investment process. We recommend you do not rely on these platforms and include these as part of an active programme of seeking investment.

Fundraising

45

Venture CapitalVenture capital (VC) investment is targeted at early stage high growth companies - and expects the highest returns for the risk that they take. VC fi rms tend to make larger investments than business angels (generally upwards of v2million and many not less than v5m nowadays). A minority of VC funds will make seed or early-stage investments (often of less than v1 million).

As previously mentioned, many early-stage VC investments are now made on a“co-investment” basis with business angels.

Venture Capital Funds are investment funds that manage money from professional investors seeking private equity in SMEs with strong growth potential.

How does a Venture Capital fi rm operate?

A Venture Capital fi rm will fundraise from both institutional and individual investors with particular expertise or signifi cant assets to donate capital to an investment fund which will then be used to buy shares in companies with high growth potential. This fund is usually agreed to last for a set period (on average 10 years) and will abide by a clear investment strategy - with the overall aim of buying equity stakes in high growth companies.

Venture Capitalists (VCs) have specifi c criteria about the kinds of businesses in which they are prepared to invest. Their investment strategy will defi ne the characteristics of the companies in which they intend to invest including their size, sector, stage of development and geographical location. When the fund managers decide to exit their investment, the capital recovered is then re-apportioned between the investors at exit in accordance with the amount they originally invested.

Even if your project does meet their general criteria, the VC fi rm will still carry out extensive due diligence on the business before deciding whether it is suitable for investment.

�See page 69 for an overview of the due diligence process.

As with business angels, the investors will aim to work with a company to increase its worth and maximise its output in order to realise a capital gain.

Like business angels, a VC will usually take a very active approach to an investment as fund managers will be working on behalf of investors to create greater value in the investee company. Therefore you can expect to require investor consent before taking any key business decisions, as well as being subject to preferential terms in the legal agreements ensuring that the VC receives its projected return at exit.

However, a start-up company will usually have already benefi ted from other sources of fi nance before it can approach professional venture capitalist investors. To be successful in being rewarded VC funds, your business needs to offer the prospect of signifi cant growth and turnover within fi ve to seven years.


46

What differences are there between business angel investmentand Venture Capital Investment?

• Business angels invest their own assets and contribute their managerial skills, whereas venture capitalists invest the funds of others.

• Business angels also invest lower amounts than venture capitalists.

• BAs tend to be involved in the early stages of a business’s lifecycle and their expectations in terms of ROI are more modest.

• Moreover BAs make their decisions of the future growth of a new business while venture capitalists are looking at the past records of already existing companies..

What does a VC fi rm bring to a company

• Long term capital

• Increased visibility with bankers, suppliers and clients

• A partnership, sharing risks and rewards

• An investment fi xed within the framework of a negotiated contract

• The adoption of high performance management standards

• Strategic and operational support along with fi nancial advice in times of crisis

• Assistance with subsequent fi nancing operations

• Alliances thanks to the investor’s network of contacts and portfolio of investments

• A partial or total exit strategy

What do VCs look for in a business proposition

• A balanced and complementary management team that have industry and previous entrepreneurial experience and the ability to grow the company

• The market size and growth potential of the investment can be accurately calculated

• The internal processes of the company demonstrate good or strong potential around strategic and fi nancial planning, corporate governance and reporting.

• A transparent legal structure where personal and professional assets are not entangled

• An agreement on the investor’s exit, with or without the head of the companySOURCE: www.evca.eu

Notably, the investment process itself associated with fi nalising a VC deal is also very detailed with specifi c stages of negotiation and documentation.

� See page 66 for on the legal process associated with securing investment from VCs

Fundraising

47

Fund Specialisations

The majority of VC funds specialise in certain sectors or services; and/or companies that are at a certain stage of development, of a particular size or geographical coverage (regional, national or international).

This is due to the fact that VC fund managers will have an in-depth understanding of a particular sector and will therefore be able to better evaluate a business proposition. This is also advantageous to you as an entrepreneur as you will be dealing with knowledgeable people who are specialists in your sector.

FRANCOIS TISON,360° Capital Partners, a VC fi rm that invests in both seed and second round businesses in continental Europe and in the UK.

VCs how to work with them?

•• The rules of the game when you have VCs on board is the company will be different; the VCs will decide how the company will be run and by whom. They will want to have a lot of control over the running of the company.

•• We are a sounding board and we have good business sense and experience. We are there for that: our interests and your interests are aligned in theory. We are here to rock the boat when it’s too steady or steady the boat when it’s too rocky.

•• We are good at hiring and fi ring. Founders fi ght, VCs disagree with investors.

•• Fundraising and exit - we have good experience.

•• Connections and introductions - don’t expect too much we are expecting you to be the expert on your business.

What returns are VCs seeking?

•• Early stage investors - they won’t invest in a business unless they think 10 times return is possible over 4-7 years.

•• Out of the investments made - Only 1 or 2 will actually provide this 10 X return; they will lose their money on 4-5 and on 3-4 they’ll get your money back

•• Sometimes VCs stay in the companies for 7 years, despite planning the exit for 3-5 years.

But it can take 10 years before they exit.


48

The realities of raising equity fi nance from Business Angelsor Venture Capital Investors

BRIGITTE BAUMANN,President elected of EBAN and Founder and CEO of Go Beyond investment group

For Entrepreneurs raising Angel Financing

• Try to have a few (pilot) clients before seeking angel – equity - fi nancing

• Make sure you know the 3 to 5 drivers well of your economic model and how you have/will prove them at the micro level

• Learn, plan and prepare before going public

• Think exit and work backwards – prepare for multiple rounds

• Ask for more than money and conduct due diligence on the investor

Investment size and shares of a company

The size of the shares that an investor will seek to take in a company will often be dependent on the company’s stage of development. An investor will usually take much larger shares in a very young company because they are providing capital at a great risk and the investors will usually have to provide a lot of support.

Irrespective of the size of the initial equity stake – often it will be agreed that equity will be returned to the company management team once they have realised certain milestones. Thus, an investor can downgrade his investment from a majority to a minority stake.

Fundraising

49

DUSAN STOJANOVIC,Business Angel - Invests in Sweden, France, Germany and US Invests from v200k and upwards

What value do you add as a business angel investor?

• He has only invested in 8 companies over the last 5 years - as he devotes a lot of time to spend with the businesses. Helping with prospects and sales, getting clients. Then raising money for the company itself once they have proof of concept.

When you invest what kind of equity stake do you look for?

• We always try to fi nd a win-win solution.

• If you push me towards a very high valuation - then I will say that you will have to fulfi l a milestone after say a year - in terms of sale and revenue.

• But if you are more reasonable then we don’t need to impose milestones.

• For example I will invest v300k for 30% of the company if you have no sales.

How to choose the right VC as an SME?

• Choosing is a privilege.

• You want to choose someone that you want to be living through both the good and bad times with.

• The due diligence process is long because we really want to get to know who we are investing in. Chemistry is very important – a VC will often take you out for dinner to get to know you better fi rst.

Dusan’s 3 hints:

1. Look for industry expertise in at least 1 of the VCs. They will then understand the business model.

2. Has the VC been an entrepreneur before?

3. How many exits has he made? Is he a serial investor?

What are the chances of raising Equity?

You should not underestimate the challenges in successfully raising equity fi nance. Currently only about 2%-4% of all projects presented to the investment community achieve investment.

The fundraising process will be a challenging and intense period for both you and the angel investors/fund managers. Over and above your contribution to the investment process you will simultaneously be heavily involved in the management of your Company during this time. It is therefore important that you and your team are prepared for this additional workload and have planned accordingly so that the performance of the business is maintained whilst the fundraising process is ongoing.


50

Cross-border private equity investmentIf you are looking to internationalise your business idea and seek early market entry to other countries, it can be useful to seek fi nance from sources in your target countries, or seek to raise fi nance from investors in other countries that are working together cross-border.

Going Global

• Know your competition (and your market)

• Evaluate the opportunities

• Understand (and manage) the risks

• Anticipate consequences of exchange rate fl uctuations

Whilst some VC funds are operating internationally, early stage and seed funds are generally operating on a more national or regional basis. This is due to the fact that they often have been set up with public funding support which limits the scope of their investments. However, some of these funds do have an international or more pan-European focus.

Business angels generally feel that the longest they are prepared to commute to meet with investee businesses is up to one half-day trip. Therefore business angel investing is often accessed on a regional basis. However, the attitude of business angels is gradually changing with the evolution of new communication technologies and lower travel costs.

Cross border initiatives or transnational networks (EASY, Sophia Business Angels, Go Beyond Ltd, MEDIA DEALS, Mountain Partners, True Global Ventures, etc.) have emerged in recent years.

However, fewer than 5% of the investments concluded by business angels active in networks are done cross border5.

But, the EASY project has organised investment events on a cross-border basis as a result of which a number of cross border deals have been made by business angels and early stage VC funds from different European countries. This has proved that the appetite for angels in cross border investing is increasing.

4SOURCE: EVCA Special Paper- Guide on Private Equity and Venture Capital for Entrepreneurs- November 20075SOURCE: EBAN Statistics Compendium 2010

“The private source of the capital and the need to be involved

with the companies fi nanced over the medium and long term, dictates

that only the most dynamic companies or those with the greatest

potential for growth are selected”.4

Fundraising

51

In 2006, 85% of the total number of investments made was in the country where the investor or fund was based.

Whilst 10% of investments were made in other European countries and 5% were made in countries outside Europe.

Issues that complicate and discourage some investors from cross-border deals include:

Different Tax, Legal and Regulatory Environments:

• Tax: Some countries such as UK and France have tax breaks for investing inearly stage businesses

• Many countries have no tax breaks for investing

• Different environments to set up and run a business in each EU country

• Different Legal Documents and procedures for deals

The Human Challenges to Cross-Border Investing!

• • Languages - how to communicate!

•• Lack of confi dence in doing deals outside their own country - too far from home!

•• Lack of access to internationally investment ready businesses

•• Lack of knowledge of other markets - valuations and growth /exit potential

•• Lack of trust in doing deals alongside angels from other countries

•• Lack of ability to follow the deal at a distance

How to access cross-border investment:

Approach an established business angel network or seed fund/early stage venture capital fund which is a member of one of the main national or international trade bodies. This will ensure that they operate in line with a relevant code of conduct and professional standards set by the industry.

For more detailed information, resources and tools on fundraising go to:http://tiny.cc/ict-fm-toolkit

SOURCE: EVCA Yearbook 2007 - Annual Survey of Pan-European Private Equity & Venture Capital Activity


52


Is your ICT propositionInvestment Ready?

The same set of characteristics, experience and skills are relevant for most sources of funding including:

• Business Angel investors

• Venture Capitalists

• Banks

• Funds (including publicly backed ones)

This section will provide an overview of the key issues to consider when preparing to raise equity investment for your ICT business proposition. It will also outline the core requirements of investment readiness and investor attractiveness.

If you have decided to seek equity investment to commercialise the results of your ICT R&D, you need to review how far you can meet the key requirements of investment readiness.

Investment Readiness = being in a position to credibly present your business to different investors and meet their requirements

As an ICT entrepreneur it is important to understand whether you are ready to seek investment and if equity investment is right for you.

I ICT i i

53

Investment Readiness Checklist Yes/No

Do you have the skills and experience in your management team to take your ICT research results forward onto commercialisation and the capacity to execute the business plan?

Do you have a clear business model, i.e. that will generate revenues and it is scalable?

What is innovative and do you have a Unique Selling Proposition that has the capacity to show real market differentiation of commercial signifi cance

Do you know your target market and can you show your potential market share, the competition and competitive advantage?

Do you own your intellectual property? Have you taken steps to protect your IP and can show a strategy protecting further developments

Do you have a realistic valuation (realistic percentage share of the company that will be given away)?

Can you clearly and succintly communicate your business proposition and investment proposal to investors both in written and spoken terms and the ability and confi dence to pitch effectively to investors?

Do you know the different fi nancial options and understand the investors’ criteria and how to approach each source of fi nance?

Are you prepared to cede part of ownership and control of your business in return for equity fi nance?

Do you understand the investment process: timescales, due diligence, legal requirements, key documents, share and share options, handling investor requirements and demands?

Are you aware of the post investment role of the investor and their requirements for ongoing monitoring of your company progress and fi nances

Are you planning now for an exit. Can you answer the investors’ question: How will I get my money back out of your company?


54

What isn’t Investment Readiness

Your business is NOT investment ready if…

• You are unwilling to give up a stake in the business

• You have a poor business plan

• • You are not looking for fast growth - Could you feasibly provide your investor(s) with a rate of return of 8-10 times within 5 years?

• • You have not proven a need for your product - either through sales or market research

• You lack knowledge of your market or knowledge of investment sources / the investment process

• You cannot effectively pitch your business

Remember, it’s all about being credible – important when raising a large amount of money!

Cross-border Investment Readiness

The requirements for investment readiness outlined above apply whether you are seeking investment from sources within your own country or when seeking investment from outside your own country. To convince international investors, the commitment of a local investor is much more credible. Research shows that cross border investing is facilitated when a lead investors takes responsibility for managing the deal at the local level and acts as a focal point for the international syndicate. If you attend an international investment forum, organisers might ask you to come with your local investor who can explain the investment proposition from his point of view.

However key additional issues should be considered:

• Do you or your team have suffi cient experience of working in an international environment? –This may have been gained through collaboration with other agencies when working on EC R&D projects or through wider international business experience.

• Have you identifi ed how your business and revenue model can operate and scale internationally?

• Have you identifi ed the potential international target markets and customers and identifi ed international competitors?

• Have you protected your IP internationally or have a strategy for doing so?

• Can you communicate effectively to international investors and pitch our business? Ideally you should have a polished pitch presentation and executive summary in English as an international investment language

For more useful Investment Readiness advice tools and resources for your ICT businessgo to http://tiny.cc/ict-fm-toolkit

Is your ICT proposition Investment Ready?

55


What do Investors look forin an ICT investment proposition?

This section will provide an overview of what makes an ICT business attractive to an investor.

Investment criteria for private investors and investment funds vary quite considerably, although generally speaking, most will be looking for ventures which meet the following criteria:

MICHAEL BLAKEY,Experienced angel investor and Director of Avonmore Developments Ltd

What do you look for in an early stage ICT business proposition?

“In terms of their idea I want to know...

• What is their product or service?

• What is it going to do?

• What is the market that they are going to enter?

• Who is their target market?

• Who are their competitors?

If they’re an early stage company and they are going up against a massive company like Siemens. Are they going to have a chance?

They’ve got to understand that customers aren’t going to choose a start up over a more established company that is doing the same thing”


56

Investment criteria for private investors and investment funds vary quite considerably, although generally speaking, most will be looking for ventures which meet the following criteria:

Have You got the Right Team to raise Money from Equity Investment

Have you assembled a team and partners with distinctly relevant experience to makethe business happen?

• Honesty: Plans and ideas do not get funding, people do. So honesty and integrity are key in persuading investors to let you manage their money. Always be honest and open. The process of investor due diligence will get to the truth in the end anyway.

• Commitment: It is a bonus (and for some investors a necessity) if the directors are prepared to put in some of their own fi nance and/or bank debt backed by personal security to demonstrate their confi dence in the venture. This should be new cash going in; the fact you have already invested thousands of Euros and hundreds of hours doesn’t really make much difference to investors.

• Market Knowledge: You need to know every intimate detail about your customers and competitors.

• Business acumen: Investors want to make sure you can actually run the business profi tably, rather than just write a business plan about it.

• Chemistry: Private investors will back people they like and trust and who are receptive to their input, which is why most private equity deals are through personal contacts.

• Determination: You need to be focused, tenacious and show a ‘bias for action’.

• Low starting salaries: Big salaries for the directors before the venture is profi table never goes down well. Be realistic and reasonable and allow for annual salary increases only when the profi ts of the business have grown accordingly.

Is your Business Model right for Investment?

• Does your venture have an understandable and relevant business model?

• Good business plan: You must have a comprehensive business plan to hand with detailed fi nancial forecasts showing what could happen in the best possible case and a ‘worst-case’ or survival version if things don’t quite go to plan (as they often don’t).

• Are you solving a big problem that is recognised today and is worth a lot of money?

• Is your solution differentiated, compelling, and sustainable?

What do Investors look for in an ICT investment proposition?

57

• High return: A realistic chance of achieving a high return on capital (10 times the original investment money) – a compound return on investment (sometimes known as the IRR or Internal Rate of Return) of 50% per annum is a good, minimum starting point. It may seem high, but it is commensurate with the risk – investors lose money on an estimated 40% of deals and need to do very well on the ones which are successful in providing an overall positive return.

• Exit route: After putting their money in, most want to get it back within three to fi ve years, either through trade sale, sale to other shareholders, refi nancing, or, rarely, fl otation. You need to demonstrate a genuine intention and ability to provide such an exit.


• Realistic fi nancial forecasts: If your forecast shows sales increasing 100% per annum you’d better have a convincing marketing strategy to back it up. Be aware that investors may hold you accountable to your forecasts and penalise you, by clawing back shares, should minimum targets not be achieved. The purpose of this is to stop people being too fanciful with their predictions.

• High growth potential: The business must be scalable to a large size, either because it can capture a market lead in a small market or reasonable market share in a large market.

• Intellectual property (IP): Having a trademark, copyright or patent can be attractive to the investor, as long as it acts genuinely as a clear barrier to entry or secures a competitive advantage, rather than just being there for the sake of it.

� For more on IP see p66.

• Local: Most private investors invest in companies located within 80 km of their home or offi ce, so that they can attend board meetings and keep an eye on their investment.

• Market knowledge: Private investors tend to back businesses which interest them, preferring those in sectors in which they have experience. So try to pitch your business to VCs and BAs that have knowledge, experience or an interest in early stage ICT businesses.

• Do you have a credible strategy for getting to market and building your business reasonably quickly?

• What kind of momentum have you already established, especially with potential or actual customers?

• Realistic valuation: The business valuation will determine the share of the business relinquished in return for funding. This can be a classic deal-killer if a balance can’t be struck between the interests and risk profi les of the entrepreneur and investor. Some investors like using ‘ratchet’ systems, where the entrepreneur’s holding is increased or decreased over time depending on whether or not performance targets are met.


58

JEAN MARC BALLY, Aster Capital, leading VC fund investing in cross stage team tech companies based in Paris

What he looks for in an investment proposition:

• “Most VCs are mainly looking for high growth companies.

• It is very diffi cult - if we don’t see any high growth potential then we won’t invest.

• Growth and attractiveness at exit is very important

• The entrepreneurs themselves are very important

• We are fi nancial entrepreneurs - we have to know that our interests are aligned.

• You must need the money that we are offering- VC money must be appropriate for your business.

• You must be able to deliver something that we are looking for.

Advice:

• Share your vision and strategy with the investors

• For a start-up it is very diffi cult to grow. Be focused and be very committed to making your business a success.

• If a business has no customers - that doesn’t mean it will necessarily be disregarded. Sometimes your fi rst customer will be your exit. But sometimes we will have to ask you to come back in a year. But in some specifi c areas you will sell the company before you make any sales.”

DUSAN STOJANOVIC, Business Angel - Invests in Sweden, France, Germany and US. Invests from v200k and upwards

What he looks for in an investment:

• “The person/management team is the most important thing. Investors don’t have anything to judge the business on other than you. What have you done? Human capital- is what we are investing in. So in all pitches really tell investors about you- your entrepreneurial skills and experience.

• Are you really solving a customer problem? Tech innovations often only solve a small problem.

• We want to see that you are entering into a market that’s very large. We want to see something that can fl y- fi rst in your country and then internationally if that’s more realistic. But be realistic about whether you can really go global.

• Another bonus is if you have at least one customer signed up

• What is not that important for us as investors- is having an exact business model when you don’t have any clients yet. This will be developed further down the line.

• IP- is important and an investor would look through all the legal stuff on this. But it is only part of the game. If you really solving a big customer problem then this is enough.

• Investors are always looking for a 10 x return. But it is a subjective judgement as to whether each company will make it or not. 2-5x should at least be achieved by companies involved.”

What do Investors look for in an ICT investment proposition?

59

What are the key issues that an ICT entrepreneur needs to understand when approaching a VC fund?

FRANCOIS TISON,Works for 360° Capital Partners, a VC fi rm that invests in both seed and second round businesses in continental Europe and in the UK.

What gets VCs excited?

• “Big markets

• Big margins

• Ambition

• The right team - not necessarily complete but demonstrating that they know what and where they lack. Qualities that they must have- they are committed, open, direct, straight forward, open to discussion and criticism but also stubborn.

The deal:

• Don’t be too arrogant such as offering 10% for £3m.

• VCs want the right risk reward

• Valuation is driven by the market and a general rule of thumb - in the US the rule of thumb is roughly a third of your equity at each round.

• Remember that for VCs it’s a risk reward business. It needs to be big to work for us.”

• When we say “no” it’s not a criticism of you or your business. Some just aren’t right for us- maybe better for another VC or more suited to angels”.

For further information, resources and tools on what investors look for an ICT businessgo to: http://tiny.cc/ict-fm-toolkit


60


How to successfully presentand pitch your ICT Project to Investors

After developing your business plan, your pitch presentation is your most important tool. Your capacity to effectively communicate your proposal in a succinct and comprehensive way which identifi es the investment proposal is going to be your main way of establishing your credibility with the investment community.

This is generally in the form of a PowerPoint presentation or it can be a succinct verbal pitch- which is often called the elevator pitch (as it should be something that you could deliver to a potential investor to engage their attention in the time it take to get from the top fl oor to the bottom fl oor in an elevator!).

Developing your PowerPoint PresentationThe presentation’s objective is to encourage investors to take a very real interest in you and your business proposition.

Writing it

• Jot down the content into the ICT Finance MarketPlace template (or use your own) by hand fi rst. (you can access the template at: http://tiny.cc/ict-fm-toolkit). View the PowerPoint presentation as complementary to you and your Executive Summary; you don’t need to read from the PowerPoint or give all details. The presentation’s objective is to encourage investors to collect and read your business plan.

• View the PowerPoint presentation as complementary to you and your Executive Summary; you don’t need to read from the PowerPoint or give all details. The presentation’s objective is to investors to collect a business plan.

• Aim for concise slides with a minimum of text (8 bullet points per slide maximum)

• Try where possible to use pictures.

• Use bullets only. No sentences on slides. You are providing the commentary.

• Think of how posters communicate and you’ll be thinking along the right lines

• Avoid any industry jargon.

• Keep fi gures simple (round fi gures are easier to understand!)

61


Structure

Title Slide - this is possibly one of the most important slides. An investor will make a judgement of your business within the fi rst minute of presenting so you must use this slide to give a mini-summary of your business. You can give an overview of your business – so the angels understand what your business ‘actually does’ – and also need to introduce yourself as you are the main thing which companies are investing into.

Achievements - this is where you want to say ‘what your company has already achieved without their funding’ it is a great place to talk about clients, turnover, partners, patents, money invested to date. For customers- logos and images are recommended as this makes it much more visual.

Management Team - in early stage businesses one of the key things which the angels are investing into is the management team. It is your ability to make the business the success that they need to trust in therefore you need to talk about yourself and your team mates. Again, logos of big companies which you have worked in works well here.

Products and Services - you have already given the audience an outline of what you do in your introduction, however, this is really where you need to talk about your product or service. You need to talk about the benefi ts and the problems it solves rather than the technology behind it. Images i.e. screenshots, photos etc… are good as case studies of how your product can be used.

Target Market - this is where you need to talk about where your product is sold and who to. It is also where you can use 3rd party research to show market size, market growth and market potential. This is where you can talk about what competition you have within your target market.

Business & Revenue Model - this is one of the key areas any savvy investor will want to learn about – how you make money and from which channel this money goes into your business. It’s also where you can say ‘how much per sale’ etc…

Financials - provide a brief overview of your fi nancials and keep them as simple as possible. Rounding fi gures so not too many zeros.

Funds Required - this is where you need to speak about how much you are looking to raise and what you are looking to spend this money on. It is recommended you do not speak about your valuation at this stage.

Why invest in us - this is where you want to repeat the key points you would like to take away from the presentation.


62

DESIGN TIPS

• Tables are easier to read than graphs and pie charts.

• Use dark backgrounds with light font or light backgroundsand dark font

• Make sure that font size is large enough to see.Headings: 44 pt, body text: not smaller than 28 pt

• Good fonts: Arial, Garamond, Sans Gill, Helvetica, Verdana and Tahoma.

• Do not use transitions as these distract both the presenterand the audience.

WIL SCHROTER

The Pitch is the Plan

If you asked me to point to the heart and soul of a startup company,

I would not say it’s the people, the culture, or even the product. I would say

it’s the pitch. The pitch is that one message that, when delivered, makes

people say “wow, that’s a great idea!”. The pitch gets everyone in the room

excited about getting on board with your product and your company.

It’s the inspiration that carries everyone along for the ride.

The pitch also determines whether or not the company’s offer has any

viability in the market. For this reason the pitch should always precede any

other developments or decisions. Your pitch is your divining rod that helps

you make decisions on where to go next. So working on the pitch should

always be the fi rst step toward introducing any new concept.

How to successfully present and pitch your ICT Project to Investors

63

Delivering your pitch to investors

Remember your Audience:

• One of the key things to remember when doing a presentation is to remember who you are presenting to. Your presentation will need to be specifi cally tailored to the level of knowledge, number of people, whether they are VCs or business angels.

• If you are presenting to VCs you can usually assume a considerable level of technical knowledge about ICT products and services. Whilst, if you are pitching to a business angel network you should not assume a high level of specifi c ICT industry knowledge. So remember not to use industry jargon (they may not understand) and do not assume a high level of knowledge of your industry.

• Your audience are looking to trust you – this can be achieved by dressing smartly, speaking clearly, having an ‘open’ body language and speaking to them with respect.

Delivery of presentation

• Don’t talk to the screen – talk to the audience

• The most important thing to convey is the benefi t of your product and theinvestment opportunity

• If your product is suitable – demonstrate it in your presentation

• Do not read from your PowerPoint presentation – attendees can read it faster than you can read. Illustrate your points with examples and substance. Don’t talk to the screen – talk to the audience

• Allow minimum of 1 minute of presentation time per slide

• DO NOT go into an in-depth explanation of the intricate detail of your technology. You will be able to demonstrate this further down the line once you have attracted the interest of investors.

PRACTICE!!

• The the main way to ‘perfect’ a presentation is to practice, practice, practice – make sure you know how long you have to present and present out loud to colleagues/friends/family to check that your presentation takes the right amount of time and comes across clearly.

• At all times, you should be able to present without your PowerPoint. The truly professional presenter gives the impression that if the computer blew up, they’d be able to continue regardless!


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You may also want to consider GUY KAWASKI’S advice(co-founder of Garage.com) called the 10/20/30 rule.

• Ten slides: Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting - and venture capitalists are very normal. If you must use more than ten slides to explain your business, you probably don’t have a business

• Twenty minutes. You should give your ten slides in twenty minutes. In a perfect world, you give your pitch in twenty minutes, and you have forty minutes left for discussion

• Third-point font. The majority of the presentations that I see have text in a ten point font. As much text as possible is jammed into the slide, and then the presenter reads it. However, as soon as the audience fi gures out that you’re reading the test, it reads ahead of you because it can read faster than you can speak. The result is that you and the audience are out of synch.

The reason people use a small font is twofold: fi rst, that they don’t know their material well enough; second, they think that more text is more convincing. Force yourself to use no font smaller than thirty points. I guarantee it will make your presentations better because it requires you to fi nd the most salient points and to know how to explain them well.

SOURCE: http://blog.guykawasaki.com/2005/12/the_102030_rule.html#ixzz0xVodhbhM

For more useful Tools and Resources for Pitching your Business to Investors go to:http://tiny.cc/ict-fm-toolkit

How to successfully present and pitch your ICT Project to Investors

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http://blog.guykawasaki.com/2005/12/the_102030_rule.html

The steps of the investment process; legal and technical requirements

If you decide to approach either an investor from a Business Angel Network (BAN) or a VC fund you need to be prepared for a long process of preparation, negotiation and fi nalisation before you fi nally receive any money.

This chapter will take you through the key steps of the investment process including the legal and technical requirements that you will have to fulfi l in order to secure the funding.

Once you have captured the potential interest of an investor, there are several stages in the negotiation process that will need to be followed. This will vary depending on whether it is Business Angel or Venture Capital fi nance. The legal structures relating to obtaining private equity fi nance will also vary from country to country. This toolkit will attempt to outline the common approach, procedures and requirements in the EU.


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Deal Formalities in the investment process

Stages in the Business Angel’s Investment Decision

Deal origination The investor becomes aware of the opportunity – typically through one of the following channels: chance encounter, referral from business associates or other individuals or organisations in their network, or personal search.

Deal evaluation Two stages: (i) Initial screening/fi rst impressions: key considerations are the ‘fi t’ with the investor’s personal investment criteria, their knowledge of the industry/market and their overall impression of the potential of the proposal. Also infl uenced by the source of the referral. (ii) Detailed evaluation: the investor will examine the business plan in detail, consult with associates, will meet the principals, take up references, and research the proposal. The decision will be infl uenced by the potential of the industry, the business idea, impressions of the principals and potential fi nancial rewards.

Negotiation and contracting

Negotiations with the entrepreneur over valuation, deal.

Main factor is pricing.

Post-investment involvement

Investor is likely to become involved with the business in some kind of hands-on capacity, including advice and mentoring, networking, functional input and member of board. Degree of involvement may vary according to the stage of business development and the performance of the business.

Harvesting Exit from the business, either because it fails or by selling their shares to another investor. Investors normally exit from successful investments by means of a trade sale.

Stages in the Venture Capital Negotiation Process:

Venture Capitalist deals are usually much more complicated than Business Angel deals. The main difference to angel deals is that the amount of money invested is usually larger so the legal process will be more complex. It will include a large number of provisions, anti-dilution measures and ratchets.

However with VC deals you would usually expect them to use their own in-house lawyers to facilitate the investment process.


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Ongoing Role for the Investor on the Board

An Angel investor will normally wish to take a strategic interest in the development and growth of your company. They often want to take a seat on the Board or take a specifi c role within the management.

The Investor sitting on the board of an investee company will become subject to a signifi cant number of duties imposed by law.

VC will always have a monitoring position on the Board and will place a representative of the Fund or a non Executive to fulfi l this role.


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Figure2: Different steps in the private equity investment process

SOURCE: ‘A guide to Private equity’, BVCA/PWC, June 2003

Stage EntrepreneurEntrepreneur & Private Equity Firm

Private Equity Firm Reports

Approaching the private equity fi rm/evaluating the business plan

• Appoint advisor

• Prepare business plan

• Contact private equity fi rms

• Review business plan

• Business plan

Initial enquiriesand negotiation

• Provide additional information

• Meet to discuss business plan

• Build relationship

• Provide additional information

• Conduct initial enquiries

• Value the business

• Consider fi nancing structure

• Offer letter

Due dilligence • Liaise with accountants

• Liaise with other external consultants

• Initiate external due dilligence

• Consultants report

• Accountants report

Full negotiationand completion

• Disclose all relevant business information

• Negotiate fi nal terms

• Document constitution and voting rights

• Draw up completion documentation

• Disclosure letter

• Warranties and indemnities

• Memorandum and articles of association

• Shareholders agreement

Monitoring • Provide periodic management accounts

• Communicate regularly with investor/s

• Seat or Board?

• Monitor investment

• Constructive input

• Involvement in major decisions

• Management accounts

• Minutes of Board and other meetings

EXIT

Due Diligence OverviewAfter reading your business plan, if an investor or fund manager shows an interest in potentially investing in your company, they will begin the process of “due diligence” which basically means carrying out further investigation into the details of your business.

It is assumed that this process will take place after an investor has attended a pitching event or met with a company of which they have made an initial positive assessment. The due diligence process encompasses the organisational, legal, fi nancial, technical and market analysis that the investor is required to carry out prior to deciding whether to invest.

The general purpose of due diligence is to:

• establish the true state of the business, or a particular part of it

• identify key strengths and weaknesses

• to identify any possible liabilities

• and to assist in determining the true value of the business.

It is only after the conclusion of the due diligence phase that an investor will fi nally decide whether to invest in your company.

This section covers the areas that the due diligence process will usually focus upon. It also provides a list of documents which have been identifi ed as generally required by investors for these purposes.

From the perspective of the investors, the key areas for consideration are:

Financial / Tax - is the fi nancial information provided to the angels an accurate refl ection of the Company’s performance? Has the Company complied with its obligations under the applicable tax legislation?

Commercial / Market – does the entrepreneur (and the angel) understand the Company’s market and the factors which determine its future performance in those markets? Does the angel believe that the market has the right characteristics to deliver the return on the investment that he/she is seeking?

Legal – has the Company complied with the relevant legislation in conducting its business such as when employing staff, disposing of its waste or ensuring that any environmentally sensitive materials are appropriately dealt with? Are there any areas of the business that could cause problems in the future, for example, onerous indemnities given to customers and suppliers, or disgruntled employees with bona fi de employment claims? Critically, does the Company own the key assets (for example, IP) which are critical to its success?


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WHAT INVESTORS WILL BE WATCHING OUT FOR:• Unrealistic Valuation (Or Revenue Model)

• Complicated Investment Terms

• Heavy Debt

• Missing Key Assumptions About Market or Financial Model

• Is the business a One-Trick Pony (One-Product or Service Company)

• No Board Per Se

• Inexperienced Management Team

• Poor Advisors in place

ENTREPRENEUR TIP:

Do your own due diligence.

“You’re about to get into bed with someone, you might want to check what they have under the covers. Don’t be afraid to ask for references. Go ahead and contact other companies that your potential investors have put money into. Make sure you’re comfortable; because your investors are going to be major infl uencers on your company’s success.”

SOURCE: Adapted from Ben Yoskovitz’s blog at http://www.instigatorblog.com/an-introductory-guide-to-startup-funding/2007/10/17/

Protecting your Intellectual Property (IP)Getting proper IP protection in place can be crucial to a company to ensure that competitors cannot freely take advantage of your innovations.

This is particularly relevant for your ICT innovation. Under the EU 7th Framework (FP7) Programme you should have already been given advice on IP or IPR (Intellectual Property Rights) provisions. In particular, when you have been working as a research team you need to have agreed on IPR issues and ownership between the participants.

Crucially FP7 participants must read the sections pertaining to IP within the “Rules for Participation”6 document and the “Grant Agreement” document.7 These offi cial documents prevail over any statement contained in this guide.

6Regulation No 1906/2006 of the European Parliament and of the Council of 18.12.2006 – http://eurlex. europa.eu/JOHtml.do?uri=OJ:L:2006:391:SOM:EN:HTML. Similar Rules apply to the Euratom Framework Programme (Council Regulation No 1908/2006 of 19.12.2006 – http://eurlex. europa.eu/JOHtml.do?uri=OJ:L:2006:400:SOM:EN:HTML). References to the Euratom rules can be found in the headings and section 12 of this guide sets out the main differences between the EU and Euratom rules.7The text of the Grant Agreement (including Annexes) may be found at http://cordis.europa.eu/fp7/calls grantagreement_en.html. Most of the provisions relating to IPR for FP7 participants can be found in Annex II of the Grant Agreement. However, for more specifi c IPR provisions may be found in Annex III, such as the ones applicable to research actions for SMEs or for SME associations. In specifi c cases, “special clauses” may also be included in Article 7 of the core Grant Agreement- a list of all such clauses is available ftp://ftp.cordis.europa.eu/pub/fp7/docs/fp7-ga-clauses_en.pdf.


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Any other legislation that applies must also be respected, for example the provisions of the State aid framework. Guidance given in the 2008 Commission Recommendation on managing intellectual property should also be taken into account.

For detailed specifi c advice on IPR for those who have participated in EU FP7 projects please see: ftp://ftp.cordis.europa.eu/pub/fp7/docs/ipr_en.pdf to download crucial documents.

However, here is a general overview of IP issues and advice worth considering when seeking investment for your ICT innovation, technology or service.

IP protection can take a number of forms, including:

• patents in the case of technical inventions;

• trademarks to protect a brand;

• design rights;

• copyright;

• and confi dential information.

You should always try and protect your idea or innovation. However, in practice, many VCs, investment funds and investor groups do not sign confi dentiality agreements or NDAs (Non Disclosure Agreements). This is mainly due to the fact that this is simply not feasible given that they see hundreds of business plans a month. It would normally suffi ce to write clearly on your business plan and other documents that this is confi dential material. Nevertheless, they usually have a duty of care not to use or distribute commercially sensitive information.

However, when meeting individual investors with whom you have not been put in touch with by a network it would be prudent to ask them to sign an NDA (Non Disclosure Agreement)before sharing your business plan or any sensitive documents with them.

Also, if possible, it is best to avoid distributing any truly confi dential information in the business plan, since you can never be sure who will read it once it has been distributed.

EXPERT TIP:

WARNING: Information on your ICT technology/product or service that has entered the public domain prior to registration is not patentable.


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ftp://ftp.cordis.europa.eu/pub/fp7/docs/ipr_en.pdf

EXPERT TIPPatent pending

This just means that you’ve put in an application or fi lled out a form. It provides some general protection over your IP. But it will still add some legitimacy and will make your business proposition more attractive.

When a trademark is pending- you can get some sort of retrospective protection.

You should be able to answer all of the questions in this section for all IP that your company has rights to, regardless of whether the company owns the IP (in whole or in part) or is licensed under that IP.

(a) What intellectual property rights does your company hold rights to?

This includes patents, trademarks, registered designs and applications for the same; copyright material (e.g. software, brochures, manuals and details of databases), unregistered design rights and confi dential information (in particular technical information that the company has chosen to keep confi dential rather than publish).

(b) Does your company have an IP policy?

The investor will want to determine how the company goes about identifying, recording and protecting its’ intellectual property. For example, you may have important IP that has not been identifi ed (e.g. due to lack of IP awareness training) or that has not been protected (e.g. an invention may not have been fi led as a patent application for budget reasons).

It is also important to understand what procedures you have put in place to deal with confi dential information that has been provided to your company, or confi dential information that your company has provided to third parties.

(c) What areas does the company’s IP lie in?

This question serves to understand who are likely to be direct and indirect infringers.

(d) For each registered right, is the right a pending application or is it a granted right?

Only granted rights can be enforced in the courts; although it may have value as a saleable asset, an application for an intellectual property right cannot be enforced.


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(e) What is the geographical scope of IP protection?

If the scope of IP protection is geographically limited then third parties are free to use that IP outside protected jurisdictions. For example if patent protection exists in Europe only. Also, the ability to enforce IP rights effectively does vary from jurisdiction to jurisdiction.

(f) Is the IP relevant?

Is the IP relevant to:

(i) The company’s current activities; or

(ii) The activities of third parties?

An application for an IP right may have broad, commercially relevant scope but the corresponding granted right is often narrower and may not be as commercially important.

IP “HOT TIPS”from NICK TALL,IPR specialist at Speechly Bircham LLP, London, UK

“Make sure that you know what you own and that you haven’t stolen it

However, if possible sign an NDA at the outset. Without an NDA in place you can destroy the patent if you fail to do so as soon as your innovation gets into the public domain.

Register as much as possible in terms of trademarks and patents. Don’t underestimate how a good trademark portfolio can look. You may not even be using those trademarks; they may be open to replication action. But if you can provide a list of trademarks to your lawyer and investor this gives a very favourable impression that you know what you’re doing and that you’ve given it some thought.

Investors will be looking for registrations and reports on trademarks etc that will have ideally been done at the outset.

You need the IP license in writing. Making sure that it isn’t breached and that any change of control procedures aren’t breached if a new investor comes in.

You need to have agreed among the team who came up with the designs in the fi rst place, who owns the design and each component of the IP. This needs to be set out in written docs and signed as legally binding agreements.


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When you’ve got a Director who wants to leave the company- they might take the IP with them unless it’s assigned to the company as a whole. Therefore you need to have provisions within the initial agreements that specify what would happen in these kinds of situations.

You also need to agree in writing how you are going to go about exploiting the IP. Such as: Will the company license out any of its IP?

Investors will also want to see that employment contracts are in place as this can help when it comes to moral rights. Especially when they try and sell the company later.

Investors will want to see payments and insurance certifi cates in relation to IP. This is usually very expensive.

Worth bearing in mind: If the investor is a competitor of the licensor this can trigger a termination right.

You might need more licenses if the investor is coming in and wants to sue some of the IP himself- check this fi rst!

An investor will be looking for exclusive licenses if the IP is particularly important to the business that he is investing in- that can have competition aspects to it. So they will want to know that you haven’t granted any exclusivity licenses to your IP and that you haven’t entered into anything that can’t be terminated extremely quickly-particularly when there’s an important bit of IP at stake.

The investor will like to see that you’ve been putting copyright and trademark noticeson things.

And crucially, that you’ve been undertaking an active search to check for infringements.

It’s very important to be aware of other people’s IP and what’s going on in the market.

Register domain names as well!

Look out for cyber squatting”.

For more information and resources on protecting your IP go to: http://tiny.cc/ict-fm-toolkit


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Key Legal DocumentsOnce the due diligence investigation is underway and the initial tranche of information has been reviewed by the investors, the investors’ lawyers will draft and circulate the documents required to transact the investment.

The most common legal structures used in Venture Capital Investment deals are : the Anglo-Saxon Limited Partnership, the FCPR (Fonds Communs de Placement à Risques) in France and other similar forms such as the SICAR (Luxembourg), the Private PRICAF (Belgium) or the Italian Fondo Chiuso. (EVCA, November 2007)

Whilst VCs will tend to have their own in-house legal team, for business angel deals (unless there are special circumstances) usually one set of lawyers is expected to act on behalf of all parties involved.

KEY STEPS OF THE LEGAL PROCESS...CHARLES FRANK,Speechly Bircham, LLP, UK

“You’ve found a potential investor

You’ve signed an NDA if appropriate

You’ve handed over the necessary documents to the investor and are keeping track of what you’ve given out

Next is the Shareholder’s Agreement

Then the Disclosure Bundle

Followed by the Service Agreements and Articles of Association

If you get to the stage when the investor is happy to take things forward you will then draw up a Heads of Terms or Terms sheet.”

Heads of Terms (or Term Sheet)

Once you have convinced the investors of the merits of your business proposal, you will receive a formal offer of investment that contains information on the terms of that investment in the form of a “Term Sheet”. This is likely to use the format of the Example Term Sheets (that you can access in the online resources for this toolkit) or similar.

This is a non-binding offer to invest, although certain provisions will be legally effective. This is the single most important legal document associated with the investment process. It sets out the terms of each document that you refer to separately in the chapter. It is drawn up to avoid the expense of having to draft the full documentation at this stage.


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Investment & Shareholders’ Agreement:

This is an agreement between all current and future shareholders of the Company that sets out the terms of the investment and sets out the relationship of the angel investors and the other shareholders. For example, matters requiring consent and information rights, and provisions such as warranties and restrictive covenants given by certain members of the existing management team.

Articles of Association:

This is a key part of the Company’s constitution that governs the running of the Company, setting out the voting rights of shareholders, how shareholders’ and board meetings will be conducted, and important provisions such as good leaver / bad leaver, drag along and tag along, and share transfer mechanism.

The Articles of Association and Shareholders’ agreement will also need to be accompanied by various supplementary documents, such as board minutes and shareholder resolutions. These should be reviewed by the lawyers acting for both the Company and the angel investors to ensure the investment is transacted correctly.

Unlike the Shareholders’ Agreement, the Articles are not a contractual document signed by all the parties. They are in fact the constitution of the company, in accordance with which the company has to act. They are binding on all of the shareholders as the “rules” of the company, of which each shareholder is a member. The Articles may cover some of the provisions which are also dealt with in the Shareholders’ Agreement. For example, it is not unusual for both documents to deal with the right for the investor to appoint a director, other board matters, and matter requiring investor consent.

The key commercial issues which would usually be found only in the Articles are: Anti-dilution protection, compulsory transfer provisions (including good leaver/bad leaver) and forced exit provisions (drag-along and tag-along).

Finally, depending on the fi ndings of due diligence and the approach taken by the angel investors, the following additional documents may be prepared and circulated:

“I can’t stress enough the importance of agreeing a Term Sheet, as more

often than not it will raise fundamental deal issues that otherwise might

not have been thought about,”

CHARLES FRANK, SpeechlyBircham


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Disclosure Letter and Disclosure Bundle:

If the persons required to give warranties in the Shareholders’ Agreement believe there to be any issues that are inconsistent with those warranties (for example, an item of litigation), they may bring this to the attention of the angel investors by way of a specifi c letter, known as the Disclosure Letter. This has the effect of qualifying the warranties and offers protection to the warrantors against a potential claim for breach of warranty. The Disclosure Letter may be accompanied by supporting documentation, for example, correspondence relating to the item of litigation, which is known as the Disclosure Bundle. The scope of the Disclosure Letter (and whether it is required) will depend on the nature of the warranties sought by the angel investors - if the management are only warranting that the business plan has been diligently prepared, for example, it is possible that no disclosures will be required.

Service Agreements:

As part of ensuring that the legal relationship between the entrepreneurs and the Company is clear, the angels are likely to require that new service agreements are entered into between key individuals and the Company at completion. These service agreements will contain important provisions such as restrictive covenants (see later), notice periods and grounds for dismissal, and the interaction of these provisions with the terms of the Shareholders’ Agreement and Articles of Association needs to be considered carefully.

IP Transfer / Licence Agreements - it is often the case that during the due diligence process, the angels discover that the intellectual property rights to a particular product are actually owned by the entrepreneurs in their individual capacities, rather than by the Company into which they are making their investment. This poses a risk to the angel investors, for if the entrepreneurs ceased their association with the Company for any reason, the Company’s ability to exploit the particular product or service may no longer exist and therefore the value of their investment would be diminished. As a result, angels would require the transfer of all relevant intellectual property rights to the Company before completing their investment.

Share Option Scheme - in order to align the interests of the employees of the Company with those of the current shareholders and the angel investors, the angels (or the entrepreneurs) may propose that, as part of the current fundraising process, an employee share option scheme is set up. This would operate by granting the participating employees an option to acquire shares in the Company at a certain point in the future (usually, an exit) for a price fi xed at the date the option is granted. If the value of the shares has increased, as anticipated by the entrepreneurs and the angel investors, the employee will share in the upside by enjoying the benefi t of the difference in value.

Before the investment can be transacted, the lawyers acting for the angel investors and the Company/the existing management will need to be happy with the form of the documents described above. In order to reach this point, it is likely that the document will go through a number of versions as they are commented upon and amended by each party and their advisers, although progress is usually best achieved by face-to-face dialogue in order to agree points of principle fi rst.


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What are the legal areas where specifi c attention is required in a cross-border syndicated Investment?

The following aspects have particular characteristics and ways of being addressed when dealing with cross-border syndicated investments and, from our experience, are usually discussed with clients when entering such investments and signing the related necessary documents:

• Responsibilities of the investors, especially of the Lead Investor

• Lead angel

• Relations between the parties

• Terms and conditions of syndication

• Terms of the investment

• Governance of the company

• Exit conditions and exit strategy

• Reporting duties

• Access to information

• Confi dentiality

• Different operational models

• Jurisdiction and penalties

• Fiscal issues – avoiding double taxation

TimetableIt is diffi cult to be prescriptive as to the timetable of a typical investment due to the high number of variables involved, for example, the diligence requirements of the investors, the maturity of the Company and the nature of the angel investors, meaning that the dynamic of every deal is slightly different.

Legal CostsThe transaction of any equity investment is a technical legal area and both the angels and the Company/entrepreneurs need to obtain advice from lawyers experienced in such matters in order to ensure that the investment documents refl ect the terms of their agreement and provide the appropriate contractual protection. However, good legal advice can seem expensive (although it is much cheaper than bad legal advice!) and both entrepreneurs and angels will wish to ensure that the legal costs are kept under control and are not disproportionate when compared to the amount of money being raised.


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With small angel deals (less than v1m) you would usually expect one fi rm to act for both parties (investors and entrepreneurs) which would also reduce the cost and simplify the process. You would only get another legal team involved if some unexpected confl icts were to arise.

For larger angel deals (more than v1m) you would usually expect there to be a different fi rm acting for the company, investor and certain members of the management team- as all interests may not be aligned.

The following tips may assist you in reducing legal costs:

• Be aware that the fees for the legal costs will usually come out of the money provided in the investment

• Agree a detailed scope of work and fee estimate, or preferably, a fi xed fee, with your advisers at the outset within a certain timeframe

• For the smallest deals - (up to v1 million) you ought to be looking at simple legal documents as it is diffi cult to justify spending a lot of money (v50,000 upwards) on lawyers’ fees for drafting bespoke complex documents.

• If it is a very early stage investment - there will be usually a second round of investment in another 6-12 months time for a higher sum of money which is when you would need more complex legal documents with extra provisions

• Keep the process as effi cient as possible with the investor(s) and yourselves (the company) running the process rather than relying on the lawyers to do it for you. The lawyers should be handling the documents (e.g. The NDA, Heads of Terms, and other investment documents). but they shouldn’t be the ones chasing people for comments on legal points

• Ideally, have one all parties’ meeting with a specifi c and detailed agenda to run through all the points, rather than these emerging as various drafts to be circulated, enabling your advisers to amend and agree the terms of the documents to refl ect this.

• Do not commit to a completion meeting until the documents are fi nalised to your satisfaction - fees can increase dramatically if outstanding points need to be discussed, drafted and then agreed in a drawn-out completion process

• BE ORGANISED: if there are several shareholders have a lead investor who can help to negotiate terms and confl icting views, rather than having to get lawyers involved

• Bigger deals will naturally use lawyers more as there is more money at stake.


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• Select advisers who are experienced in transacting early stage equity investments and have the resources to keep up with the process - some entrepreneurs and angels default to their “relationship lawyers” who may have dealt with their house purchase, for example, and this can lead to delays in the timetable and unnecessarily aggressive terms being accepted

• Encourage those advisers to adopt industry standard practice where appropriate to narrow the range of points that need to be negotiated

• Remember that a fi xed fee will be subject to assumptions

• It is very unusual to pay lawyers a percentage of the investment acquired - it will usually be a prearranged fee.

For more information, advice, resources and tools on the legal process associated with accessing investment go to: http://tiny.cc/ict-fm-toolkit


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Exits

How to ensure that your business has a compelling investment proposition and clear exit strategy.An exit is the process by which investors (hopefully!) realise a substantial capital gain by selling their shares in the investee company for a higher value than their initial investment.

The existence of demonstrable exit avenues is a key determinant of the attractiveness of an opportunity.

When developing your investment proposal, it is important to understand the level of returns that investors seek from a business and the need to focus on the exit strategy.

How are you going to create value in your business?

Who else will recognise the value that you have created?

How might you realise this value through exit? What is your likely exit route - for example: licensing, trade sale, IPO?

What valuations are being achieved by comparable businesses exiting via different routes?

What is the timescale you envisage and milestones? (i.e. when will the investors achieve returns?)

The three main types of exit event are as follows:1 Sale of the entire issued share capital to a third party, often a trade purchaser, although

occasionally by way of a “buy-out”, where the investee company is acquired by an entity funded by a private equity investor, a bank and/or a management team;

2 Buy-back of the Angel’s shares by the company itself from its own resources, or perhaps by a fellow investor or by the entrepreneur; or

3 Flotation of the company on a public market, such as the Alternative Investment Market (AIM) in the UK, by way of an initial public offering (IPO).

E i

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In each case, these will be critical events for both the company and the Angel Investor, which will necessarily give rise to a considerable number of legal issues.

It is therefore vital for both the companies and investors to obtain, either independently or as part of the wider seller group, the best legal advice from lawyers who are experienced and skilled in these types of transactions. This will ensure that the prospects of achieving the desired fi nancial return from the exit are maximised and ongoing risks are minimised.

JERRY ENNIS,VC fund manager, highly successful serial multinational ICT entrepreneur and COO of Flirtomatic

“When planning exits - be realistic about it. You have to plan for exits and include it in your strategy from the outset.

Winning awards, publicity and identifying potential partners and people who might buyout your business is crucial.

Most people end up exiting or being bought out by people that were never conceived of as potential purchasers by the entrepreneur.

You can never actually count on being bought out by a large company such as Google or Yahoo like so many startup companies think will happen. This is a nonsensical exit strategy that will be rubbished by potential investors, as the chances of that actually happening are so minimal.

You’ve got to have much more than that in your exit strategy.

You’re fi rst best opportunity is likely to be the last best opportunity. So if there is an offer on the table then you should always take it seriously- even if it’s not what you want or if you think that you can do better.

People often hang on to businesses for far too long, hoping to get a better offer or more money. But there is absolutely no guarantee that you will get a better offer or more money at all. So when you get an offer of a buyout or exit opportunity always take it seriously.

So always keep thinking about your exit strategy and when someone comes along with an offer - take it seriously - don’t get too greedy!

The way to exit is top get someone to buy the business - not by buying shares back from your shareholders. The IPO market hardly exists anymore”.

For more information, advice, and resources on exits go to: http://tiny.cc/ict-fm-toolkit


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Other Sources of Financefor your ICT Business

Below is an overview of some of the other sources of fi nance that are available to early stage ICT SMEs and R&D projects:

Sales and Profi t - Entrepreneurs often underestimate the potential revenues generated by customers and sales. This is a fast way to growth and less expensive than looking for external equity.

Friends and family - are commonly the fi rst port of call for the initial funding that you require to set up your business. The advantages being that the terms of the funding are not usually onerous and your relations with your investors could be easy-going. However, not all entrepreneurs have friends and family with spare cash to invest and those that do can fi nd that this puts extra strain on personal relationships.

EU R&D 7th Framework Programme: The EU R&D Framework programme is the main grant giving programme to support research and technological development for ICT. It offers opportunities to collaborate with other research organisations and SMEs across Europe to support technological development; product and market testing and exploitation across a range of sectors and different countries. The EU has earmarked v9.1bn for funding ICT under FP7, making it the largest research theme in the Co-operation Programme. The Commission issues an annual ICT Work Programme which sets out the themes/challenges of strategic interest and which forms the basis of Calls for Proposals as well as research into Future and Emerging Technologies, and support for horizontal actions. Further Info sources: www.cordis.europa.eu

Asset Finance - Outstanding invoices are often an SME’s biggest asset. Two ways to exploit COMMERCIAL invoices: Factoring and Invoice Discounting. Factoring: is suited to smaller fi rms (below £1m turnover). Factoring Company controls SME’s sales ledger, providing credit collection and control. Pays 80-90% of invoice within 24hrs Invoices are sent to and assigned to the factor. Factor pays the balance (less charges) when the invoice has been paid.

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http://cordis.europa.eu/)

Investment Funds and Syndicates: Whereas private investors tend to invest small amounts in early-stage businesses, there are a few small-scale investment funds and formal syndicates of private investors which look at larger deals of around v250,000 to v1m in businesses with more of a track record.

For more information www.eban.org and www.evca.eu

Corporate Venturing: This is where a large company invests in a smaller venture with which there is some strategic commonality. This is particularly appropriate for ICT and high-tech, innovative businesses in specialist sectors. Considered to be currently underutilised but may increase in popularity as more large corporates begin to recognise the benefi ts, including tax relief of such investments.

Stock markets: There are a few ‘junior’ stock markets such as the Alternative Investment Market (AIM), OFEX and ShareMark in the UK, Alternext operated by Euronext in Europe or Alternativa. There are less offi cial procedures involved than with their larger counterparts, but the costs of listing are still high. Entrepreneurs have to bear in mind that IPOs are the exceptional exit rather than the rule.

Incubators: Also known as innovation centres and business accelerators - provide fi nance, advice and support services to innovative companies of the future. Incubators can also frequently be virtual spaces funded by venture capital companies or set up by large consultancies that are able to offer a complete range of technological, advisory and other business support services to entrepreneurs. Such incubators are private-sector and profi t-driven, as opposed to being publicly funded, with their return coming from their investment in companies rather than from rental income. These types of incubators tend to focus mainly on high-tech and internet-related companies. For further information, please visit www.ebn.eu

For more information on other sources of funding go to: http://tiny.cc/ict-fm-toolkit


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http://www.ebn.eu/

www.eban.org

www.evca.eu

Acknowledgements

With thanks to all of the investors and experts who contributed to this toolkitby giving their time, expertise and advice on access to fi nance.

We would especially like to thank the following individuals for their invaluable contributions:

JEAN MARC BALLY, Aster Capital, Leading global VC fund, Paris

BRIGITTE BAUMANN, President elected of EBAN and Founderand CEO of Go Beyond investment group, Brussels

MICHAEL BLAKEY, experienced angel investorand Director of Avonmore Developments Ltd, UK

ANTHONY CLARKE, Chief Executive and co-founder of Angel Capital GroupChair of British Business Angels Association; Chair Emeritus of EBAN, London

JERRY ENNIS, VC fund manager, serial multinational ICT entrepreneurand COO of Flirtomatic, UK

CHARLES FRANK, Speechly Bircham LLP, London

CLAIRE MUNCK, CEO of EBAN and Project Co-ordinator of ACCESS-ICT

NICK SHAH, experienced angel investor, member of London Business Angels

DUSAN STOJANOVIC, Investor within Internet/M-commerce/Softwarein France, Sweden, Germany, US, China and Founder at TGV

NICK TALL, Speechly Bircham LLP, London

FRANCOIS TISON, 360° Capital Partners,leading European VC fi rm, Luxembourg, Paris and Milan

This toolkit was written and compiled by SOPHIE WILLMINGTON and JENNY TOOTH at Angel Capital Innovations, partner in ACCESS-ICT project.

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Notes


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Notes

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Design: [email protected]

The “ICT Finance MarketPlace” is an initiative delivered by 3 EU funded projects with the aim of improving access to fi nance for innovating ICT SMEs across Europe.

www.ict-fi nance-marketplace.com

REMEMBER that to access the additional information, resources and tools associated with this toolkit you can

go to: http://tiny.cc/ict-fm-toolkit


http://www.ict-finance-marketplace.com/site/