Jacques LaPointe,AVAC Ltd.
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AVOID“START UP MISTAKES”
IN
MONEY MGMT&
FINANCIAL PLANNING
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Today’s Topic
Alberta start -up landscape AVAC has 1000’s of AB
companies AVAC portfo l io of 50+ companies Hands-on exper ience work ing
with the Founders of ear ly s tage cos .
Start-up stage scal ing operat ing growth ex i t .
Seen issues from: Fund Raising Cash Management Financial Planning Exit Etc.
Lots of common patterns Lots of common mistakes
Avoidable “Re-run Movies” Avoidable mistakes
BACKGROUND
About Me
6+ years at AVAC Lead/co- lead $19 Mi l Investment 12 investee companies Port fo l io has ra ised over $55 Mi l
in equi ty and debt . Board Part ic ipant /Advisor for
Port fo l io 15+ years Pr ior to AVAC
Product Management, Marketing, Business Dev., Operations and Technical experience (Public/Private Co.s)
NA and Internat ional exper ience Lead invest igat ion for acquis i t ion Helped grow revenue $0.5-$14MM 4 awarded patents MBA, P.Eng.
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Every company and every situation is unique!!Some themes / recommendations in this
presentation may apply more to some businesses versus others.
There’s always more to the issue than we can discuss!! Some simplification here!
Focus is on early stage companies.While not obvious, the Focus here is on the
Financial Impact.This is an Alberta Story!!!!!!! Based on real
examples.
Let’s have some discussion
REALITY / DISCLAIMER
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BackgroundFounders start a business with a product or service
idea.Eventually need money beyond Friends & Family.
THE INVESTOR PERSPECTIVE
Management? Team
Model Business Model
Market? Opportunity
Money? Financing
Magic? Product/Service/Tech/IP?
Momentum? Market Traction
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Mistake / IssueMany companies BLOW their investment opportunity!
Wait too long to engage investors Mindset is “Build it and investors will come!”
Many companies have ONLY a basic understanding of the investor’s perspective (now popularized by TV’s Dragons & Sharks)
Founders consume cycles “learning” while raising money What an investor is looking for? Why they invest? What types of companies? What stage of progress do they invest? Investment approach / structure / timing of cash? How the investor makes money?
THE INVESTOR PERSPECTIVE
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RecommendationTalk to as many investors, advisors, etc. at
conception and through out the building of your company. Defining your business Structuring your business Business model / pricing model / etc. Accessing grants and other sources of funding Before you need to raise money!!
Engage with Start-up groups, Innovate Calgary, TecEdm, etc.
Engage before you need to raise money!!
THE INVESTOR PERSPECTIVE
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BackgroundHistorical fund raising results in growing valuation
(Alberta). Company progress “deserves” higher share price
(valuation)Successive raises take place over time:
Founders, Friends/Family, Connections, Angel Rounds, etc., etc.
VALUATION GAP
Founders
Friends/Family
High Net Worth Individuals 1
Other Connections
Angel Round
High Net Worth Individuals 2
Concept
Prototype
V1, V2, V3
Strategic Industry PartnerMedia CoverageV4, V5, V6
Customer Discussions
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Mistake / IssueValuation has grown ahead of:
“REAL” revenue “REAL” commercial progress. Ahead of other “REAL” valuation metrics.
Becomes very diffi cult to finance further growth Valuation has grown unattractive to new investors.
Unsupportable valuation Revenue? Return of Investment? Market traction? Views/Visits/Downloads? Comparable Companies?
VALUATION GAP
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RecommendationRaise valuation in small increments
Focus on key valuation metrics. Don’t fall in love with your “development” progress Don’t drink too much of the Company Koolaid
Keep your valuation attractive for future investment. YOU WILL NEED TO RAISE MORE MONEY!
Seek advice from investors Understand what investors are looking for!
Avoid the down round!
VALUATION GAP
DownRound!!
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BackgroundTypically companies raise “enough” money
i.e. based on estimated costs to grow beyond cashflow breakeven (to be self-sustaining).
Or finance certain stages of development Beta Trial / Prototype Proof of concept Product ready for market Reach Initial sales
RAISE MORE MONEY?
Proof of concept
Worked = Continue
Issues = Pivot
Failed = Stop / Quit
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Mistake / IssueCompanies don’t raise enough money when they can95.5% of all early stage companies need more money
And on several occasionsTypically and unfortunately progress takes longer
than everyone thinks / hopes.Raising money gets harder especially when things
don’t go exactly as planned (i.e. takes longer).Companies don’t raise enough - Dilution and
Valuation tend to be considered versus long term objectives and survival.
RAISE MORE MONEY?
Proof of concept
Worked = Continue
Issues = Pivot
Failed = Stop / Quit
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RecommendationTake the money while you can.
While there’s interest / excitement!Expand your Use of Proceeds if needed
Realistically budget more than you think you’ll need. Add more money to each budget item and consider new
items You can always cut back/re-budget/redefine later (things
will change) Don’t be afraid of dilution
RAISE MORE MONEY?
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BackgroundFor all the “right” reasons and “good” intentions:
Founders and/or Shareholders loan money to the company. Convertible debt is used for financing from some angels /
investors Accounts Payable Grows because contractors agree to be
paid later for work undertaken: Legal Firm Patent work $25-50K S/W development $50-100-200K
Start up loans are utilized i.e. BDC.
All necessary financing steps at the time.
DEBT TRAP
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IssueWhen trying to raise money again, Financers can be
scared away when they see the level of debt on the books
Why invest $500K when there’s $350K in debt? Due Diligence stops!Investor concerned that money will pay debt and not
advance companyYour financials don’t always explain your plan to
address debt: i.e. SRED will repay Founders/Shareholders i.e. Convertible debt is planned for equity conversion in Q4,
etc.
DEBT TRAP
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RecommendationCarefully plan debt accumulation versus equity or
other sources of financing. Don’t be afraid of dilution.Convert loans to equity ahead of fund raising (or at
least get additional notes to the financials such that investors can understand the repayment plans so their capital is not at risk)
Convert Accounts Payable to manageable, structured long term debt.
DEBT TRAP
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Background Start-up builds business and gains traction Hires a “marquee” or “proven” individual at substantial
salary / options / etc.
Issue After 8-10 months it is not working Company is faced with:
Lost productivity / progress Severance Options at issue Time consuming resolution Money spent “Community” wondering what happening (NOISE)
HIRING KEY PERSONNEL
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RecommendationCompany and the Marquee individual need to define
deliverables to: Align expectations with company vision/strategy Provide tangible attributes for separation
Ensure start-up oriented employment agreement If the “marquee” individual is looking for big severance that
should be a Red Flag. Options to be earned with progress or granted over time
HIRING KEY PERSONNEL
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BackgroundMany early stage company Boards are formed with
InvestorsThis is not surprising:
They believe in you! They may know you (family / friends) They like your market, your idea, your vision, etc.
They join your Board because they can bring value: Experience that you can leverage. Invested in other companies. Board experience. Venture Capitalists Genuine interest = Investor
BOARD DEVELOPMENT
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IssueBoard members are confl icted (Typically major
shareholders)First and primary obligation of the Board is to the
company.WRT Financing: Too often the Board discussion is
shareholder based (about dilution versus adequate funding to achieve strategic plan).
Companies can be hampered with raising too little or too high a valuation
BOARD DEVELOPMENT
It’s settled. We’ll raise money at double the valuation!
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RecommendationTry to recruit independent Board members that can
still add value to your businessLearn about Board roles, guidelines, competencies,
etc.
BOARD DEVELOPMENT
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BackgroundFounders start a business with mutual intentions
Sometimes friends, relatives or spousesSplit ownership equally, invested equally at startOne decides to leave business but retains ownership
share
THE PARTNERSHIP
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Mistake / IssueAn inappropriate structure was established for
separation One founder still has a major influence (shareholder) on the
company but is not involved. Large voting block of shares remains with former founder Significant company development still to go Interests no longer align Strategic direction, financial decisions, etc. at odds
$$$$
THE PARTNERSHIP
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RecommendationConsider potential outcomes of your partnership.Develop structure whereby partners/founders can exit
Amicably in the current and future stages of the company
Some kind of staged approach? Seek legal counsel
THE PARTNERSHIP
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BackgroundCompany has established itself “in-market” and is
progressingDecides its time to exit
PREPARING FOR AN EXIT
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Mistakes / Issues Fact: Most companies that try to sel l don’t get acquired. Companies hire an M&A (merger acquisit ion fi rm) that is referred to them.
Few analyze and evaluate fi rms Company has not thought through an Exit “Bui ld it and they wil l come” Company has not properly prepared itself for an Exit and has to start
Financial reporting Company Structure i.e. Equity & Debt status, Board of Directors, etc. Evidence of progress (the “data room”)
Sales pipeline, material agreements, employee agreements, etc. IP agreements, IP / Patent applications
Valuation expectations What are acquirers looking for? Revenue? Strategic? IP? Team?
Could be big fi nancial mistake.
Recommendation Consider the exit path throughout your journey. Always keep an eye on the exit strategy and what is required Talk to advisors. Get to know an M&A special ist/advisor.
PREPARING FOR AN EXIT
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Mistakes / Issues Not hearing what the investor is asking for – not answering the question Not giving the investor what they requested
Financial statements, Cashflow, A/R, A/P, Competitive Landscape Giving the investor something they didn’t ask for Misguided expectations
All the money upfront Investment is in the bag
Turn-off s Slow / No responses to questions and due di l igence Selective answers to due dil igence Aggressive / pushy / want fast response Big t ime gaps disappear for a month then asks what is the status “I think you have everything you need” tel l ing the investor No shows by team members invited to Due Dil igence meetings I just need $100K and everything wil l be fantastic not thought through Distrust / lack of report Ungracious or inappropriate responses to a decl ine
INVESTOR DISCONNECTS / TURNOFFS
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RecommendationThink like the investorGet to know the investorUnderstand the investor perspective
INVESTOR DISCONNECTS / TURNOFFS
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START UP
04/07/2023 29