The Materials Entrepreneur: Raising Venture Capital19 April 2010

Hazel MooreFirstCapital

Raising equity funding means selling a stake in your business to an external party

What are you doing when you raise venture capital?

• Entering into a Faustian pact

• Surrendering control (in practice if not in fact) over your company in return for money

• Pros

• Limited liability

• Pay on success (reduced exit proceeds)

• Cons

• When things go wrong…..

• Puts you on a timeline to sell

How much money you can raise, and who from, depends on what stage of development the business is at

What are the sources of equity funding?

Stage of development

Type of funding

Typical amount

Potential investors

Feasibility

Develop bench prototype

Seed <£50kFriends and family

R & D

Initial trials of demonstrator unit

Start-up £50k-£1mnAngels, seed funds

Scale up & production

Develop production prototype and engage initial customers

First round £0.5mn-£2mnAngels, some VCs

Expansion

Generating revenues from product in market

Second round >£1mnVCs, strategics

Angels typically can provide missing skills to fledgling management teams – this can be a great benefit (or a hindrance)

Angels: who are they?

• Private individuals who invest their own money in seed and start-up businesses that interest them

• Typically invest from as little as £5k up to £250k, often in groups, eg Cambridge Angels, OION

• Usually only invest locally (within 50 miles/2 hrs)

• Often secretive and difficult to find – access via angel networks, university alumni, professional advisers, networking

VCs come in all sorts of different shapes and sizes. Unless you do your homework and target carefully, you can waste a lot of time and get no-where

Venture Capitalists: NOT “one size fits all”

• Professional investors who invest money that has been entrusted to them by others (typically pension funds, insurance companies, banks etc)

• Investment amount can range from £500k to £10mn (or more)

• Who should you approach? Do your homework

• Know their criteria (stage, sector, geography)

• Check their portfolio (competing investments, sector knowledge)

• Seek an introduction

To make lots of money!

Typically for an early stage business, you need to have the potential to make your investors 10X their money

Puts you on a timetable to generate success and sell the business

What do investors want?

VCs fund only around 1-2% of businesses that approach them

There are lots of very good businesses that are not suitable for venture capital

What makes a good investment opportunity for a venture capitalist?

• Very high growth potential

• Large addressable EXISTING market

• Evidence of commercial demand/need

• Having an identifiable “unfair advantage”

• Products not just technology

• Robust IPR protection

• Excellent quality team with track record of success

• Realistic financial forecasts and capital requirements

• Credible exit options

Investors want to invest as little as possible for the maximum possible return in the shortest possible timeframe

Therefore anything that delays or reduces the exit or requires unanticipated extra capital is bad news

What do investors really dislike?

• Technology push not customer pull

• No evidence of commercial need

• Low value business models

• Licensing (not enough value capture)

• Process innovation (how to police?)

• High capital requirements

• Heavy investment in fixed assets

• Lengthy time to commercialisation

• Market yet to develop

• Slow adoption cycle by customers

All risk must be seen in the context of the potential return

If the potential return is very high, investors will take more risk

The more that you can do to mitigate or reduce the risk, the better your chances

Investors are very risk averse

• Market risk

• What if the market is not big enough?

• What if the customer does not want to buy the product?

• Execution risk

• What if the management cannot deliver?

• Financial risk

• What if delays mean more money is needed?

• Investment risk

• What if I cannot sell for enough money?

• Technology risk

• What if it cannot scale to production?

Fundraising is also about psychology

Create demand and desire for what you are selling

Maintain momentum and competition in the process

How to maximise your chances of running a successful process

• Offer an attractive investment opportunity supported by a compelling business plan and presentation

• Know who to approach and how to get in front of them

• Achieve (and report) sales/milestone progress during fund raising process

• Maintain deal momentum to achieve closure

The key steps

• Preparation - before you start

• The business plan

• The presentation

• Marketing – making it count

• Selecting your targets

• How to get in the door

• Completion - getting the money

• Negotiating terms

• Navigating due diligence

Objective of the teaser/business plan is to secure a meeting

Sales document not an operating plan

What makes a good investor business plan?

• Crisp, clear, compelling

• Concise and well presented, avoid jargon

• Short

• 25-30 pages

• Save the detail for later

• Focus on:

• Market opportunity – how big, why you?

• Customer benefits – quantify

• Management capability – track record

• Financials – underpin with defensible realistic assumptions

You only have one chance to make a first impression

What makes a good investor presentation?

• First impressions matter

• Be on time

• Prepare: know who you are meeting and their background

• Practice beforehand

• Prepare a powerpoint presentation of 10-12 slides

• Focus on the investment case

• Expect the meeting to last no more than 1 hour

• Listen to the questions and answer them clearly

• Be enthusiastic and upbeat

• Ask for the money

Fund raising is time consuming - persistence and hard work is required

How to get in the door

• DO NOT SEND AN UNSOLICITED PLAN BY EMAIL

• Seek a referral; or

• Check the name of the relevant person and call him/her

• Have your elevator pitch prepared for the phone call

• Capture his/her attention

• Ask for a meeting

• Don’t forget to follow up (at every stage)

Keep momentum high and create a sense of competition

Surviving due diligence

• Don’t take your eye off the ball

• Fund raising will take 4- 6 months

• The business MUST continue to make progress

• Keep the momentum high

• Respond quickly to information requests

• Think about your referees and tee them up (VCs won’t just take your word for it)

• Focus on the whole deal, not just the valuation

• Get the best advisers and lawyers you can afford

GOOD LUCK!

hazel.moore@firstcapital.co.uk+44 20 8563 1563