Full Spectrum of Financial Options
September 14, 2011
Agenda
ICCC Program Overview
Impact as of 2010
Program Benefits
Eligibility and Application
Financing your business growth
Copyright © 2010 ICIC 2
1
Inner City Capital Connections Program
Copyright © 2010 ICIC 3
1.1
Overview
The Inner City Capital Connections (ICCC) is a free national program designed to
drive the growth of inner city businesses. It is the country’s only program that teaches
growing inner city companies about capital and matches them with investors to create
jobs and local economic prosperity.
 History: Seven (7) ICCC events have already occurred:
Los Angeles (2005), New York (2006), Miami (2006), Chicago (2007), New York (200809), and Los Angeles (2010).
 Partners: The ICIC, Bank of America and Fortune
Copyright © 2010 ICIC 4
1.1
Timeline
Training
Nominations & Applications
Selection
of Applicants
Oct. 20:
Detroit
July
Aug.
Sept.
Oct.
Oct. 25:
Webinar
Nov. 10:
Main Event
Nov.
Dec.
5 companies
selected to
present
Copyright © 2010 ICIC 5
1.2
Impact as of 2010
 ICCC companies have raised $372 million in capital:
$150 million in equity financing and $223 million in debt.
 21% CAGR for revenues and 24% average CAGR for employment
 72% of ICCC participants surveyed this year will add a collective 900 new
jobs -- a 40% increase
 Participants have been featured in publications like the Wall Street Journal,
Reuters, Inc. Magazine, Portfolio, PE Hub, MSN Money and Small Business
Television
Copyright © 2010 ICIC 6
1.3
Program Benefits
Companies will…
Discover a full range
Learn how to optimize
of financial options
business plans to attract
potential investors
ICCC
Build networks and
Obtain company-specific
strengthen relationships
with investors
feedback from seasoned
investors
Copyright © 2010 ICIC 7
1.4
Eligibility and Application
Eligibility Criteria:
 Companies headquartered in or having at least 51% of
their physical operations in an inner city
 For-profit corporations, partnerships, or proprietorships
with revenues of at least $2 million or more OR have
40% of their employees located in the inner city
Application Process:
 Simple one-page application
Copyright © 2010 ICIC 8
1.5
Application Form
1.6
What to do at ICCC
S trategize your approach
T hink about what you
need capital for
A ssess your business
plan
R ehearse your 5 minute
After
pitch
T rain at the training day
During
L isten: hear what other have
Before
to say
E ngage yourself in the
process
A sk for feedback: ask
investors what they think, not
just for their capital
G ather feedback
R each out to investors
O ptimize new
relationships from ICCC
W elcome new wealth
creation strategies
R e-assess your business
plan and your strategy
N etwork: meet investors
and other companies
Copyright © 2010 ICIC 10
2
Financing your business growth
11
2.1
Growth Requires Capital
Operational capacity
Working capital needs
Capital expansion
 Management
 Accounts receivables
 Technology
 Sales and distribution
 Inventory
 Equipment
 Support and service
 New sales/orders
 Leasehold improvements
 Administration
Equity, Tax Credits
Line of credit, Factoring,
Equity, Purchase order financing
Debt, Tax
Credits, Grants
12
2.2
Debt vs. Equity
Debt
Equity
Risk
Emphasis on collateral and cash flow
to reduce risk (higher risk for
borrower)
Emphasis on future opportunity and return on
investment by assuming risk (higher risk for
investor)
Repayment
Repayment starts after funding
Deferred repayment
Return
Return for lender not based on
company performance
Return for investor dependent on company
performance
Cost
Lower cost for company if business
is successful
Higher cost for company if business is
successful
Dilution
No ownership dilution
Ownership dilution
Relationship
Monitoring relationship
Involved partnership
Documents
Standard issues and documents
Complex issues and documentation
13
Forms of Financing
2.3
Bank Debt
Mezzanine
Debt
Venture
Capital
Growth
Equity
For companies with
positive cash flows
(need to support
current interest
payments)
For start-up
companies
searching for large
amounts of capital
For companies
seeking an
infusion of capital
to meet growth
objectives
Used for line of
credit, working
capital, real estate
and other
investments in
capital equipment
Used in conjunction
with bank debt and
private equity to “fill
the gap”
Used for proof of
concept or to test
the business model
and begin building
out professional
management team
Used after a
company has a
viable product or
service and is
seeking to scale
the business
Requires collateral
and operating history
Unsecured high
interest (e.g. 12-18%)
debt often bundled
with equity “kickers”
known as warrants
For companies
with positive
cash flows
Pre-revenue or early
stage revenue
companies
14
2.4
The more established your business, the less risk a lender or
investor takes on
Stage Risk
Angel and Venture
Capital
25-55%
high
15-25%
Growth Equity
Active Investors
Return
Later Stage
Equity
5-18%
Mezzanine
Risk Capital
Passive Investors
Debt
low
Risk
high
15
2.5
Equity is the most expensive, risk tolerant form of capital
Traditional
Equity
Equity Stage
Form
Amount
Seed Stage
Wealthy individuals, small
VC funds
$25k-$250K
Early Stage
Development Stage
Later Stage
Community
Development
Equity
Double Bottom Line
Angel groups, VC funds
Growth equity
Private equity
Financial returns and job
creation for underserved
regions and/or people
$500k-$3M
$3M-$10M
$10M-$1B
$250K-$2M
16
Debt Capital Overview
2.3
Ownership
None
Typically
a non-dilutive
form of
financing
Structure
Secured vs.
Unsecured
Private vs. Public
debt
Mezzanine and other
sub-debt ;
- Placed first in recovery
of assets in event of
company’s liquidation
- Include covenants that
require strict financial
ratios to be maintained
Timelines
Variable terms
Typically 3-5 year
term loans
Repayment is not
dependent up on
“liquidity” event
Pricing:
Commercial debt price ranges from 8-14%
interest rate and
Mezzanine debt ranges from 12-18%
interest rates + equity stakes via warrant
positions
Partnership
Debt investors are
typically comprised of
commercial lenders,
mezzanine investors, and
hedge funds
Focus – debt investors are
generally focused on cash
flow of the underlying
business and ability to
repay
Operational Involvement –
debt investors are usually
not as involved in the
business on a day to day
basis as equity investors
Exit – debt repaid by cash
flow; can be refinanced\
17
2.7
Debt Considerations
Pros
 Non-dilutive
Cons
Necessitates strong and consistent
cash flows
 Cheaper capital (with current cash
flow needs); leverages equity of
owner
 Maintains management control
Restricts cash flow; often requires
financial covenants
 Debt providers typically not
involved in day to day of business
 Significant owner risk
Management doesn’t benefit from
operational expertise of investors
18
Equity Overview
2.3
Ownership
Typically, 1545% ownership
plus 1-2 seats
on board of
directors
Structure
Timelines
Preferred stock vs.
common stock)
3-8 years holding
period
Select super rights
Expectations of
company “liquidity”
event—sale,
merger, IPO or
recap
Control new
financings, sale of
company, key hires,
etc
Partnership
Strategy—e.g.
business and
financing strategy,
business and
partnership
development
Operations—e.g. sales,
marketing, finance, etc
Finance—e.g. raising
capital including loans,
equity, grants, etc.
19
2.9
Equity Considerations
Pros
Owner liquidity
 Remove the day-to-day
funding street
 Added strategic advise
 Provide supplementary
resources like financial
management experience
 New Networks
Cons
Ownership dilution
 Reduced management control
 Less owner risk
 More involved than your debt
provider
 Reduces the short-term trade-off
between cash flow and growth
 Expensive capital
 Cost of legal and other
documentation
20
2.10
A Successful Investment
Win-win for founders and investors
Company Example:
 $5M revenue, nearing
breakeven
 Raised $3M of equity, selling
33% of company
 Valuation: pre-money + newmoney = post money
$6M pm + $3M = $9M
Five Year Growth
18
16
14
12
10
8
6
4
2
0
Sales
1
Growth & Value:
 20% annual growth for five
years = $15.3M revenue
 Sell company for $30M to third
party
 Owners get $19M (66%),
investors get $10M (33%)
original investment
2
3
4
5
6
30
20
10
Exit
Valuation
Founders
Investors
Starting
Valuation
Total
21
Questions?