Raising investment
16 October 2013
Jonathan Gold
© Finance Tree ltd, 2013
www.financetree.biz
www.riverscap.com
Finance Tree works with businesses to help them
understand the needs of investors and find the right
investment.
2005 NStar Corporate Finance established
2006 Finance and Business launched
2008 (April) Management Buyout and creation of Finance Tree
2009 (April) created Rivers Capital Partners
2010 Managers of the £7.5m North East Angel Fund
2012 Invested in 40 businesses and total 80 investments
www.riverscap.com
© Finance Tree ltd, 2013
No free lunch…money costs
Banks
Grants
Other lenders (ie: UK Steel Enterprise… NESTA)
FFF
Venture Capital / Business Angels
Sales !!
© Finance Tree ltd, 2013
Unreasonable risk
for an
unreasonable return
© Finance Tree ltd, 2013
Venture Capital / Private Equity…
“Private Equity is medium to long-term finance
provided in return for an equity stake in potentially
high growth unquoted companies”.
Source: British Venture Capital Association (BVCA) 2005
NB: Almost all are… FSA regulated collective investment schemes…
© Finance Tree ltd, 2013
Are you 1 in 100
Most VCs probably invest in 1 in 10 they look into
But at least another 90 have tried
So what makes you stand out ?
How can you blow everyone else away
1. Displace the competition?
2. Convince people to buy-in and buy?
3. Do more than collect hits on a
website
4. MAKE A RETURN…
© Finance Tree ltd, 2013
Sources of capital of capital
Concept Finance
Research
Grant
~ £100,000
SEED FINANCE
~ £250,000
“Family
money”
Early Stage
Commercial
loan
£500,000
to ~ £1m-2m
Business Angel...
Strategic development partners
GRANTS….
North East Finance for Business (£125m)
© Finance Tree ltd, 2013
Venture
Capital
Venture capital is often a
crucial element in…
Getting a new business going
Start-up
Funding a step-change in the business
Rapid organic growth or M&A
Effecting a change of management or control
Buy-in / buy-out / public-to-private
Funding long-term development pre-revenue
Typically high technology
© Finance Tree ltd, 2013
The investment model
Generating £ cash…
Investment in…
Sale of company…
or “exit “
Development &
early sales
(losses…)
…10x return in 5 yrs
Time … since investment
© Finance Tree ltd, 2013
Finance for Business
North East Funds
© Finance Tree ltd, 2013
Statistics of VC portfolios…
10
Investments
4
Fail
4
Living dead
2
Stars
© Finance Tree ltd, 2013
Why bother?
VC should add real value to your business
•
•
•
•
•
•
Recruitment of the senior team and suitable NXDs
Extending your contact base of customers/partners
Assisting the business to enter new markets
Providing support on complex deals (eg: acquisitions)
Acting as a friendly outsider in strategy debates
Securing additional funding & negotiation of exits
© Finance Tree ltd, 2013
So is there a downside?
Lose some control –
– there will be another owner of your business
VC will normally want a seat on your Board
Full transparency in terms of information & business
Typically look to agree a growth and exit strategy up front.
© Finance Tree ltd, 2013
Applying…process
2 page
proforma
Reject or
resubmit
Referral
(sponsor)
Fund
Manager
1
2
Eligibility Screen
(against POC)
Due
diligence
Project proposal
prepared with Sponsor
and Fund Manager
Mentor or NXD
appointed
Term sheet
(signed)
Investment
Committee
Draw down
funds
Monitor
3
© Finance Tree ltd, 2013
Professional
advisors
Fund
Manager
Next stage
of finance
© Finance Tree ltd, 2013
Financial value drivers
16
SALES
Working
Capital
Cash
Tax rate
Cash margin
Fixed Assets
Cost of
capital
© Finance Tree ltd, 2013
Value & IRR
Ultimately its what an investor will pay !
Investment required
•
Time to a given return
•
Return the investor needs
•
RISK
Valuation
• Pre-investment
• Post-investment
• % ownership to give return
© Finance Tree ltd, 2013
1
2
3
4
5
6
7
1x
0
0
0
0
0
0
0
2x
100
41
26
18
14
12
10
3x
200
73
44
31
24
20
17
4x
300
100
58
41
32
26
21
5x
400
123
71
49
38
30
25
6x
500
144
81
58
43
34
29
7x
600
164
91
62
47
38
32
8x
700
182
100
68
51
41
34
9x
800
200
108
73
55
44
36
10x
900
216
115
77
58
46
38
IRR… internal rate of return
YEARS
Multiple
1
2
3
4
5
6
7
1x
0
0
0
0
0
0
0
2x
100
41
26
18
14
12
10
3x
200
73
44
31
24
20
17
4x
300
100
58
41
32
26
21
5x
400
123
71
49
38
30
25
6x
500
144
81
58
43
34
29
7x
600
164
91
62
47
38
32
8x
700
182
100
68
51
41
34
9x
800
200
108
73
55
44
36
10x
900
216
115
77
58
46
38
© Finance Tree ltd, 2013
Indicative timeline…end game
Task
Timeline
(months)
1
2
3
4
5
Initial planning meetings
Plan/offer development
Modeling & Valuation
Information memorandum
Tax planning
Investor identified
Presentations to investors
Consideration of offers
Preparation for due diligence
Negotiations with investors
Internal due diligence
Legal document prep.
Final offers
Investor due diligence
Exclusivity period
Completion
BLUE internal
© Finance Tree ltd, 2013
RED externally driven
6
What do investors look for ?
© J.Gold, 2011 all pictures by J.Gold rights reserved
© Finance Tree ltd, 2013
Lessons from Venture capital…
What are investors looking for
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Leadership potential of lead entrepreneur
Leadership potential of management team
Industry expertise in management team
Track record of lead entrepreneur
Track record of management team
Sustained share position
Marketing and sales expertise of team
Organisational abilities of team
Ability to get cash out of the investment
Degree of product-market understanding
Expected rate of return on investment
Time to breakeven
Finance and accounting expertise of team
Ability to create post-entry barriers
Business meets funding constraints
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Process/production capabilities of team
Uniqueness of product/technology
Market growth and attractiveness
Degree of market already established
Time required to payback investment
Ability to influence nature of the business
Importance of unclear assumptions
Stage of investment required
Ease of market entry
Strength of suppliers and distributors
Nature and degree of competition
Location of business
Business and product fit with VC portfolio
Projected market size
Sensitivity to economic cycles
Ability to syndicate
Seasonally of product market
Scale and chance of later financing rounds
Location of business relative to fund.
Source: Tradeoffs in the investment decisions of European Venture Capitalists. (Authors: Daniel F. Muzyka and Sue
Birley) Journal of Business Venturing Vol 11 No.4 July 2000
© Finance Tree ltd, 2013
Business models not Business plans...
VALUE
PROPOSITION
Market position
OFFERING
Delivery/resource
SYSTEM
FINANCIAL model
© Finance Tree ltd, 2013
·
·
·
Choice of Target Segment
Development of customer benefit
Competitive position (or USP)
·
·
·
·
Actual product / scope FEATURES / BENEFITS
How its delivered... Is on-line the product or means to an end... How does delivery matter
Customer decision process
MAP the PRODUCT OFFER to the CUSTOMER BUYING process
·
·
Aligning internal SYSTEMS, delivery PARTNERS, PLATFORMS
Ensure these meet the PRODUCT delivery benefits
·
·
·
·
·
·
·
REVENUE to generate SHAREHOLDER value
GROWTH model
Advertising
Product Service or information sale
Transaction / facilitator
Subscription
…and EXITS/returns !
© FinanceTree ltd, 2011
© Finance Tree ltd, 2013
Last but not least…EXITS…
PLANNED from day one
Fund Manager will want a well defined EXIT
Investment Return to the fund from growth of company…
Common exits
Further investment round (someone else buys out fund)
Listing on a stock exchange (IPO)
Trade sale, sold to another corporation.
© Finance Tree ltd, 2013
Thank you
16-18 Hood Street
Newcastle-upon-Tyne NE1 6JQ
0191 230 6370
www.riverscap.com
www.financetree.biz
www.twitter.com/financetree
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© Finance Tree ltd, 2013