Introduction to Finance for start-ups
3 October 2012
Jonathan Gold
Confidentiality Statement: Please note that this document or presentation is and remains the property of Finance Tree. We will enforce
our copyright to all material. Reproduction or use of this material is only permitted with prior written consent of Finance Tree ltd.
© Finance Tree ltd, 2012
£7.5m
© Finance Tree ltd, 2012
Track record
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
47 investments in 32 businesses
£4.3m invested plus £2m additional
© Finance Tree ltd, 2012
www.riverscap.com
Sources of Capital
1.
Banks
2.
FFF…. & Founders cash
3.
Business Angels
4.
Venture Capital
5.
IPO/ Aim/ Stock Markets
6.
Crowdfunding
7.
Peer to Peer lending
4
© Finance Tree ltd, 2012
Colours of money !
uk.zupa.com
Crowd Funding
Its relatively new…
Advantages / Disadvantages
2 Examples…not a recommendation !
www.crowcube.com
www.growthfunders.com
© Finance Tree ltd, 2012
Money costs money …
Accountants
CORPORATE FINANCE SPECIALISTS
Legal advisors
Non-exec directors
Brokers, banks…
© Finance Tree ltd, 2012
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, 2012
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, 2012
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 – eg: biotechnology, electronics
© Finance Tree ltd, 2012
Finance for Business
North East Funds
£15m
£25m
£7.5m
£20m
£20m
£20m
© Finance Tree ltd, 2012
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, 2012
Statistics of VC portfolios…
10
Investments
4
Fail
4
Living dead
2
Stars
© Finance Tree ltd, 2012
Why bother?
VC 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, 2012
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, 2012
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, 2012
Professional
advisors
Fund
Manager
Next stage
of finance
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, 2012
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
17
© Finance Tree ltd, 2012
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, 2012
RED externally driven
6
Part I. The Investors Perspective
19
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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, 2012
The Management Team
21
© Finance Tree ltd, 2012
21
Innovative Defensible Products
22
© Finance Tree ltd, 2012
22
Market size
23
© Finance Tree ltd, 2012
23
Scalable Business Models
24
© Finance Tree ltd, 2012
24
Value drivers…
…it all comes down to these…
SALES
Working
Capital
Cash
Tax rate
Cash margin
Fixed Assets
Cost of
capital
25
© Finance Tree ltd, 2012
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, 2012
The
investment
process
27
© Finance Tree ltd, 2012
Investment Process
• Initial enquiry
• Basic questions (eligibility, type of business, stage, investment need)
8-12 weeks
• Business plan submitted
• Review and initial due diligence
• Rivers Investment Meeting
• Investment Committee
• Offer letter
• Due diligence
• Agreements
• Completion
• Post deal support and monitoring until exit
28
© Finance Tree ltd, 2012
Contact to Exit
Enquiry
Eligibility
Business plan submitted
Meetings…Review
Investment Committee
Due diligence
Offer Letter (term sheet)
Legals
Post deal….. monitoring….exit
29
© Finance Tree ltd, 2012
Completion
Business plan
• No right answer
• No set format
• No right length
•
•
•
•
•
•
•
30
© Finance Tree ltd, 2012
Communicate
Concise
Clear assumptions
Back up evidence
Team
Financials
Risk
Business Plan: It is Simple!
But so many people don’t cover the basics
Idea
•
What is it?
•
Applications explored
•
Key Markets
•
Users/ Benefits
•
Environment / competition
Strategy
•
What is your goal
•
By When?
•
What type of business are you?
•
How do you make money (sales) ?
•
Revenue model
•
Delivery / production
•
Team and systems
•
Risks / risks managed
Finance
•
Cash flow forecast (cumulative)
•
Breakeven
•
Investment needed
•
Investment return
31
© Finance Tree ltd, 2012
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Exec Summary
Business Model
Mission
Ownership
Governance
Management
Risks
Key Personnel
Resources
QA
Marketing
Products
Financial Model
Investment Offering
Please Include
• Proposition
• People
• Potential
• Path to market
• Proven
• Funding needed - enough to grow
• Financial return
• Forecasts and exit
32
© Finance Tree ltd, 2012
Assessment
Carried out on…
You
Your plan
Your references …….others you don’t know
By the Fund manager, external advisors, experts
33
© Finance Tree ltd, 2012
Due diligence… going behind the plan
Be prepared you will have to answer questions on
everything about the business and your team:
• Directors (disclosures)
• Share agreements
• Other investors
• Finances
• Contracts (staff and customers)
• Orders, claims
• Patents, other IP….
• …. And more
34
© Finance Tree ltd, 2012
Deal or no Deal
35
© Finance Tree ltd, 2012
Too often forgotten
• Need to inform and stimulate… too many myths
• Need for advice… experience matters here
• Legal agreements… be aware, most are not
• Deal Costs… factor in and limit
36
© Finance Tree ltd, 2012
Offer
Simple offer letter…not term sheet
Due diligence… forms are simple
BUT…Be prepared
• Value implied by offer
• Time limited…normally 7-10 working days
• Exclusive for around 10 weeks
37
© Finance Tree ltd, 2012
Financial Instruments
• Loan
• Equity
• Convertible
• Kickers…. Uplift
• Mezzanine
38
© Finance Tree ltd, 2012
Types of shares
• Ordinary
• “A” Ordinary
• Prefs
• Different right and incentives / restrictions apply
39
© Finance Tree ltd, 2012
Fees
• Costs money to raise money
• 10% capital raised
• More on small deals
• Ours Fees 2.9% arrangement
• No annual monitoring
• Non-exec directors
40
© Finance Tree ltd, 2012
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, 2012
RED externally driven
6
Why Bother?
A good VC should add real value to your business over and
above the money providing help with:
• Recruitment of the senior team and suitable non-exec Directors
• Extending your contact base of customers/partners
• Assisting the business to enter new markets
• Providing support on complex deals (e.g. acquisitions)
• Acting as a friendly outsider in strategy debates
• Securing additional funding and negotiation of exits
42
© Finance Tree ltd, 2012
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
• Will want full transparency in terms of information about the
business
• Typically look to agree a growth and exit strategy up front
43
© Finance Tree ltd, 2012
Things to Remember about VCs
• Investors in FUND are their ultimate ‘client’
• Funds normally operate within a fixed timeframe – this is why an exit so
critical
• Investment will almost always involve ownership
• VC managers only make money if their portfolio businesses are
successful
• Objectives defined by annual rate of return over a hurdle rate set by the
investors
44
© Finance Tree ltd, 2012
Part III. Post-Investment
45
© Finance Tree ltd, 2012
The
EXIT
46
© Finance Tree ltd, 2012
The only ways out
•
•
•
•
Trade sale
Buy-back
IPO or other stock market listing
Sale on to other investors.
• And the only other “Exit” is….?
47
© Finance Tree ltd, 2012
EXITS…
At some point the Fund Manager agrees to EXIT the
investment…
…and (hopefully) return any profit to the fund from the
growth of the company or its value…
Common exits are:
• Further investment round (someone else buys out fund)
• List on a stock exchange
• Trade sale, sold to another corporation.
© Finance Tree ltd, 2012
Investment in UK Technology companies…
2009
(BVCA performance Survey)
49
£394m in technology-related businesses (2008: £619m)
Of this, three areas received the most amounts
Communications – £51m
Computer software – £46m
Medical / Pharma – £36m
(2008… £81m)
(2008... £310m)
(2008… £73m)
Of the total amount invested
Early stage –
Expansion –
MBO/I –
© Finance Tree ltd, 2012
33%
41%
20%
(2008… 43%)
(2008… 31%)
(2008… 3%)
AIM… new listings
Month
UK
International
Total
January 08
11
1
12
February 08
6
3
9
April 2010
May 2010
4
1
0
0
4 (£74m)
1 (£5.8m)
Source: LSE
NB: listings in April 2010.. 2 in mining 1 in industrial metal
© Finance Tree ltd, 2012
Thank you…
© Finance Tree ltd, 2012
We have moved ! … to:
2 Collingwood Street
Newcastle NE1 1JF
0191 230 6370
www.riverscap.com
Jonathan Gold
Director
j.gold@riverscap.com
0191 230 6370
Pictures by J.Gold
Copyright 2011
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© Finance Tree ltd, 2012