12 October 2010
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, 2010

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
2011 15 investments 4 follow-on £1.8m <£700,000 additional cash www.riverscap.com
© Finance Tree ltd, 2010

LC
L
Imperial College
AngelNet
SA
T
ISIS (Oxford University)
E-S yn erg y
AE
A T ec hn olo gy
Cascade Seed Fund
SET 2
Southampton University
DT
I
Rainbow Seed Fund
Qi
3
NS tar
POC Pilot
DCF
3-Pillars Fund
University of Bath
Bristol University
© Finance Tree ltd, 2010
Fin an ce
Tr ee
No rth
Sta r E qu ity
North East Co-IF
North East POC
Riv ers
Ca pit al
3

Other lenders
(ie: UK Steel Enterprise… NESTA)
FFF
Venture Capital / Business Angels
© Finance Tree ltd, 2010

Accountants CORPORATE FINANCE SPECIALISTS
Legal advisors
Non-exec directors
Brokers, banks…
© Finance Tree ltd, 2010

“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, 2010

Concept Finance
Research
Grant
~ £100,000
“Family money”
Commercial loan
SEED FINANCE
~ £250,000
Early Stage
£500,000 to ~ £1m-2m
Business Angel...
Strategic development partners
GRANTS….
Venture
Capital
North East Finance for Business (£125m)
© Finance Tree ltd, 2010

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
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£15m
£25m
£7.5m
£20m
£20m
£20m
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Generating £ cash…
Investment in…
Sale of company… or “exit “
Development & early sales
(losses…)
…10x return in 5 yrs
Time … since investment
© Finance Tree ltd, 2010

10 Investments
4 Fail
Living dead
2 Stars
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VC should add real value to your business
• Recruitmen t 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, 2010

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, 2010

2 page proforma
Referral
(sponsor)
1
Fund
Manager
2
Reject or resubmit
Eligibility Screen
(against POC)
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Project proposal prepared with Sponsor and Fund Manager
Mentor or NXD appointed
Term sheet
(signed)
Due diligence
Investment
Committee
Draw down funds
3
Monitor
Professional advisors
Fund
Manager
Next stage of finance

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
1x
6x
7x
8x
9x
10x
2x
3x
4x
5x
1
0
500
600
700
800
900
100
200
300
400
2
0
144
164
182
200
216
41
73
100
123
3
0
81
91
100
108
115
26
44
58
71
4
0
58
62
68
73
77
18
31
41
49
6
0
34
38
41
44
46
12
20
26
30
5
0
43
47
51
55
58
14
24
32
38
7
0
29
32
34
36
38
10
17
21
25
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Multiple
1x
2x
7x
8x
9x
10x
3x
4x
5x
6x
1
0
100
600
700
800
900
200
300
400
500
2
0
41
164
182
200
216
73
100
123
144
3
0
26
91
100
108
115
44
58
71
81
62
68
73
77
31
41
49
58
YEARS
4
0
5
0
18 14
47
51
55
58
24
32
38
43
16
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38
41
44
46
20
26
30
34
6
0
12
32
34
36
38
17
21
25
29
7
0
10

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 RED externally driven
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© Finance Tree ltd, 2010

Lessons from Venture capital…
What are investors looking for
1 Leadership potential of lead entrepreneur
2 Leadership potential of management team
3 Industry expertise in management team
4 Track record of lead entrepreneur
5 Track record of management team
6 Sustained share position
7 Marketing and sales expertise of team
8 Organisational abilities of team
9 Ability to get cash out of the investment
10 Degree of product-market understanding
11 Expected rate of return on investment
12 Time to breakeven
13 Finance and accounting expertise of team
14 Ability to create post-entry barriers
15 Business meets funding constraints
16 Process/production capabilities of team
17 Uniqueness of product/technology
18 Market growth and attractiveness
19 Degree of market already established
20 Time required to payback investment
21 Ability to influence nature of the business
22 Importance of unclear assumptions
23 Stage of investment required
24 Ease of market entry
25 Strength of suppliers and distributors
26 Nature and degree of competition
27 Location of business
28 Business and product fit with VC portfolio
29 Projected market size
30 Sensitivity to economic cycles
31 Ability to syndicate
32 Seasonally of product market
33 Scale and chance of later financing rounds
34 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, 2010

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22
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24
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NE POC
£10m 4yrs
(venture capital)
194 Investments
£15.2m Leveraged private investment
Scottish Enterprise
£41m ~10yrs
230 projects
(grant)
47 new tech companies
£241m leveraged private investment
West Midlands (APoC) (loan/grant)
£6.32m 2yrs
283 grants
143 businesses supported
£2m leveraged private investment
© Finance Tree ltd, 2010
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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, 2010

© Finance Tree ltd, 2010
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• Initial enquiry
• Basic questions (eligibility, type of business, stage, investment need)
• 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
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© Finance Tree ltd, 2010

Enquiry
Eligibility
Business plan submitted
Meetings…Review
Investment Committee
Due diligence
Offer Letter (term sheet)
Legals Completion
Post deal….. monitoring… .exit
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© Finance Tree ltd, 2010

• No right answer
• No set format
• No right length
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• Communicate
• Concise
• Clear assumptions
• Back up evidence
• Team
• Financials
• Risk
© Finance Tree ltd, 2010

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
1.
2.
3.
4.
5.
Exec Summary
Business Model
Mission
Ownership
Governance
6.
7.
8.
Management
Risks
Key Personnel
9.
Resources
10.
QA
11.
Marketing
12.
Products
13.
Financial Model
14.
Investment Offering
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© Finance Tree ltd, 2010

• Proposition
• People
• Potential
• Path to market
• Proven
• Funding needed - enough to grow
• Financial return
• Forecasts and exit
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© Finance Tree ltd, 2010

Carried out on…
You
Your plan
Your references …….others you don’t know
By the Fund manager, external advisors, experts
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© Finance Tree ltd, 2010

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
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© Finance Tree ltd, 2010

© Finance Tree ltd, 2010
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• 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
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© Finance Tree ltd, 2010

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
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© Finance Tree ltd, 2010

• Loan
• Equity
• Convertible
• Kickers…. Uplift
• Mezzanine
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© Finance Tree ltd, 2010

• Ordinary
• “A” Ordinary
• Prefs
• Different right and incentives / restrictions apply
© Finance Tree ltd, 2010
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• Costs money to raise money
• 10% capital raised
• More on small deals
• Ours Fees 2.9% arrangement
• No annual monitoring
• Non-exec directors
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© Finance Tree ltd, 2010

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 RED externally driven
6
© Finance Tree ltd, 2010

• The Importance of the Management Team
• Innovative products/services
• Market size
• Scalable Business Models
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© Finance Tree ltd, 2010
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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
43
© Finance Tree ltd, 2010

• 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
44
© Finance Tree ltd, 2010

• 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
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• And the only other “Exit” is….?
48
© Finance Tree ltd, 2010

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, 2010

Investment in UK Technology companies…
2009
(BVCA performance Survey)
£394m in technologyrelated 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 – 33%
Expansion –
MBO/I –
41%
20%
(2008… 43%)
(2008… 31%)
(2008… 3%)
50
© Finance Tree ltd, 2010

Month
January 08
February 08
April 2010
May 2010
UK
11
6
4
1
International
1
3
0
0
Total
12
9
4 (£74m)
1 (£5.8m)
Source: LSE
NB: listings in April 2010.. 2 in mining 1 in industrial metal
© Finance Tree ltd, 2010

Jonathan Gold j.gold@financetree.biz
Follow us on TWITTER www.twitter.com/financetree
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16-18 Hood Street
Newcastle-upon-Tyne NE1 6JQ
0191 230 6370 www.riverscap.com
Jonathan Gold
Director j.gold@riverscap.com
0191 230 6370 www.twitter.com/financetree
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© Finance Tree ltd, 2010
Pictures by J.Gold
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