Are you investment ready?
Jeff Harriman, Capital Markets Specialist
Agenda:
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Types of capital
What do investors look for in you?
What should you look for in an investor?
Raising capital process – intro
Importance of books and records discussion incl.:
• Structure, IP, presentation skills, pitch
• Financials, valuation, & term sheet
Vocabulary
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Accredited Investor
Exemptions
Tranches
Seed round
Mezzanine
Bootstrap
Cap table
Angel
Term Sheet
Redemption Feature
Venture Capitalist
Due Diligence
First round
Intellectual property
Patent
Articles of Incorporation
Types of capital
The life cycle of a business involves a number of
stages of growth and development. Investors
refer to the types of capital by the term that
describes these stages of growth in a business,
e.g. ‘start-up’. Funding can also be referred to as
stages, rounds or tranches, e.g. ‘first round’ or
‘early stage’.
Types of capital
• Pre-seed/R&D:
– Expand the concept
– Advance product development
• Seed:
– Continued research and product development
Types of capital
• Start-up:
– The company is being set up or in business for a short time
– No commercial product
– No track record
• Expansion/Mezzanine:
– The company is established
– Requires capital for further growth and expansion
– The company may or may not have made a profit at this
stage
What do investors look for in you?
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Is the company being set up or in business for a short time?
Business opportunity in superior product
High growth potential
Global prospects
Sustainable competitive advantage
Quality management team
Previous investors
Existing customers and partners
Realistic and alternative exit strategies
Professional business practices
What do investors look for in you?
No track record
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Passion
Openness
Trust
Understanding of what the companies goals are
Can your innovation be patented?
What should you look for in an investor?
Know what attributes you are looking for in an investor:
• Passive vs. active
• Mentor/board member vs. hands-on management role
• Industry knowledge – expertise in your field
• Track record as investor
• Trustworthy (get referrals from other investee companies)
• Contacts and networks
• Long term relationship – someone you get along with
• Capacity for follow-on funding
• Enthusiastic
• Ethical
Process of raising capital
The capital raising process is a long one, usually
taking 3-6+ months. A fairly formal process is
followed. Business angels tend to be quicker
and more relaxed about this process.
Process of raising capital
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Introduction to venture capitalist or business angel
First meeting – produce your executive summary
Site inspection – Investment brief submitted
Introduction to the management team – sign confidentiality agreement
Business plan submitted
Valuation
Negotiation and acceptance of the term sheet
Due diligence and documentation
First round received
Follow-up funding
Exit
Let’s get to it
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Preparation
Structure
Intellectual property
Pitch
Financials
Valuation
Due diligence
Term sheet
Presentation
Preparation
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What is needed
What format
Anticipation
Follow-up
When do you become an annoyance
Structure
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Articles of incorporation
Issued and authorized
Shareholders agreement
Employment contracts
How many shareholders?
Minute books
Share structure
Intellectual property
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Patents, trademarks and trade secrets
Licensing arrangements
Who developed?
Defensibility
Contractors
IP Muggings
Pitch
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Develop a pitch
Adapt it to the audience
Practice, practice, practice
Listen to others
Record yourself
Ask for advice
Keep it brief
Financials
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Historic financials are what they are
Analyze your balance sheet
What are industry norms?
How are your ratios?
Are they realistic?
Put yourself in their shoes
Financials
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Cash flow statements
13 to 20-week projections
Ability to meet obligations
Sales funnel that has been qualified and weighted
Where is the risk?
Do your financials actually tell the story you wish to
tell?
Due diligence
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Cash flow statements
Preparing for the inquisition
Make it a business process
Aids in preparing a business for sale
Gives investors comfort
A very valuable exercise
Stages of due diligence
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Deal screening
Interest assessment
Letter of interest
Detailed due diligence
Term sheet
Final legal documentation
Cashing the cheque
Valuation
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Valuation in early stage is a negotiation
Realism
Selling the future
IRRs
Venture capital method
Scorecard method
Valuation
• The best way to cut your ROI in ½ is by investing at 2X the
valuation
• Valuations <$2Million are less likely to have any down rounds
• Investing at the right valuation is better protection than antidilution
• Local valuations are primary consideration but all markets
are affected by national trends
• Follow-on investors are not always local
• Entrepreneurs have limited knowledge of valuation
Term sheet
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Lays out deal structure
Is generally open to negotiation
Is not a letter of commitment
May have additional hurdles to overcome
Many different formats
Term sheet
The investment agreement:
• Sets out the terms – “we will invest $ into your
company in exchange for % of the company”
• Sets out the conditions precedent – “Here are the
things that have to happen between now and when
we close in order for us to close.”
• Defines the close – “Here are all the other things we
need in place in order to close.”
What Many Angels insists on
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Price protection
Redemption feature
Board seat
Drag along, tag along rights
Right of first refusal on selling of shares
Conversion of shareholder loans
Financial reporting and access rights
Tax credit application
Confidentiality
Other legal stuff…
Raising capital is a humbling experience. It can
be a lot like banging your head against a
wall…repeatedly. After a while you get numb to
the pain and focus on success…If you survive.
Thank you for your participation!
• More information
– www.fcnb.ca
• Contact FCNB
– 866 933-2222 (toll free in NB)
– 506 658-3060