© Finance Tree ltd, 2013 Raising investment 16 October 2013 Jonathan Gold .

© Finance Tree ltd, 2013

Raising investment 16 October 2013

Jonathan Gold www.financetree.bizwww.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


No free lunch…money costs

BanksGrants

Other lenders (ie: UK Steel Enterprise… NESTA)

FFFVenture Capital / Business Angels

Sales !!


Unreasonable risk for an unreasonable return


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…


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 website4.MAKE A RETURN…


Sources of capital of capital

ResearchGrant

GRANTS….

Business Angel...

North East Finance for Business (£125m)

“Familymoney”

Commercialloan

Strategic development partners

SEED FINANCE

~ £250,000

Concept Finance

~ £100,000

Early Stage

£500,000to ~ £1m-2m

VentureCapital


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


The investment model

Time … since investment

Investment in…

Generating £ cash…

Sale of company… or “exit “

Development & early sales (losses…)

…10x return in 5 yrs


Finance for Business North East Funds


Statistics of VC portfolios…

10 Investments

4 Fail

4 Living dead

2 Stars


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


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.


Applying…process

2 pageproforma

FundManager

Reject orresubmit

Eligibility Screen(against POC)

Duediligence

InvestmentCommittee

Professionaladvisors

Term sheet(signed)

Draw downfunds

Monitor

Referral(sponsor)

Project proposalprepared with Sponsor

and Fund Manager

Mentor or NXDappointed

FundManager

Next stageof finance

1

2

3


16

Financial value drivers

SALES

Cash margin

WorkingCapital

Fixed Assets

CashTax rate

Cost ofcapital


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

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


IRR… internal rate of return

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

YEARS

Multiple


Indicative timeline…end game

Task Timeline(months)

1 2 3 4 5 6

Initial planning meetingsPlan/offer developmentModeling & ValuationInformation memorandumTax planningInvestor identifiedPresentations to investorsConsideration of offersPreparation for due diligenceNegotiations with investorsInternal due diligenceLegal document prep.Final offersInvestor due diligenceExclusivity period Completion

BLUE internal RED externally driven


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


Business models not Business plans...

VALUE PROPOSITION

Market positionOFFERING

Delivery/resourceSYSTEM

FINANCIAL model

· 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

© FinanceTree ltd, 2011

…and EXITS/returns !


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.


Thank you 16-18 Hood Street

Newcastle-upon-Tyne NE1 6JQ0191 230 6370

www.riverscap.comwww.financetree.biz

www.twitter.com/financetree

© Finance Tree ltd, 2013 Raising investment 16 October 2013 Jonathan Gold .

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Transcript of © Finance Tree ltd, 2013 Raising investment 16 October 2013 Jonathan Gold .