Towards the futureStartups & Innovation

March 19, 2013

Alexander M Orlando, DBAamo@partners500.com

Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expect during the investment process

Innovators & Innovators

InnovaHub

Innovator’s Ranks

Individuals that inspire through their wishes

innovation

Professionals that utilize their skills and knowledge to propose innovative solutions for a prize.

Inventors or innovators that seek to to sell,

license, or fund their inventions.

Entrepreneurs, organizations, and investors that are looking

for new ideas, solutions, or inventions.

Seeders

Solvers Seekers

Sellers

© 2013 Alexander M Orlando , DBA

InnovaHub

Innovators’ Style

Seeders

Solvers Seekers

Sellers

© 2013 Alexander M Orlando, DBA

InnovaHub

Innovator’s Score

Calculate your innovators score on www.innovahub.com

A big undertaking

• Starting a business is a big commitment– Energy & Passion– Time– Financial resources (yours and your investors)

• Before thinking of financing, is worth taking a deep breath …

Key questions about you

• Why am doing this– Make money– Lifestyle– “Change the world”

• How long do you want to commit?• What level of financial risk are you prepared

to take?

Key questions about the business

• Be honest with yourself about the risks / unknowns– Do customers want the product / service?– Do you have the competence to build the product

and the team– Can you monetise the product / service?– How competitive is / will the space be?– How big can the overall market become?

your idea…

question

can you do an elevator pitch?

and an audience…

45 Seconds!! YES 45.

Introduction 10 sec

Problem Solved 15 sec

Your Vision 10 sec

Requirements 10 sec

IMPOSSIBLE?

3 keywords

describeyour idea

to

picture your idea

an effective elevator pitch is illustrative and tangible.

your pitch should be clearrather than being filled with …

be concise

An effective elevator pitch containsas few words as possible and does not go into

too much unnecessary detail.

keep your eyes shut while someone reads your text out loud and

videotape your presentation

Overview of financing options

Angel Financing

Venture Capital

Private Equity

PublicStock Markets

Self Finance / Bootstrapping

Debt / Bank Finance

Equity FinancingNon-Equity Financing

Self financing / bootstrapping• Financing growth from previous cashflow and personal funds• Obviously need to have cashflows…• Most good bootstrapped companies emerge from a service or consulting

companies that are productising their offering• Pros

– Bootstrapped companies almost always spend cash more effectively than equity financed companies

– Already being close to existing customers, give excellent ability to understand problems and define good solutions

• Cons– Resources for product and market dev constrained by cashflows– May miss a big opportunity if other players raise finance and invest heavily

Debt / bank finance

• Relatively limited funds will be available ; likely to want security anyway

• Banks only lend to predictable businesses they can understand

• If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance

• Not particularly useful web or high growth tech industries

Large PotentialMarket

Opportunity

Unique Product Or Concept

PassionateFounding Team

Pre-requisites

Intensecompetition

likely

Need to moverapidly

Implications…

Hiring

Infrastructure

VC funding supports

Rapid Product Development

Internationalisation

Partnerships

Commercialisation

Good reasons to raise equity finance

When NOT to raise VC

Applicationis a feature

not a product

Market size istoo small

Motivation isnot financial

• Risk is not that you waste time unsuccessfully trying to raise finance …

• … real danger is that you do succeed in raising VC funds– Lose opportunity for small exit which could be personally lucrative– Lose opportunity to run lifestyle business– Get bound in to 3+ yrs work you may not enjoy

Equity Financing

SeedEarly StageSeries A, (B)

Later Stage(B),C,D…

Pre-IPO / Buy-out

PrivateEquity

Investment Size

Potential Sources of Funds

0 - €1m

Grant-funding

University seed funds

Friends and family

Angel Investors

(Venture Capital)

€2m-€20m

Venture Capital

(Wealthy) Angel investors

€5m-€20m

Venture Capital

€30m+

Specialist Late stage tech investment funds

Hedge Funds

Venture Capital – How the VC makes money

• Raise fund every 2-4 years– Pension funds, financial institutions and specialist “fund of fund” investors

• Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money

• Very small management fee on funds managed~ 1-2.5% pa

• Carry~ 20-25%x (Total Return – Total Amount Invested)

Angels – How the Angel investor makes money• Unlike the VC the Angel invests their own money

• Much smaller absolute returns can be very meaningful to an angel

• The Angel approach is to invest small amounts at a very early stage / low valuation– €50-€250k at valuations of €500k-€4m

• Two “exits” for angel– Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x money– Firm raises VC money, after which Angel typically becomes more passive but has built

up exposure very cheaply to a venture backed enterprise

• The key thing when selecting an Angel therefore is whether they can help you raise VC finance– See which Angel investors have invested with which VCs

• Advice and Strategy• Hiring

– Developers– Country Managers– Sales– CEO / CFO / COO– Advisory Board

• Partnerships• Profile and PR• Further access to capital

• Internationalisation

• Trusted service provider relationships– Search / recruiting– Branding / PR– Finance, etc

• Exit optimisation– Knowledge / contacts

with relevant buyers– Experience with process

Venture Capital – What a good VC will add

What does an investor look for? Technology Traction

• Can evaluate each as– Exceptional– Good / credible– Mediocre / incomplete

• Misconception that being good / credible across the board is what VCs look for– Can always add credible attributes to the mix later

• We focus on finding opportunities which rate as exceptional in one attribute

Team

Identifying relevant VC partners

Has funds to invest

Match of Size/Stage/Geography

RelevantPortfolio

No directlycompetitiveinvestments

Excellenttrack record

Shortlist

• Do create a shortlist• Rifle is a better weapon than a

shotgun

• Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors

Getting on radar screens

• Out of the blue email is a longshot• Try to build context

– Analyse portfolio companies – are there any links there?– Analyse contact network and advisors– Analyse press coverage– Participate in blog conversations– Attend events and conferences– Relevant PR around product also helps

• VCs spend their time looking for businesses with momentum

Sharing relevant information

• 100 page business plan not required

• 20 page ppt which clearly answers main questions is best bet– Product– Market– Business Model– Team– Competition– Product Roadmap– Technology Overview– Business Development– Financial Status

Pre - first meeting Pre - termsheet Post - termsheet

• Dialogue rather than documentation – expect lots of meetings

• Calls with current / prospective customers or partners

• Meeting broader team

• Brainstorming around strategy

• Identifying key hires post closing

• Formal presentation to VC partnership

• Some additional reference calls with partners / customers

• Personal reference calls

• Legal / accounting audit (if relevant)

• Drafting legal documentation

2-4 weeks 1-2 Months

Types of investment• Ordinary Share investment

– Simplest form, often used by angels– All shareholders have similar rights– Company Board composed according to

• Convertible Loan– Sometimes used by both Angels and VCs– Typically when another financing is anticipated soon– Loan will convert (with a discount ~25%) into the next financing round

• Preferred Share Investment– Typical Structure used by VCs and occasionally larger Angels investing as a

group

• Board Representation• Liquidation Preference• Participation rights• Anti-dilution rights• Element of reverse vesting• Certain control and veto rights• Period of exclusivity to close legals

Photo Source: Philip Greenspun, MIT

Venture Capital – “Typical Deal Terms”

Alexander M Orlando, DBAamo@partners500.com