© finance tree ltd, 2010 introduction to finance for start-ups 18 october 2010 jonathan gold
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© Finance Tree ltd, 2010
Introduction to Finance for start-ups
18 October 2010
Jonathan Gold www.financetree.biz
© 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
www.riverscap.com
© Finance Tree ltd, 2010
3
Qi3
AEA Technology
SAT
Imperial CollegeLCL
ISIS (Oxford University)
Cascade Seed Fund
Rainbow Seed Fund
North East POC
North East Co-IFNorthStar E
quity
Finance Tree Rivers Capital
DTI
SET 2
NStar
E-Synergy
AngelNet
3-Pillars Fund
DCF
POC Pilot
Southampton University
University of Bath
Bristol University
Who am I to talk !
© Finance Tree ltd, 2010
No free lunch…money costs
BanksGrants
Other lenders (ie: UK Steel Enterprise… NESTA)
FFFVenture Capital / Business Angels
Sales !!
© Finance Tree ltd, 2010
Money costs money … part 2
Accountants CORPORATE FINANCE SPECIALISTS
Legal advisors
Non-exec directors
Brokers, banks…
© Finance Tree ltd, 2010
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, 2010
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
© Finance Tree ltd, 2010
Venture capital is often a crucial element in…
Getting a new business goingStart-up
Funding a step-change in the businessRapid organic growth or M&A
Effecting a change of management or controlBuy-in / buy-out / public-to-private
Funding long-term development pre-revenueTypically high technology – eg: biotechnology, electronics
© Finance Tree ltd, 2010
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 Tree ltd, 2010
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
© Finance Tree ltd, 2010
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, 2010
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
© Finance Tree ltd, 2010
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
© Finance Tree ltd, 2010
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
© 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
POC stories18
NE POC (venture capital)£10m 4yrs
194 Investments£15.2m Leveraged private investment
Scottish Enterprise (grant)£41m ~10yrs
230 projects47 new tech companies£241m leveraged private investment
West Midlands (APoC) (loan/grant)£6.32m 2yrs
283 grants143 businesses supported£2m leveraged private investment
© Finance Tree ltd, 2010
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, 2010
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, 2010
Investment in UK Technology companies… 2009 (BVCA performance Survey)
21
£394m in technology-related businesses (2008: £619m)
Of this, three areas received the most amounts Communications – £51m (2008… £81m)Computer software – £46m (2008... £310m)Medical / Pharma – £36m (2008… £73m)
Of the total amount invested
Early stage – 33% (2008… 43%)Expansion – 41% (2008… 31%)MBO/I – 20% (2008… 3%)
© Finance Tree ltd, 2010
AIM… new listings
Month UK International Total
January 08 11 1 12
February 08
April 2010May 2010
6
41
3
00
9
4 (£74m)1 (£5.8m)
Source: LSE
NB: listings in April 2010.. 2 in mining 1 in industrial metal
© Finance Tree ltd, 2010
Thank you…
Jonathan [email protected]
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