bootstrap business seminar 8: raising capital and doing deals

BOOTSTRAP SEMINARS 2013Raising Capital & Doing Deals

Stuart Hillston, CEO, Constellation Capital

© 2013 Constellation Capital 2

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where—” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

—Alice’s Adventures in Wonderland BY LEWIS CARROLL

26/11/2013


Where we’ll go today• Raising Capital (not in order!)

– Why raise money?– When should you raise?– How will you raise?– What type of capital?– Where do you get it?– Who from?

• Doing Deals– What you will need to do a deal– How a deal can go wrong

26/11/2013


Why raise money for your business?Ask yourself these questions about your business:• Where are you now?• Where are you going?• How will you get there?

26/11/2013


Why raise money for your business?• Describing this “journey” is your basic business

strategy• Regardless of the starting point, most

companies need cash to achieve their goals• The three main reasons for raising money are:

– To start– To grow– To acquire

26/11/2013


Why raise money for your business?• To start a company you will have:

– some initial expense– some ongoing fixed expenses– some ongoing variable expenses

26/11/2013


Why raise money for your business?• To grow you will most likely have to:

– Spend money before you can earn it– Hire people– Develop more products– Open an office– Do marketing

• It is cash flow – or lack of it – which most often kills off companies

26/11/2013


Cash Flow• A company with £1,000 of costs and £2,000 of

revenue can still go bust• Cash flow is all about the timing differences

between the costs and the revenues• You must be realistic about these timings!

26/11/2013


Why raise money for your business?• To acquire another company you will need:

– Cash for the legal costs– Cash for the acquisition (some, if not all)– Cash for the increased expenses/cash flow– Cash for integration

26/11/2013


When to raise money?• When you know how much you need• Before you need it• And especially before you run out of cash• Allow 3-9 months for the process• Preparation shortens the time• So does a good valuation!

26/11/2013


Where from?• Where you get your capital will depend on how much

you need…• And what type of capital

– Debt• You borrow the money and have to pay it back (+interest)

– Equity• You sell shares in your company and are expected to deliver a

return

– Grant/gift• You are given the money, usually with restrictions on what you

can do with it26/11/2013


Where from?• Primary sources of equity capital (selling shares)

– The 4 F’s – founders, family, friends (& fools)– Angel Investors– Crowdfunding– “junior” funds

• SEIS - £150,000, one time only• EIS - £5,000,000 once per year

– VCs– Private Equity– Institutional Investors

26/11/2013


Where from?• Common terms:

– Seed capital – getting started, typically up to £50,000

– First round – making it real, early growth – typically up to £500,000

– Series A – real growth, scale, traction – typically more than £1,000,000

26/11/2013


Where from?– Seed capital – 3 F’s– First round – Angels, Crowd, small funds– Series A – Funds, PE, VC– Series B onwards – PE, VC, Institutions– Acquisition – PE, VC

26/11/2013


How to go about it• To raise money you need 3 essential

documents (more later)– A business plan which states how you will effect

your strategy, resources required, time– An investment presentation (not a product pitch)– A summary (teaser) – the last thing you write!

26/11/2013


How to go about it• But before you start writing:

– You are not “selling” an idea…– … or a product …– … or even a dream

• You are making an investment case• So what do you need to know?

26/11/2013


Think like an investor• The three basic risks in all investments

– Valuation risk• You over value the investment when entering and so

reduce the returns on exit (if there is one)

– Execution risk• The company (management) fail to deliver on the plan

– “Force of sale” risk• Being unable to sell shares when you want to sell, or

being forced to sell when you don’t want to!

26/11/2013


What makes a good investment?• An undervalued company which doesn’t need

the money which someone else wants to buy for a much higher price.

• But you don’t see many of those…

26/11/2013


What makes a good investment?• A clearly identified problem or opportunity• A practical, innovative solution• A viable, scalable market• A team that can make the plan happen• A clear differentiator from competition (USP)• Solid financial plan• “”right” level of funding, at a realistic valuation• Clear route to market and growth opportunities

26/11/2013


What you need to do the deal• A clear idea of what you need (not just cash!)• Good documents (BP, deck, teaser)• A lawyer (even for seed rounds)• An understanding of equity• A shareholders agreement• A term sheet• A sensible valuation

26/11/2013


Doing the deal• How much cash do you need and why?• Do you have enough cash cover?

– 3-6 months operating expenses at cash low point• What other help do you need?• What people do you need?• Where is your team deficient?

26/11/2013


What you need• Good documents

– Business Plan (including financials)• 1-2 years for start-up is fine• 3 years for early stage growth• 5 years beyond that

– Pitch deck– Summary (Teaser)

26/11/2013


The business plan – an outlineBusiness Name & Cover SheetLegal Notices (FSMA disclaimer, Confidentiality)Table of ContentsExecutive SummaryIntroduction & StrategyThe Problem/OpportunityThe Product/Service/SolutionThe MarketThe Management Team

26/11/2013

The Management TeamThe Revenue ModelMarketingSWOTFinancialsDevelopment Opportunities / Future PotentialInvestor PropositionAppendicesSupporting documentation


The business plan – common questions• How long should it be?• What format should it be?• How do I keep it confidential?• Does style matter?• What about supporting documents?• Can you show me a perfect business plan?• I don’t like your template, can I use my own?• Will you write my/our plan for us?26/11/2013


The pitch deck – 30 second pitch

26/11/2013

• Problem or Opportunity– Who has it?– What is it?

• Solution– Maturity (viability, dev stage, barriers to entry)– “Fit” (sector)– Innovation (model,

technology)• Scale

– Market (size, geography, readiness)

– Growth

• Ability (Risk)– Team– Competition– Barriers (regulatory, 3rd

parties)• Magic

– Secret sauce– Differentiation

• Why?– What do you need?– Why invest in you?– Why XXXX?


The summary/teaser• The last thing you should write!• Ideally 2-4 pages encapsulating the investment

proposition• Work hard on condensing the words and

retaining the meaning• This is your introduction (your first

impression), substance & style

26/11/2013


And finally…• Investment deals fail to complete…

– Valuation– Terms & conditions of investment– Sharp practice by investors– Naivety of management– Deal fatigue

26/11/2013


And really finally…

26/11/2013


10 Things you shouldn’t put in your business plan!

1. The numbers are conservative2. The entire “product” brochure set3. The exit is a trade sale or a flotation4. We only need 0.001% of the market5. There is no competition6. Your 10 page CV (life history)7. A guaranteed return for investors8. A 10-year financial plan9. Huge salaries for management10. TPYOS26/11/2013


Summary• Strategy comes first

– Assess where you are starting from– Determine your goal(s)– Describe how you will get there– Work out the resources you will need

• SWOT (and other tools)• Business plan

– Build it – Proof it and then get it checked externally– Maintain it

• Documentation set26/11/2013

bootstrap business seminar 8: raising capital and doing deals

Economy & Finance