correlating innovation, business models, development plans, private financing
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Correlating Innovation, Business Models, Development Plans, Private FinancingTRANSCRIPT
Correlating Innovation,Business Models,
Development Plans &Private Financing
GameON: Finance ConferenceToronto, Canada
October 28-29, 2008
514-865-2323
© 2008. Tom Sweeney2
Discussion Topics
• Revisiting Innovation• Why Value Leadership and New Market innovation are better plays
for early stage companies (in Canada) than Sustaining and Low-End
• Business Models• The CEO’s #1 job is to actively manage reality• Read Confronting Reality by Larry Bossidy
• Business Plans & Pitches• Do plans with your team, not (just with) consultants• 20-minute rule for pitches and 2 minutes for micro-pitch
• Venture Economics & Development Plans• Not all companies are VC candidates• Use existing cash to achieve specific milestones that directly map to
a financing timetable based on your realistic access to capital
Questions or discussion anytime, please!
Revisiting Innovation
Why IP is so important tobuilding sustainable
companies...
© 2008. Tom Sweeney 4
Customers Pay for Perceived Value
• For every product-market category, including video games,Customers decide based on a set of established “ValueMetrics”, typically defined by the established players in thatmarket
• Example:• Bubble gum: chewing quality, size of bubble, smell, brand, etc
Established Customer Value
Metrics SetPe
rcei
ved
Valu
e
Price
Product - Market
• Pricing is a function of Perceived Value
© 2008. Tom Sweeney 5
Value Innovation & IP’s Role
SustainingLow-End
Value LeadershipNew Market
Companies that go from a startup to market leadership have typicallyintroduced one of four forms of Value Innovation.
© 2008. Tom Sweeney 6
Sustaining Innovation
Price
Customer ValueMix
Sustaining Innovation is when incremental improvements are made to one ormore components in the existing customer Value Mix. This is a tough space,particularly for Canadian companies. The market is dominated by theestablished companies.
© 2008. Tom Sweeney 7
Low-End Innovation
Price
Low End Innovation is when similar value can be sold at a dramatically lowerprice that incumbents can’t or won’t easily match. This usually requireseither business model innovation or operational excellence to stay inbusiness. It’s also a tough space for Canadian startups. Think of IKEA andDell.
Customer ValueMix
© 2008. Tom Sweeney 8
Value Leadership Innovation
Price
Customer ValueMix
New IPNew IP
Value Leadership Innovation is when new IP with proper protection isintroduced to an established market and one or more new Value Metricsbecomes the dominant reason why customers choose that product. Why doyou use Google?
© 2008. Tom Sweeney 9
New Market InnovationNew Market Innovation is when a new product or service is introduced thatmakes it easier or more convenient for people to do what they previously hadto go to experts to do for them. California and its ecosystem leads the worldin repeatedly doing this. Steve Jobs is the master.
NewCustomerValue Mix
Price
New IPNew IP
New Product-Market
+
Business Models
What are they?
© 2008. Tom Sweeney 11
Business Models: Five People, Ten Definitions….
“An organized and rigorous way of looking at the health andprofitability of your business now and in the future. [A business
model] is a statement of the current reality and its likely – asopposed to hoped for – future direction. It is an early warning system
for real-world changes that pose threats or provide glimpses ofopportunities. The business model is a blueprint for taking action.”
“I can’t define it, but I know what it is when I see it.”US Supreme Court Justice, Potter Stewart
“Hire the world’s best athletes as spokespeople. Buy anenormous amount of advertising to get every sporting goodsstore to carry your products. Make the product overseas for
very little money. Charge very high prices.”Excerpt from Seth Godin’s, Bootstrapper’s Bible
Larry Bossidy & Ram Charan, Confronting Reality
© 2008. Tom Sweeney12
“Product-Marketing” is a Critical Concept thatNeeds a Remarkable Hyphen
Bootstrapper’s Bible• Great way to spend $5.00• Lighter approach to business
models but lots of pointers forbootstrapping!
Purple Cow• If your product is not remarkable
in its (niche) market ……
Blue Ocean Strategy• Deeper look at developing
compelling and sustainableproduct-market positions
© 2008. Tom Sweeney 13
Confronting Reality
• Provides a very detailed lookat how to develop yourbusiness model, evaluate itand constantly adapt it toreality
• This book is the sequel toExecution: The Discipline ofGetting Things Done
• Talks about actively managingthe reality of a business
• Both books are excellent
© 2008. Tom Sweeney14
Business Models Have Three Main Components
Repeated Iteration and Actively Managing RealityProduces Tested, Actionable Business Models
External RealitiesFinancial history of your
industryOverall business environment
Customer baseRoot-cause analysis
Financial TargetsOperating margins
Cash flowCapital intensityRevenue growth
Return on investment
Internal ActivitiesStrategy
OperationsPeople
Organization
Source: Confronting Reality
The Truth AboutBusiness Plans &
Investor Pitches
What purpose do theyserve….?
© 2008. Tom Sweeney 16
The Truth About Business Plans
• The exercise to produce one is fundamentally important
• VCs can spot plans done by consultants a mile away
• Most companies spend too much time on generating a“complete” (long) document
• Should be 12-15 pages that convey “deep and insightful” analysisbased on “bottom-up” assumptions and a solid grasp of the businessmodel
• VCs typically don’t read business plans to be able to say “no”
• Be ready with a clear and well thought-out summary• The first two or three paragraphs are critical
• Don’t assume investors have read anything you have sent• Plan on having 20 minutes to make your case with no more than 10-
12 slides and around a 30-point font
© 2008. Tom Sweeney 17
BusinessModel
5 6
UnderlyingMagic
8
10
Team
Title& Speaker
Intros
1 2Elevator Pitch
CompanyOverview
3Problem
&Customer
4Solution
&Key Benefits
9
Projections
11Status
&Timeline
12
SummaryWhy Us?
Ten (+2) Slides, 20 Minutes, 30 Point Font
Competition&
Advantages
7
Marketing&
Sales
Obey the 10/20/30 rule. Stay high-level and hit the key points. Nobody writes acheque based on your presentation, but they do say “no”.
Venture Economics,Development Plans and
Use of Cash
The core drivers of duediligence….
© 2008. Tom Sweeney19
Venture capital is a specialized form of private equity, characterizedchiefly by high-risk investments in new or young companies
Angels
Venture Capital
Early Stage Later Stage MezzanineCapital
BuyoutCapital
PRIVATE EQUITY
Public Equity Markets (TSX Venture, TSX, etc.)
Valu
e C
reat
ion
and
Paid
-In C
apita
l
Company Lifespan and Venture Capital Stage
1 Year
2-3 Years
3-4 Years
5-7 Years
Angel Seed Start-Up Early Stage Later Stage
Convertible Debt orCommon Shares
(<$500 K)
Preferred Shares“A” Round
($3-5 million)
Preferred Shares“B” Round
(>$5 million)
Preferred Shares“C” Round
(>$15 million)
Mezzanine IPO
TSXVentures
© 2008. Tom Sweeney 20
Business Models and Venture Financing
• VC must generate high internal rates of returns to their LPs• Portfolio theory: winners cover the losers• Early stage VCs target high multiples (10X +) and IRRs of >50%
• A company’s development plan and its internal “clock-speed” must beobsessed to use investment cash to achieve specific milestones on acompetitive schedule
What is a “4X Multiple” ?• The increase in a VCs investment
when there is a liquidity event(M&A, IPO, MBO, RTO). “Weinvested $1M and made $4M.”
What is “30% IRR”?• Considers how much was returned by a
liquidity event and how long it took• Invested $1M and got $4M back in 3 years ~
59% IRR (great)• Invested $1M and got $4M back in 7 years ~
19% IRR (weaker)
Silicon Valley’s Entrepreneurial “Clock Speed”• The 10-year IRR for early-stage Silicon Valley VCs is 54.9%. The average in
Canada for the same period is -3%
© 2008. Tom Sweeney21
Start-Up Business Model: Bootstrap With a Planto Achieve Specific & Important Milestones
Due Diligence Milestone
Receiver’sWall
Director’sWall
The Idea New MoneyDeposited
VC Due Diligence Process
6-12 months
Family &Angels Grants SR&ED
TractionMilestone
Traction Milestone: achieve this key milestone before starting a financing round (gives investor confidence you’ve done something “important” already)
Due Diligence Milestone: achieve this second key milestone during financing(tell VC about it in “First Pitch”, hit the milestone, tell VC you did it)
First Pitch
Closing($$)
Under-funded company
Properly funded company
Bootstrap and Seed Syndicate
© 2008. Tom Sweeney 22
Financing Stages & Development
Bootstrap First Round VC (Series “A”)
Second Round VC(Series “B”)
Acquisition
Tota
l Cas
h Pa
id-In
to C
ompa
ny
Shareholder Equity at Acquisition
38%
29%
33% Common
Series "A"
Series "B"
$1.5 on $2.0 million pre(two tranches)
$4.0 on $8.0 million pre(two tranches)
Example•Bootstrap to achieve working prototype prior to “A” round•Secure $1.5M participating preferred on $2.0M pre-money•Achieve product and early revenue•Secure $4M on $8M pre-money•“A” round VC participates in “B” round
© 2008. Tom Sweeney 23
=XIRR is a Formula You Should Learn
T1 T2 T3 T4 T5
A2
Time
A1
B1
B2
C1
=XIRR((-A1,-A2,-B1,-B2,C1),(T1,T2,T3,T4,T5))
VCs want “C1” (their fully converted equity) to be large and “T5” (time to exit)to be as short as possible
Acquisition
“A” RoundFirst Tranche
“A” RoundSecond Tranche
“B” RoundSecond Tranche
“B” RoundFirst Tranche
Cas
h In
vest
ed
© 2008. Tom Sweeney 24
Excellent VC Deal Terms Reference Book
Correlating Innovation,Business Models, &Development Plans
with Private Financing
GameON: Finance ConferenceToronto, Canada
October 28-29, 2008
514-865-2323