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Funding Options for

Start-ups &

How investors

evaluate early stage

companies

Eileen Modral

e.modral@oxin.co.uk

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Covering today

• Understanding types of finance

• Risk v Reward

• Investment ready: what are investors looking

for?

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Entrepreneurs Golden Rule

The further you get on the money

you have the more of the

company you own at the end.

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Types of Financing

• Grants

• Equity Investment • Owner-managers

• External investors

• Mezzanine

• Debt • Overdrafts

• Loans

• Credit

• Trade Finance

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Accelerators & Incubators

Early days

Launch/

Start-up

Development

Trading

Expansion

Pre Revenue Post Revenue

Friends, Family

Business Angels

Small VC’s

Debt

Private Equity

Time

The Funding Escalator

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Grants

There are lots of schemes – but not necessarily for what you want to do

Knowing what grants are available is a big job, let alone keeping track of changes

You should first and foremost consider what you need to do to develop your business, and then consider whether to apply for grant funding – not the other way around

apply-for-innovation-funding

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The Company financing lifecycle

Source: http://www.marsdd.com/wp-content/uploads/2009/12/company-financing-lifestyle.png

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Ba

nk b

ala

nce

£

-

0

+

Technology firm

• Large investment required

• Late break-even

• Huge upside (Apple)

Services firm

• Low investment required

• Early break-even

• Modest upside

Time

Different Firms, Different Profiles …

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What money When

Credit to https://hoteliyo.com/early-stage-funding-sources/

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Pre-seed and Seed sources of

funding

• Self-funding

• Bootstrapping

• Friends, Family and Fools

• Government Grants

• Start-up Loans Scheme

• Accelerators and Incubators

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Accelerators Incubators

• 205 incubators

• 163 accelerators

• 11 pre-accelerators

• 7 virtual accelerators

• 4 virtual incubators

March 2017 active in the UK BEIS Research Paper No 7

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Accelerator v Incubator

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Early Stage Funding Options

• Seed Enterprise Investment Scheme

• Business Angels

• Reward Based Crowdfunding

• Equity Crowdfunding

• Early Stage EIS Funds or other Venture Funds

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Crowdfunding

• Reward-based crowd funding

• Equity Based Crowd Funding

• Peer to Peer Lending

• P2P Invoice Discounting

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Crowdfunding landscape

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Equity

• Equity financing is the process of raising

capital through the sale of shares in an

enterprise.

• Equity financing essentially refers to the

sale of an ownership interest to raise

funds for business purposes.

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Attributes of a “High Growth Potential”

Business

The presence of a market opportunity

• The reason why customers must buy

Product/service that solves a problem

• Better, bigger, faster, more efficient, new, disruptive

Defensible market position

• Intellectual property, USPs, exclusivity, first-mover advantage

A solid route to market

• A describable and believable business model

Committed management team

• Ability to “execute” business plan

The underlying potential to generate significant returns

• Profitability, value of assets, market position, exit potential

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Features of Angel Investment

Own Money

No need to

justify decisions

Can accept

more risks

Benefit from

tax incentives

Less formal

agreements

Less capital

available

May not be able

to provide more

Specific skills

Can be difficult

to find

Don’t have to

invest

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Not their own

money

Need to mitigate

risks

Formal

agreements

Have deeper

pockets

Can follow-on

No real fiscal

incentives

Paid to make

investments

Seen to be

“controlling”

Good at building

value

General business

skills

Features of VC Investment

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Difference between Angels and VCs

Angels • Investing their own money gives

flexibility

• No one to justify investment

decisions to

• Can accept greater identified

risks

• Benefit from significant tax

breaks

• No need to make investments

• Can provide specialist skills and

experience

• Less capital available

Venture Capital • Investing from a fund of other

peoples money

• Investment committees, auditors,

investors, peers

• Generally need to mitigate

identified risk

• Rarely benefit from any fiscal

incentives

• Are paid to make investments

• Provide general commercial

business skills

• Usually have deeper pockets

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Investment Principles

The 3 principles of investment

• All investors want to get their money back.

• All investors want to get a return on their investment

• All investors want to get a return on their investment that is proportionate to the risks involved.

Low

Reward

High

Reward Low

Risk

High

Risk

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Three steps:

• Determine the risks to be addressed by the

money to be raised

• Determine how much money that will take

• Determine the value of the company before the

investment

Valuation!

Investment Principle (2)

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The Nature of Company Debt and Equity

EQUITY

• Pure ‘risk’ capital

• Money ‘owned’ by you or the

business (therefore doesn’t

have to be repaid)

• Money invested in a business

in return for an ownership

stake

• Return to shareholders via

sale of shares and/or dividend

DEBT

• Loans are not risk capital

• Money ‘owed’ by the business

(therefore has to be repaid with

interest)

• No ownership stake by lender,

but loans are usually secured

against an asset

• Return to lenders via repayment

of principal, plus interest

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The relationship between risk and

Investment: Companies

The goal of the company is to raise its value thus:

• increasing its share price

• reducing the amount of the company it must sell to

raise the capital it needs at each round

• increasing the share of the company owned by the

founders and employees

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Investors are Looking For …

Management Team • that can deliver

• with whom they can work and add value

Business • that is innovative (content and/or process)

• with a sound economic model

• which can scale

Deal Round that … • is well thought through

• has competitive valuation and terms

• fits investors portfolio, values and exit strategy

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..an enriching experience and for maximizing their chances of success!

• to add value

• to diversify their investment portfolio

• to manage risks

• quality deals

• positive returns

Know your Partner, Investors are searching for…

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Types of VCs

• Venture Capitalists can be segmented in a number of ways By Sector

• Biomedical versus Chips versus Web

By Size • Small fund (<£100M) to large fund (>£1B+)

By Geography • UK, EU, India, Israel

By Stage • Seed/early – two people and an idea/demo

• Mid-Stage – initial revenue traction

• Late-Stage – near breakeven – expansion/mezzanine capital

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Who? Know Your Audience

• Research beforehand, use networks

• Pressures facing investors

• Their business credentials

• Their technical backgrounds

• What they want from you

• What they want from an investment

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“If you experience great difficulty in raising money, it’s

not because VCs are idiots and cannot comprehend

your curve-jumping, paradigm shifting, revolutionary

product.

It’s because you either have a piece of crap or you are

not effectively communicating what you have.

Both of these are your fault” Guy Kawasaki

Garage Technology Ventures

Not What You Say, What They Hear

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What is a Business Plan?

It’s a statement of intent • What you are planning to do and how you are going to do it

• What you goals, aims and objectives are

It’s a “shopping list” • Details what resources you will need

• People, equipment, skills and cash

It’s a check list • Clarity of thought

• Things that need doing along the way

It’s a document for … • Funders

• Management, staff, owners and employees

• Competitions

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Components

Executive

Summary

Market

Opportunity

Product/Service

Description

Operational Delivery Market

Analysis

Organisation/

Management

Risk

Assessment

Financial

Projections Appendices

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Business Plans for Equity Providers

• An outstanding 2-3 page executive summary

• Outlining a market problem that needs solving

• A description of the solution to this problem

• The management team

• A market and competitor analysis

• The business delivery model

• Keep to about 20-25 pages

Use appendices for in depth descriptions, technical analysis, market data and detailed financial forecasts

• Think of this as the elevator pitch

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Business Plans – for Banks

• 2 page Executive Summary

• Business background – products/market

• Management team and experience

• Proven expertise and ability to execute the plan

• The peak requirement

• P&L, cash flow and balance sheet – with assumptions

• Sensitivity analysis

• Competitive position

• Evidence of ability to service all borrowings in the business and security available

• No surprises

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The elevator test? The kitchen table test?

The Camelot test?

Does it pass …

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The Executive Summary

Good sources of funds receive 20+ plans/week

• NEVER underestimate importance of first page

• Think of a journalist’s first paragraph:

Who, what, when, where, how and why?

• Backing the team or the market?

• What is the need from investors?

• What’s in it for the investors?

• When and how do they get out?

Typical VC funds:

• 25-150 proposals per month

• 6% - 15% result in a meeting

• 0.5% - 2% result in investment

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Financing Bottom Lines: Company

• Companies won’t get money just because they need it

• Companies must be credit-worthy or investment ready

• Companies must be commercially viable

• Companies must have the ability to “feed the funding”,

Finances must look good: • Profit is helpful

• Revenues are essential in projections

• Cash is best of all

• Good ideas are just ‘hot air’

• Go to the right source at the right time with the right story

• Get a targeted introduction

Remember : NEED FOR MONEY ≠ INVESTMENT READINESS

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Tips to achieve funding

• More difficult to attract funding when you really need it

• Plan to fund raise well in advance

• Take advice from people who have done it for

businesses similar to yours

• Work out how much and what sort of funding you will

require

• Work out who is appropriate to approach

• Provide them with the information they are looking for, in

the format they want

Equity Funding

Individual Angels

Investor training

Small groups and directed by

angel needs

Local pitching sessions

Post network

meetings/ dining clubs

Local events to create interest

Syndicates Connectivity

to other groups

VC, VCT other organisation

Sector interest

Funding levels

Direct liaison

Trade investment/JV

Events

Sector specific

Open

Innovation