introduction to finance for start-ups 18 october 2010 jonathan gold

© Finance Tree ltd, 2010

Introduction to Finance for start-ups

18 October 2010

Jonathan Gold www.financetree.biz


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


3

Qi3

AEA Technology

SAT

Imperial CollegeLCL

ISIS (Oxford University)

Cascade Seed Fund

Rainbow Seed Fund

North East POC

North East Co-IFNorthStar Equity

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 !


No free lunch…money costs

BanksGrants

Other lenders (ie: UK Steel Enterprise… NESTA)

FFFVenture Capital / Business Angels

Sales !!


Money costs money … part 2

Accountants CORPORATE FINANCE SPECIALISTSLegal advisorsNon-exec directors

Brokers, banks…


Venture Capital / Private Equity…

“Private Equity is medium to long-term financeprovided 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…


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


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 for Business North East Funds

£25m

£15m

£7.5m

£20m

£20m

£20m


The investment model

Time … since investment

Investment in…

Generating £ cash…

Sale of company… or “exit “

Development & early sales (losses…)

…10x return in 5 yrs


Statistics of VC portfolios…

10 Investments

4 Fail

4 Living dead

2 Stars


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


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.


Applying…process

2 pageproforma

FundManagerReject or

resubmitEligibility 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


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• RISKValuation• Pre-investment• Post-investment• % ownership to give return


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


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


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


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.


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.


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%)


AIM… new listings

Month UK International TotalJanuary 08 11 1 12February 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


Thank you…

Jonathan [email protected]

Follow us on TWITTER www.twitter.com/financetree

mailto:[email protected]

introduction to finance for start-ups 18 october 2010 jonathan gold

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