© Finance Tree ltd, 2012 Introduction to Finance for start-ups 3 October 2012 Jonathan Gold Confidentiality Statement: Please note that this document or

© Finance Tree ltd, 2012

Introduction to Finance for start-ups3 October 2012

Jonathan Gold

Confidentiality Statement: Please note that this document or presentation is and remains the property of Finance Tree. We will enforce our copyright to all material. Reproduction or use of this material is only permitted with prior written consent of Finance Tree ltd.


£7.5m


Track record

2005 NStar Corporate Finance established2006 Finance and Business launched2008 (April) Management Buyout and creation of Finance Tree

2009 (April) created Rivers Capital Partners

2010 Managers of the £7.5m North East Angel Fund

2012

47 investments in 32 businesses

£4.3m invested plus £2m additional www.riverscap.com


Sources of Capital

1. Banks

2. FFF…. & Founders cash

3. Business Angels

4. Venture Capital

5. IPO/ Aim/ Stock Markets

6. Crowdfunding

7. Peer to Peer lending uk.zupa.com

Colours of money !


Crowd Funding

Its relatively new…Advantages / Disadvantages

www.crowcube.com

www.growthfunders.com

2 Examples…not a recommendation !


Money costs money …

Accountants

CORPORATE FINANCE SPECIALISTS

Legal advisors

Non-exec directors

Brokers, banks…


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…


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 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

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


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


IRR (Internal Rate of Return)

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

YEARS

Multiple


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


Part I. The Investors Perspective


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


21

The Management Team


22

Innovative Defensible Products


23

Market size


24

Scalable Business Models


Value drivers…

SALES

Cash margin

WorkingCapital

Fixed Assets

CashTax rate

Cost ofcapital

…it all comes down to these…


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.


Theinvestment

process

27


Investment Process8-

12 w

eeks

8-12

wee

ks

• Initial enquiry

• Basic questions (eligibility, type of business, stage, investment need)

• Business plan submitted

• Review and initial due diligence

• Rivers Investment Meeting

• Investment Committee

• Offer letter

• Due diligence

• Agreements

• Completion

• Post deal support and monitoring until exit


Contact to Exit

29

Enquiry

Eligibility Business plan submitted

Meetings…ReviewInvestment Committee

Due diligence Offer Letter (term sheet)

Legals Completion

Post deal….. monitoring….exit


Business plan

• No right answer• No set format• No right length

• Communicate• Concise• Clear assumptions• Back up evidence• Team• Financials• Risk

30


Business Plan: It is Simple!But so many people don’t cover the basics

Idea• What is it?• Applications explored• Key Markets• Users/ Benefits• Environment / competitionStrategy• What is your goal• By When? • What type of business are you?• How do you make money (sales) ?• Revenue model• Delivery / production• Team and systems• Risks / risks managedFinance• Cash flow forecast (cumulative)• Breakeven• Investment needed• Investment return

1. Exec Summary2. Business Model3. Mission4. Ownership5. Governance6. Management7. Risks8. Key Personnel9. Resources10. QA11. Marketing12. Products13. Financial Model14. Investment Offering


Please Include

• Proposition

• People

• Potential

• Path to market

• Proven

• Funding needed - enough to grow

• Financial return

• Forecasts and exit

Company Address and your Contact Details!

Company Address and your Contact Details!

How much £££?

How much £££?


Assessment

Carried out on…

You

Your plan

Your references …….others you don’t know

By the Fund manager, external advisors, experts

33


Due diligence… going behind the plan

Be prepared you will have to answer questions on everything about the business and your team:

• Directors (disclosures)• Share agreements• Other investors• Finances• Contracts (staff and customers)• Orders, claims• Patents, other IP….• …. And more

34


Deal or no Deal

35


Too often forgotten

• Need to inform and stimulate… too many myths

• Need for advice… experience matters here

• Legal agreements… be aware, most are not

• Deal Costs… factor in and limit

36


Offer

Simple offer letter…not term sheet

Due diligence… forms are simple

BUT…Be prepared

• Value implied by offer

• Time limited…normally 7-10 working days

• Exclusive for around 10 weeks


Financial Instruments

• Loan• Equity• Convertible

• Kickers…. Uplift

• Mezzanine

38


Types of shares

• Ordinary• “A” Ordinary• Prefs

• Different right and incentives / restrictions apply

39


Fees

• Costs money to raise money• 10% capital raised• More on small deals

• Ours Fees 2.9% arrangement• No annual monitoring• Non-exec directors


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


Why Bother?

A good VC should add real value to your business over and above the money providing help with:

• Recruitment of the senior team and suitable non-exec Directors

• Extending your contact base of customers/partners

• Assisting the business to enter new markets

• Providing support on complex deals (e.g. acquisitions)

• Acting as a friendly outsider in strategy debates

• Securing additional funding and 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

• Will want full transparency in terms of information about the business

• Typically look to agree a growth and exit strategy up front


Things to Remember about VCs

• Investors in FUND are their ultimate ‘client’

• Funds normally operate within a fixed timeframe – this is why an exit so

critical

• Investment will almost always involve ownership

• VC managers only make money if their portfolio businesses are

successful

• Objectives defined by annual rate of return over a hurdle rate set by the

investors


Part III. Post-Investment


The EXIT

46


The only ways out

• Trade sale

• Buy-back

• IPO or other stock market listing

• Sale on to other investors.

• And the only other “Exit” is….?

47


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)

49

£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 Total

January 08 11 1 12

February 08

April 2010

May 2010

6

4

1

3

0

0

9

4 (£74m)

1 (£5.8m)

Source: LSE

NB: listings in April 2010.. 2 in mining 1 in industrial metal


Thank you…


Jonathan Gold [email protected] 0191 230 6370

Pictures by J.GoldCopyright 2011

www.goldsplace.comwww.twitter.com/financetree

We have moved ! … to:

2 Collingwood StreetNewcastle NE1 1JF

0191 230 6370

www.riverscap.com

Documents

© Finance Tree ltd, 2012 Introduction to Finance for start-ups 3 October 2012 Jonathan Gold Confidentiality Statement: Please note that this document or