© InvestorNet - gate2growth.com 2007- page : 1 Gate2Growth is supported by the European Commission InvestorNet - Partner in the Gate2Growth initiative

Uffe Bundgaard-Jørgensen © InvestorNet - gate2growth.com 2007- page : 1

Gate2Growth is supported by the European Commission

InvestorNet - Partner in the Gate2Growth initiative

How to attract investors

Funding schemes and private investors

Paris

November 27th 2007

By

Uffe Bundgaard-Jørgensen, Ph.D.




The paradox and the problem!

• There is no lack of funding possibilities!• But there are thousands of good projects in vain seeking financing!

• Private sources of funding require a competitive risk adjusted return of capital.• But only few projects offer this return.

• Investors can only analyze very few projects.• But entrepreneurs think they read it all, do not know how to find the right investors.

• Few project are tailored to meet investor requirements.• And investors are really looking for high growth opportunities they can understand!

BUT the diagnose of the”combined paradox & problem” is:

”LACK OF CAPITAL” !




Sources of innovation financing.




Besides public support there are basically three sources for innovation financing.

• Loans– Provided by banks

• Equity– Provided by investors

• Revenues !!!– Generated from sales !




Different view on the same project. • If you gather 10 Bankers in a room and ask them to judge if a loan appliaction shall

be granted.– In most cases they will agreee – at least on the principles.– The loan decision is rather objective than it is subjective.– Each bank will have the capacity to process a lot of loan applications.

• But if you put 10 Investors in a room and ask them if they will invest in a project presented.

– 8 of the Investors might prefer to ”run away” while the two remaining investors might be facinated by the opportunity.

– The investment decision is rather subjective than it is objective.– In contrast to the bank, the individual Investor only has the capacity to process a few selected

deals.

• Loan applications are typically processed by standardised methods.

• Investment opportunities are assessed based on personal preferences and interest, and through a thorough and sometimes lengthy due-diligence process.




500 new deals/year

Screening process

250 selected deals

150 selected deals

10 min/deal

20 min/deal

75 analysed deals 4 Hours/deal

50 negotiation

5-10 investments

10 Days/deal

490 rejected deals1 month/investment

Investor questions:

If I believe in the businessplan and the budgetscan I make money?

Do I believe in the businessplan and the budgets?

Is it realistic ? Can this management deliver the promised results ?

Ok, would you like to meet us and discuss?

Are you ready to startserious negotiations.

The deal funnel




500 new deals/year

Screening process

2 min/deal

250 selected deals

150 selected deals

10 min/deal

20 min/deal


50 negotiation

5-10 investments

10 Days/deal


Investor questions:

Do I like the businessconcept and - model ?


Do I believe in the businessplan and the budgets?




The deal funnel




Sector or business fit.

• If the Investor has experience from e.g. the Energy sector, he will immediately be interested if you say:

– We can cheaply store and release MW of energy in the form of hydrogen at room temperature and at atmospheric pressure – and we have demonstrated it in ”real life”!

• If his experience is from e.g. consumer goods, he will probably look elsewhere for new deals.




He may be attracted by bigger and cheaper flat screens !




… but only if the technical solution is good !




The product shall be easy to understand

If you are not a scuba diver, you would not know what this strange productis – and why it is good!




And the product shall solve a real need !




What troubles investors in the clean tech and energy sector ?

• How efficient is competing technology ?• How energy price sensitive is the project ?• What does it cost to protect the concept and can it be done?• How easy/difficult is it to scale up/internationalize?• Barriers from rules & regulations in other countries?• Is there a real proof of concept under realistic conditions?• Dependence on political “whims” ! • Often very capital intensive projects• Lack of understanding of barrier for market uptake




500 new deals/year

Screening process

2 min/deal

250 selected deals

150 selected deals

10 min/deal


50 negotiation

5-10 investments

10 Days/deal


Investor questions:


If I believe in the businessplan and the budgets,can I then make money?




The deal funnel







Time line

~ € 20k - 100k

~ € 100 – 500k ~ € 500k – 5m

Round B /C

Validate innovation potential

Develop business

application

Structure / grow

business

Innovation

Risk Profile

Labs

Funding Need

Pre-Seed Seed Round ASpin out / license




The risk of Dilution

If more rounds of financing is expected, the early investors face the ”risk of dilution”.




More rounds and increase in valuation.Pre-money valuation Amount invested

Series A Series B Series C Series D




Pre-money valuation Amount invested

Series A Series B Series C Series D

More rounds and decrease in valuation.




How it should be !




Multiple attempts

But be prepared for this!




-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

Year 1 Year 2 year 3 year 4 year 5

Required growth in company value

Company value (30 % IRR) or 3 times back Company value (40 % IRR) or 4 times back

Company value (50 % IRR) or 5 times back Investment (33% ownership)

What does 30% or 50 % IRR mean?




5 years growth requirement & ownership %

30 % IRR

40 % IRR

50 % IRR

Required company value in year 5

0

5000

10000

15000

20000

25000

30% IRR 40% IRR 50% IRR

Investor ownership 50 %






500 new deals/year

Screening process

2 min/deal

250 selected deals

150 selected deals

10 min/deal

20 min/deal


50 negotiation

5-10 investments

10 Days/deal


Investor questions:



Can I trust the businessplan and the budgets?




The deal funnel




All examples from the

NABI discovered that the highest-cost element to municipalities wasnot the price of the bus per se, but rather the cost that came after the bus was purchased: Maintenance of running the bus over itstwelve-year life cycle. This made NABI create a bus unlikely any the industry has seen before. NABI adopted fiberglass in making its busses killing “five birds” with one stone:• Fiberglass bodies are corrosive-free• Body repair is faster, cheaper and easier• Light weight (30-35% less than steel) cut fuel consumption• Light weight allowed the use of lower-powered engines and • fewer axles




The NABI “blue ocean” strategy!

High

Low

InitialPurchaseprice

Corrosion Maintenancecost

Fuelconsumption

Environmentalfriendliness

Aestheticdesign

Customerfriendliness

Life Cycle cost

Average U.S. transit bus

Source: Blue Ocean Strategy, Kim & Maubogne, 2005




The NABI “blue ocean” strategy!

High

Low

InitialPurchaseprice

Corrosion Maintenancecost

Fuelconsumption

Environmentalfriendliness

Aestheticdesign

Customerfriendliness

Life Cycle cost

Average U.S. transit bus

Source: Blue Ocean Strategy, Kim & Maubogne, 2005

NABI would not have won any tender if they had not influenced the tender criteria from

-Product priceto

- Life cycle cost




ProRett examples – could ETV have been used ?

• Solar cell related project– Interesting technology– Academic inventor with limited business experience– No serious scalable proof of concept

• Recyckling project– Academic inventor with limited business experience– No serious scalable proof of concept

• Energy storage – Interesting technology– Limited competitor analysis and price sensitivity analysis– Can be turned into an investment proposal

• Biofuel project– Proof of concept outside lab missing– Limited competitor analysis and price sensitivity analysis– Business plan revised through ProRett intervention– Found investors and is now on a growth track




Technology verified

Market accessestimated

Competitors evaluated

Energy efficiency

documented

Capital requirement

correctlyestimated

Return ofinvestment

meeting investor

requirement

Management capabilities

Market Size

estimated

Regulatorycompliance

The ”investor puzzel” to be solved




500 new deals/year

Screening process

2 min/deal

250 selected deals

150 selected deals

10 min/deal

20 min/deal


50 negotiation

5-10 investments

10 Days/deal


Investor questions:




If it is realistic, can this management deliver the promised results ?



The deal funnel




500 new deals/year

Screening process

2 min/deal

250 selected deals

150 selected deals

10 min/deal

20 min/deal


50 negotiation

5-10 investments

10 Days/deal


Investor questions:




If it is realistic, can this management deliver the promised results ?



The deal funnel




Management company

InvestorInvestor

InvestorInvestor

InvestorInvestors

Fund IIFund I

Fund I

Porteføljeselssskaber PorteføljeselssskaberPortfolio CompaniesPortfolio companiesPortfolio companies Portfolio companiesPortfolio companies

PorteføljeselskaberPorteføljeselskaberPorteføljeselskaber

PorteføljeselskaberPorteføljeselskaberPortfolio companies

A typicalVC fond




Management company

InvestorInvestor

InvestorInvestor

InvestorInvestors

Fund IIFund I

VC Fund I

Porteføljeselssskaber PorteføljeselssskaberPorteføljeselssskaberPortfolio companiesPortfolio companies Portfolio companiesPortfolio companies

PorteføljeselskaberPorteføljeselskaberPorteføljeselskaber

PorteføljeselskaberPorteføljeselskaberPortfolio companies

Investors request not less than Libor + 8% to 10 %

Need 2 % to manage and will request 10 – 20 % carried interest

Each Fund shall receive 15 % IRR

If risk is 50 %, then each Portfolio co. shall have the potential to generate 30+ % IRR




Capital requirement

Seed Start-Up Development Growth M&A/Restructuring

Bank loansFFF

Business Angels Venture Funds

Corporate investors/

Large Venture Funds

IPO/Stock market

New trends in the market.




Understanding investors is imperative !

• There is a need to understand how investors think and why they act as they do.

• It is also relevant to know how they analyze investment opportunities.

• There is a need to understand the fund raising process – from the start – to the investment has been made and finally to the exit.

• There is a need to understand how to structure the offering to the Investor and how to make a business plan that become “the project of his dreams!” .

• There is a need to know about the most important documents, and how they play a role in the negotiation process.






















What is considered as a good investment ?

• The business potential and strength and competence of the management team.

• Good fit with investor preferences.

• The possibility to “protect” the business concept and the growth potential.

• Substantial capital gain possibilities.

• Predictable environment = not too much depending on political decisions

• Clear and realistic exit possibilities for the investor.




InvestorNet

Address : SCION-DTU

Diplomvej 381DK 2800 Kongens LyngbyDENMARK

Phone: (+45) 39 307 307Fax : (+45) 39 642 396Mobile: (+45) 40 521 645

E-mail: [email protected]

Documents

© InvestorNet - gate2growth.com 2007- page : 1 Gate2Growth is supported by the European Commission InvestorNet - Partner in the Gate2Growth initiative