Classroom Training Modules - October, 2011 Investors Readiness R R 1

Classroom Training Modules - October, 2011

Investors Readiness

RR

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Classroom Training - Agenda

Investors Readiness: Background and Definitions The Investors Readiness Approach Investors Readiness Principles Investors Readiness Guidelines

I. PeopleII. TechnologyIII. Organization and processesIV. PlanningV. Fundingo (break)

Investors Readiness MethodsI. Primordial Guidelines, Assess & SelectII. Design & PlanIII. Set-up & Run

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Investors Readiness: Background and Definitions

“European investors are reluctant to invest in innovative SMEs and Start Ups because of the high risks which are not compensated by realized returns. Europe has too few Business Angels, just it has too few private Venture Capital Funds that are willing to invest in seed, start-up and development stages. Over the years, EU and Member States have demonstrated their commitment to bridge the finance gap faced by SMEs and Start Ups, in particular innovative early stage ones, recognizing the benefits for entrepreneurship and innovation provided by equity funding. Many initiatives were launched to increase the supply of equity finance to innovative SMEs and Start Ups. However, complementary efforts are needed on the demand side: SMEs and Start Ups need to become “investment ready” if they want to satisfy investors needs.” European Commission, Directorate General for Enterprise and IndustryFinancing SMEs, Entrepreneurs and Innovators – Investment readiness workshop, Brussels, 28 November 2006.

Several Member States have introduced policy measures to identify the gaps and develop investment readiness programs, helping SMES to understand the financing options available, assess their business strategy, structure their business plans and manage the raising of equity. Moreover, Member States launched initiatives to support the creation of environments to facilitate the born and growth of innovative companies, such as incubators and science parks.

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Investors Readiness: Background and Definitions

Investment Readiness – refers to the capacity of an entrepreneur, who is looking for external finance, to understand the specific needs of an investor and to be able to respond to these needs by providing an appropriate structure and relevant information, by being credible and by creating trust to increase the probability of an investor to invest in the project.

Investment Readiness Program – it aims to correct failures at the demand side of the equity market, helping innovative entrepreneurs that have a firm with growth potential to raise external finance, in particular equity finance. Programs can include guidance and advice, mentoring, business and operational support, networking. Two kind of programs exist: at institutional level and at single company/initiative level.

Investment Readiness Methods – include guidelines, tools and techniques to assess and design a business strategy, to ensure that business has an appropriate corporate structure, to evaluate an initiative, to improve the quality of presentations, best practices, checklists, …

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The Investors Readiness Approach From innovation to the market: a “black hole crossing” journey

the “Innovation blackhole”INNOVATION MARKET

Basic researc

h

Pre-ind. research & dvlp

Identified innovation

s PoC

“by Project” initiatives PRODUCT DEVELOPMENT

“Start-up” initiatives NEWCo.

DEVELOPMENT

Innovative

productsInnovative

Co.s (products &

services)

• universities• research institutes• TTOs / incubators• public agencies • foundations•young/new entrepreneurs and inventors

SEED FUNDING DEVELOPMENT FULL FUNDING

• business angels• venture capitalists• public agencies• investment funds• industrial partners

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Reasons of the Innovation black hole and the Investors readiness Approach

Apart of scientific failures, the main reasons for the disappearance of innovations are:

• focus on the invention/science, missing care of the business/operational requirements

• wrong expectations of the inventorship, wrong assumptions for development

• fatal errors in initial stages or during the set-up of the development projects and Co.s

= initiatives not ready / not appealing for investment= initiatives with weak business and operational foundations

Starting from the consideration that the value of an innovation is to make it works, the Investors Readiness approach focuses its efforts in addressing high-potential innovations to a successful development journey, getting them ready with regards to all the critical factors and, consequently, ready and attractive for investors.

Delivery of innovations from research to the market: knowledge and focus on how to do it are the keywords.

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Investors Readiness Principles

Ready for investors = ready for successful development

The value of an innovation is to make it works

People is the key

Technology is the treasury

Listen, understand and dialogue

First in the innovation, never for the execution

Focus on key adding value matters

If you measure it, you can manage it

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Investors Readiness Guidelines: People

Build the right team. Bring in industry experience. Bring in serious entrepreneurs.

Have a clear and well tailored Human Resources Plan. Consider temporary solution but plan internalization of key roles: excellent processes need excellent owners.

Assure participation and retain of the key people.

Be passionate and committed. Have a vision. Be inspired leaders.

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Investors Readiness Guidelines: Technology

Build original, protectable technology. Innovate, don’t duplicate.

Secure your rights on the technology.

Verify that the technology has a real market potential, needs to be appealing. Do not underestimate/underevaluate the competition.

Define your patenting strategy, think globally. Verify and assure patentability and freedom to operate. Possibly have options, follow-ons and backups. Plan the patenting process and find experienced hands to manage the prosecution.

Have clear, detailed and well structured Investigator Brochure/s (one for every product). Keep them updated.

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Investors Readiness Guidelines: Organization and Processes

Organizational Infrastructure

Have formal control and decision-making processes.

Have a thin and expandable operative organization, clear roles for employees and appropriate organizational units.

Have in place good management control and forecasts systems, insuring financial records and documentation procedures in place, so to assure well organized and accessible archives (helpful also for due diligences).

Processes outcomes create value. Target high value processes. Keep under internal management the processes that give higher value and are fundamental for the development of the company / project.

Do not underestimate the need for adequate operative environments, web presence, equipments, tools.

Manage compliances and quality requirements.

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Investors Readiness Guidelines: Organization and Processes

Shareholders Structure

Avoid uncomfortable ownership for investors (pre-financing situation state of the art, e.g.: number and type of shareholders; complex shareholders agreements; etc).

Be prepared to cede control and decide the maximum control to be ceded, being your position reasonable from an investor point of view.

Expect dilution and request of privileged clauses in terms of governance and exit.

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Investors Readiness Guidelines: Planning

Have a clear and well structured Business Plan in line with the operational planning. Answer to the four critical factors for the success of every new venture: the people; the opportunity; the context; the possibilities for both risk and reward. The sessions of the BP that treat such factors are: The company (company profile; people; organizational

infrastructure; business model & strategy; product / services pipeline; IP; development plan).

The market, company positioning and competitive advantage (also from a scientific point of view).

Financials (methodology & assumption; P&L; BS; CF). Assumptions for the “business case” based on proven estimate factors (e.g. existing employees salaries; providers quotations; market terms of payments) or market averages.

The investment opportunity (the Opportunity and Financing Requirements; Way Outs; Risk Management).

Be frugal on finances, but prepared for difficult times. Have contingencies. Do not underestimate the funding needs. Do not underestimate the fund raising process.

Manage a roadmap to phase the capital risk. Identify and plan “market proof-of-concepts”.

Think big, start small, scale fast. Be ambitious. -15-

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Investors Readiness Guidelines: Funding

Consider (and if opportune mix) alternative source of funding: Equity (diverse players); Debt (warranties!); Public funding (if coherent with company pipeline and with reasonable time of payment).

Understand the Investors fund cycle, know your Investors’ fund focus. Seek investors suitable with your project. Always consider that private Investors: Realize temporary investment (3-5 years) and want capital gain

through the cede of their shares in the company. Request clauses such as: lock up of the entrepreneurs / initial

shareholders, meaning no disinvestment opportunity for the founders until the investors are out of the company; right of pre-emption; tag along; drag along; entrepreneurs / management commitment to the 100% of their professional time plus no competition clause.

Build a reasonable and comfortable investment structure. Define in advance the pre-money evaluation of the company [different methods, e.g.: Economic / Financial (e.g. Discounted Cash Flow); Market comparable / Comparables transactions; Decision tree analysis]; identify a convincing way-out strategy.

Be ready and prepared for presenting. Consider to engage supports. Verify your due diligence checklist and prepare the DD Package.

Prepare shareholders and governance.

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Investors Readiness Methods Investors readiness methodology vs. development stages

Basic researc

h

Pre-ind.

resarch & dvlp

Identified innovation

s PoC

“by Project” initiatives PRODUCT DEVELOPMENT

“Start-up” initiatives NEWCo.

DEVELOPMENT

Innovative products

Innovative Co.s (products

& services)

Assess & Select

Design & Plan

Set-up & Run

Investors Readiness methodsInvestors Readiness methods

“Primordial”

guidelines

SEED FUNDING

1st readiness level needed

DEVELOPMENT FULL FUNDING

2nd readiness level needed

Set-up & Run

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Investors Readiness Methods Primordial Guidelines, Assess & Select

• universities• research institutes• TTOs / incubators• public agencies • foundations• young/new entrepreneurs and inventors

“Primordial” guidelinesDefinition and application of guidelines, to apply during the development of scientific researches in order to safeguard potentials for future economic exploitation. (Institutional level)

Assess & Select

High-potential projects

identification and current status assessment

Hard-Soft factors evaluation (*)

Definition of strategic

guidelines and high-level

business plan

Go-not go

(*) Hard factors (product & rights, time/cost to value, target market), Soft factors (key people, shareholders/governance)

Main Tools: • Assessment Guidelines & Checklists• Industry’s Best Practices & Market

Data• High Level Business Plan

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Investors Readiness Methods Assess & Select – Main Tools

Assessment Guidelines & Checklists. During the assessment of a potential initiative, help to be sure to collect all the relevant information (checklists) and to evaluate objectively all the relevant key success factors (assessment guidelines).

Industry’s Best Practices & Market Data. Sources of information about market players, dynamics and economics. Usually by industry experts, on-sale reports/data bases, free materials (internet).

High Level Business Plan. At a preliminary level of refinement, contains full exposition of the initiative and of its potential return to investors :o the Company, o its products, development plans, market and positioning,

financials,o the investment opportunity. (more details follow)

Check list

Self Assessment tool

Market data Analysis

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Investors Readiness Methods Design & Plan

Design & Plan

Detailed design of the best “ready to go” status (*)

Gap analysis vs. current status

Action plan to achieve “ready to

go” status

Go-not go • business angels• venture capitalists• public agencies• investment funds• industrial partners

Commit Key people and

stakeholders

Business and funding planning

• universities• research institutes• TTOs / incubators• public agencies • foundations• young/new entrepreneurs and inventors

Main Tools: • Key People /Third Parties Agreements• Shareholders Agreements• IP matters: Freedom To Operate, Patentability, Brand,

Strategy, Assignments and Agreements for the Rights to exploitation

• Business Plan

Secure Rights

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Investors Readiness Methods Design & Plan – Main Tools

Key People Agreements. To assure that the initiative has fully on board the human resources/competencies necessary for its success (e.g. CEO, CFO, CSO). The Agreements need to contain clauses to assure commitment, motivation and retain of the key people. Besides the employment/engagement contracts, often include interests into the company and stock option plans.

Third Parties Agreements. To assure that the initiative owns the key “third party assets” fundamental to its development and potential of returns. Include Service Agreements, Materials Agreements, Spin-Off and Incubation Agreements, ….

Shareholders Agreements. Company’s (Statuto) and Private (Patti Parasociali) acts, contain rules and procedures abouto governance o ownership/shareso entrance of new shareholdersRules need to be coherent with the initiative’s “venturing”

nature, avoid barriers to the entrance of investors as new shareholders, warrant a clear, fast and agile decision making environment.

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Investors Readiness Methods Design & Plan – Main Tools

IP Matters: o Patentability and Freedom To Operate Analysis. Refer to the

certification of the potential of a innovation in terms of its future patentability and applicability with no constrains/dependencies. Performed by IP experts, could be opportune at multiple countries level (e.g. USA and EU) and need to be rigorous and accurate.

o Brand. Could become a value itself, the definition of a global branding approach has to support the creation of a distinctive and powerful image in the real (market) and virtual (internet) world.

o IP Strategy. Starting from the current status, defines the direction of its prosecution and expansion, including patenting approaches and options, new IPs, follow-ons and backups. Includes, when applicable, the management of industrial secrets and trademarks.

o Assignments and Agreements for the Rights to exploitation. Includes IP Assignment and Licensing Agreements.

Business Plan. At a deep level of refinement, contains full exposition of the initiative and of its potential return to investors. (more details follow)

Patentability analysis

Business Plan

IP Assignment

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Investors Readiness Methods Set-up & Run

Set-up & Run

Achieve “ready to go” status (action

plan implementation)

RUN

• business angels• venture capitalists• public agencies• investment funds• industrial partners

• universities• research institutes• TTOs / incubators• public agencies • foundations•young/new entrepreneurs and inventors

Main Tools (Funding): • Funding Strategy & Plan• Decision Taking Procedures• Non Disclosure Agreement • Elevator Pitch & Short Presentation

(non conf.)• Business Plan &, Project Presentation

(conf.)• Product/s Investigator Brochure/s

(conf.)• Due Diligence Package• Investment Structure & Term Sheet Main Tools (Run): • Development & Go-to-Market Plan• HR Plan• Plan & Control Procedures • Risk Management Approach

FUNDING

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NDA

Elevator pitch

Investigator Brochure

Term Sheet

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THANK YOU FOR YOUR ATTENTION

Documents

Classroom Training Modules - October, 2011 Investors Readiness R R 1