Effective Communication in the Acquisition of Private Equity Financing

Northeast Indiana GROWTH CAPITAL SYMPOSIUM

April 22, 2009Sweetwater

Remound Wright Northeast Indiana Innovation Center

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• Remound W. Wright, Inaugural Director, Center for Entrepreneurial Excellence (CEE) – (7 Years with the NIIC)

• Duquesne University – MBA• Business Development, Strategic & Corporate

Financial Planning (6 Years w/ Phelps Dodge & NAVL)• Public Accounting + Internal Audit (10+ Years with

Touche Ross & Co. & Westinghouse Electric)

Who am I?

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• What is NIIC?• 501 (c) 3 Non-profit business technology based

incubator & accelerator;• Innovation Park is 55 acre campus adjacent to

IPFW our host at Stellhorn and Hobson Roads;• 70K+ square feet in 2 bldg (biomedical wet lab

space and office space) including the new EGC• ISO 9000-2001 Certified• 11.5 FTE staff• 5 Clients have graduated since inception

Why an Innovation Center presenter?

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The Venture Financing Chain

GestationInception

Prototype

Roll-out

Growth

Expansion

Maturity

FoundersAngel Investors

Venture Capital Firms & Corporate Investors

Banks

IPO, Acquisitions

Time

revenue

Why Discuss Effective Communication?

Because….There is Art in the Ask!

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The worlds of business and fine art have much in common.

Money and MusicFinance and Fiction

Profits and Paintings

A painter puts oils on a canvas…A writer puts pen to paper….

An entrepreneur takes a business idea and brings it to life.

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How you ask questions is very important in establishing a basis for effective communication.

1. Effective questions open the door to knowledge and understanding. The art of questioning lies in knowing which questions to ask when.

2. Address your first question to yourself: if you could press a magic button and get every piece of information you want, what would you want to know? The answer will immediately help you compose the right questions.”

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Why Discuss Effective Communication?

Effective communications critical to the success of all private equity (PE) relationships

-This is a relationship business.-People have choices:

•Who to invest in;•Who to invest with;•Who to take term sheets from;•Who to work deals with;•Who to establish and maintain relationships with.

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Four Goals of Effective Communication

1.To inform – you are providing information for use in decision making, but aren’t necessarily advocating a course of action;

2.To request for a specific action by the receiver;

3.To persuade – to reinforce or change a receiver’s belief about a topic and, possibly, act on the belief;

4.To build relationships – some messages you send may have the simple goal of building good-will between you and the receiver.

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Effective Communication…

1. Achieves shared understanding2. Directs the flow of information3. Helps people overcome barriers to open

discussion4. Stimulates others to take action to active

goals5. Channels information to encourage people

to think in new ways and to act more effectively

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The 5 Essentials of Effective Communications

1. Know your audience and match your message to the audience.

2. Respect your audience and suspend judgments.

3. Know exactly what you want to achieve.4. Think and organize before you proceed.5. Think from your audiences point of view.

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Many entrepreneurs don’t get the funding they seek because they don’t know the investors criteria.

If approaching an angel investor you must have thought through these key questions…1.How much money do you need?2.What do you intend to do with the funds?3.How much return will the investor realize on the investment?4.When will the investors realize a return?5.How will the investor realize a return?

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Investors typically analyze an opportunity by its stage of development.

•Pre-seed Stage•Seed Stage•Early Stage•Mid-stage•Late-stage•Exit

•Proof of Concept•Pre-sales, pre-profit•Early sales, pre-profit•Growing sales, breakeven•Growing sales, profits•Large growth potential

Entrepreneurs must know the intended outcome of investment based on their stage of development.

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Entrepreneurs must know who typically invests at each stage of their development?

Entrepreneurs must know when and where (the appropriate places) to look for investment.

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Stage Amount Source

Pre-seed Stage $100,000 Family, Friends & Founders

Seed Stage $500,000 Angels

Seed Stage $2,000,000 Venture Capital

Early Stage $5,000,000 Venture Capital

Mid-stage $8,000,000 Venture Capital

Late-stage $10,000,000 Venture Capital

Exit $11,000,000 - $1B Investment banks, companies

An investors expected rate of return by stage development.

Entrepreneurs must know when and where (the appropriate places) to look for investment.

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Stage Source ROI

Pre-seed Stage Family, Friends & Founders 20X in 7 Years

Seed Stage Angels 10X in 6 Years

Early Stage Venture Capital 5X in 5 Years

Mid-stage Venture Capital 3X in 3 Years

Late-stage Venture Capital 2X in 2 Years

Exit Investment banks, companies

1.35X in 1 Years

Effective communication demands that entrepreneurs to know the ?’s.

If approaching a banker for investment you must address these key questions…

•Ownership•Business Plan•Cash Flow•Contingency Plan

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Effective communication demands a well written strategic business plan.

It is vital in today’s world that the entrepreneur realistically understands how their product is positioned in the market place.

The Big 8 key strategic questions relate to:

1.What market problem or need does the product address; 2.How big is the problem; 3.Why is this product the best solution and why will customers buy; 4.What management skills are required to bring the product to market; 5.How much money is required; 6.How will those funds be used; 7.How will competitors be neutralized, and 8.How much money will this venture make?

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Beyond the previously mentioned criteria, we let clients know that investors look for...

•Great deals, not good deals;•Exceptional Return on Investment (ROI);•Dominant competitive advantages;•Proven management;•Large and growing markets;•In their sweet spot; and•Synergy with other portfolio companies.

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For entrepreneurs the results of effective two-way communication are…

•Develop & Maintain Better Relationships•Trust•Rapport•Credibility

In this environment – information travels quickly

•Stronger Skills in:•Leadership•Negotiating•Relationship building

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Investment Center for Advancement of Regional Entrepreneurship

An Entrepreneurial Preparedness Program of theNortheast Indiana Innovation Center

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iCARE – where effective communication about venture financing begins.

A “one-stop-shop” where entrepreneurs find out every thing they need to know about venture financing.

Come and learn more about “Art of the Ask”!

THANK YOUContact Info:

Remound W. WrightDirector

Northeast Indiana Innovation CenterCenter for Entrepreneurial Excellence

3201 Stellhorn Road, Fort Wayne, Indiana 46815rwright@niic.net260-407-6462 DD260-402-1920 Cell

http://www.niic.net21

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Venture Capital GlossaryWhat We/They Say… What We/They Really Mean…

Acquisition strategy The current products have no market

Adverse customer selection Existing customers can’t stand the product; no positive customer references

Basically on plan Revenue short fall of 25%

Dotcom business model Potentially bigger fools have been identified

Considerably ahead of plan Hit plan in one of the last three months

Currently revisiting the budget Financial plan is in total chaos

Cyclical industry Posted a huge loss last year

Entrepreneurial CEO Totally uncontrollable, bordering on maniacal

Funding interruption Existing investors tapped out and unwilling to provide additional funding

Ingredients are there Given two years we might find a workable strategy

Investing heavily in R&D Trying desperately to catch the competition

Limited downside It can’t get much worse

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Venture Capital GlossaryWhat We/They Say… What We/They Really Mean…

Long selling cycle Yet to find a customer who likes the product

On a manufacturing learning curve Can’t make the product with positive margins

Possibility of a slight shortfall A revenue shortfall of 50%

Repositioning the business Multi-million dollar investment recently written off

Somewhat below the plan Revenue shortfall of 75%

Too early to tell Results to date have been grim

Turnaround opportunity Lost cause

Unique No more than 6 competitors

Upgrading the management team The organization is in complete disarray

Window of opportunity Without more money, the company is dead

Work closely with management Talk to them on the phone once a month

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Alternative Guide to Venture CapitalVC Term… What It Really Means…

Accountants As in investigating accounts, an oxymoron

Business Plan Winner of the Booker Prize for Fiction. Vital to securing an investment. Treated like an embarrassing relative post-investment.

DCF Analysis Deceit by Computer Fraud. Highly scientific and extremely unreliable method of valuing companies.

Due Diligence The (sometimes optional) process of finding out what your buying. Ideally before buying it.

Envy Ratio The ratio between how much money a management team makes and how many workers they make unemployed.

Exit The only door a VC can see.

(David) Frost on Sunday A VC’s favorite interviewer. Also the first letter of FOSB – an impolite decline. Also: Failure. Unimaginable.

Hockey Stick Every self respecting business plan should have one. Shows the smooth line progression from heavy start up loss to Microsoft levels of profitability that is in every startup’s birthright. Hockey sticks are useful for beating management over they head when they don’ t happen.

Internet The medium by which a number of stupid and unlikely people have made millions. And lost them again. To be approached with caution.

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Alternative Guide to Venture CapitalVC Term… What It Really Means…

Incubator Where teenagers lecture entrepreneurs on the facts of business life (how much they would sell their Pokémon cards for, the latest Teletubby stories, etc.) Would-be investment executives work at incubators until they are old enough to join a proper firm.

Jersey Where many VC funds are domiciled. Because they like the weather.

Kindergarten See Incubator.

Lawyers A necessary evil, apparently.

Management To be blamed for poor investments.

NPV – No Positive Value Another widely used and largely useless valuation technique.

Profit and P45 Form given to departing employees. VCs seek to make one by handing out the other.

Private Equity VCs like to keep private how much equity they own.

Portfolio Company Like children – Cute to look at in the early stages, then they start spending your cash and ruining your records, before you finally lose patience with in and boot them out of the family home.

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Alternative Guide to Venture CapitalVC Term… What It Really Means…

Quantum Leap What lemmings believe in before they invest in dot-com start ups Also: Question. Obvious and usually unacceptable evidence of disbelief.

Receivership An alternative exit strategy. Very popular with American VC firms in the late 80’s early 90’s.

Stock Exchange Where large numbers of old economy companies have historically been put out to pasture. A slow lingering death awaits. A happy hunting ground for VCs. An unlikely exit scenario unless you have little revenue and no profits.

Trade Sales What a VS tells his investment committee when he can’t think of how to exit a deal. Also: Terrible deals. What the competition does.

Unions A VCs greatest ally. Particularly helpful in restructuring dying businesses to meet the needs of the market economy. We’re all capitalists now.

Warranties and Indemnities

A guarantee (backed up with financial penalties) from the vendor to say they’ve been honest .”

Window of Opportunity What a management team always promises.

Youngster Dot.com manager.

Zero Sum Game Pleasant way of generating M&A fees.