Financing Start-ups Jeff Skinner, London Business School KCL 28 January 2014 © Jeff Skinner 2014

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Financing Start-ups Jeff Skinner, London Business School KCL 28 January 2014 Jeff Skinner 2014 Slide 2 The Journey Hypothesis Test Business Plan Resources (including cash) Execute Sales, value create Scale Sell Jeff Skinner 2014 Slide 3 Finance for what? Youve done market research Found out what takes you towards: Sales (channel, supplier, team) development Next round of investment. Maybe: Proof-of-Concept (Action, Market, Value, Manufacture) Value chain (supplier, distributor) building Internal capacity (team, infrastructure etc) building Working Capital (time delay to payment) Jeff Skinner 2014 Slide 4 Product-focused development Development spend Risk Value of business Slide 5 Jeff Skinner 2014 Value-focused Development Milestones Risk Value of business Development spend Slide 6 Jeff Skinner 2014 Whats a milestone? Product (corporate spending other peoples cash??): Something else has worked One more brick in the wall (tick on PERT chart) Value (entrepreneur spending own cash): Something fundamental hasnt gone wrong (or maybe it did glad we found out early) A concept proved Leap of faith justified Flipped some heads in a row. Slide 7 Extract from business plan Raised $1.2M to: Protect initial IP Develop prototypes Launch evaluation kit program Develop early sales channels and secure JDA partners Seeking $5M in new capital to: Scale existing JDA efforts Transition JDA partners to solution sales Begin mass production of ForceTouch sensor solutions Jeff Skinner 2014 Slide 8 Wasted finance... We chose the wrong risk We didnt prove anything Development funding Risk Value Slide 9 Jeff Skinner 2014 Slide 10 Sources of Finance Own sweat, resources under your control Friends, fools, family etc (3Fs) Bootstrap (retained earnings, cashflow) Customers, suppliers (who share your success) Grants, soft money Banks Crowdfunding (the Market) Angel Investors Venture Capital Jeff Skinner 2014 Slide 11 Own sweat, resources All you have at the outset! Likely to be limited But early stage (research) costs little. Web-based business might not need a lot. The most important thing is to make the most important thing the most important thing. Can retain 100% ownership & control. Unlikely to be enough unless a consultancy. Jeff Skinner 2014 Slide 12 Family, family & fools Maybe good for a few k. Leveraging emotional & social capital Position as education (no return needed) Think what happens if all is lost. Be honest, keep communicating progress. Careful if equity (OK if loan or grant) Jeff Skinner 2014 Slide 13 Bootstrap Buy an apple, sell the apple, buy two apples Slow growth which sometimes fine (especially if good margin/multiplier) Not good if small Window of Opportunity Consult and use cash to grow main business Soft to Hard - consultancy as mkt rsch)? Keep all equity, control. Jeff Skinner 2014 Slide 14 Customers, suppliers Your success means: More business, profit for suppliers, distributors, service providers. Services or goods that users want. Can mean: Generous terms negotiated from suppliers: Long payment terms Some up-front, balance when you sell Customers paying in advance (positive cash flow): Up-front (pay now, receive later) Subscriptions Rare but great since no dilution. Jeff Skinner 2014 Slide 15 Grants, soft money Various small sums: Start-up loans (Government): 10k. TSB (or even RCUK) grants Business Plan Competitions Start-up Chile University PoC, free stuff Accelerator (mostly for equity) Maintain Ownership & Control. Small sums but can make all the difference! Jeff Skinner 2014 Slide 16 Businesses can apply for both the CSR Awards and the Transformational Finance Awards, while social ventures should get their applications for the Big Venture Challenge by Feb 10 th Sarasin & Bridges have announced a 30m Social Investment Fund while the UKs first Local Impact Fund has been launched in Liverpool ClearlySo Newsletter (27Jan2014) Jeff Skinner 2014 Slide 17 Banks Hardly ever for high risk Usually secured debt. You have few assets as security. Can securitise: fixed assets (marketable machinery etc) working capital & invoices. Low risk, lowish interest Short term (can be called in) Really not for start-ups Jeff Skinner 2014 Slide 18 Crowdfunding New entrant P2P finance - on the rise. Currently illegal to offer shares to the public* But can give sample, information for donation Some services (e.g. CrowdBnk) can fix equity. Think of this as a fundraising campaign Research Kickstarter etc to see what works Jeff Skinner 2014 * Except High Net Worth Individuals Slide 19 Angel investors ~20k - 200k Often first serious money High Net Worth individuals Bring expertise as well as money. Gather & syndicate in Clubs, accelerators See: (Angellist) Angel Co-investment Funds - See: Massive Govt Incentives SEIS up to 150k. Take risk (thus equity & control). Jeff Skinner 2014 Slide 20 Venture Capital Tend to specialise. Most famous - but back very few. Seek x10 returns to compensate for lemons. From 500k to 5M first round. Looking for high growth best for businesses: Ready to scale Needing lots of R&D - then going global (Pharma) Court but unlikely to be VC-ready for years. Jeff Skinner 2014 Slide 21 Other things bought for equity Idea itself? Individual (Sweat Equity) Team (ability to execute). Intellectual Property (brand, data, patents) Assets (property, facilities) Cash Contracts? Goodwill (relationships, sticky customers, subscriptions Jeff Skinner 2014 Slide 22 Types of cash investment Pure debt: Secured Pay back with interest Very limited upside and downside Pure equity (ordinary shares) Unsecured Share of eventual profits/sale Share fully in upside and downside Jeff Skinner 2014 Slide 23 Variants on Debt/Equity Preferred Shares Liquidation Preference Convertible loan Anti-Dilution Ratchets Warranties Preferential right to invest in future rounds Option pool Jeff Skinner 2014 Slide 24 Controlling Interests Standard Shareholder rights Nominee Directors Veto Rights Vesting (with Good & Bad Leaver provisions) Tag & Drag Along Rights Jeff Skinner 2014 Slide 25 Gen up These terms are the language of investment. Not difficult to understand. Read some Agreements: mentsforearlystageinvestments.aspx mentsforearlystageinvestments.aspx Read the book (terms & process explained): Things that can go wrong read for example: investment-round Always understand everything seek worked examples (ifthen). Jeff Skinner 2014 Slide 26 Slide 27 (Pre-Money) Valuation of Business Valuation hard if complex (debt/equity) instruments used. But if pure equity (share of business) then: DCF (risk-adjusted future revenue) Benchmark, market (what others got) What VC needs now to get 10X at exit. Whatever you/they can negotiate. Price that leaves you with just enough incentive. Remember that investor has another bite of cherry but you may not. Jeff Skinner 2014 Slide 28 Conclusions Youre in two markets: product and money Investor is a customer: buy money with equity Research market before selling: Why wouldnt you (& people like you) invest? What do you (& other investors) value? Start conversations now: Build awareness, relationship, reputation Seek advice Jeff Skinner 2014 Slide 29 Heterogeneous investors Investors segment just like other customers Different preferences when it comes to: Available resources (cash) Degree of involvement Risk & reward appetite Pressures (e.g. exit, IRR) Languages Knowledge, sophistication. Jeff Skinner 2014 Slide 30 Esin Akan Handbags are smartly designed luxury leather handbags for working professionals. The modular designs help them to transition in different environments in an elegant and stylish way: from the office to the gym, a meeting to a cocktail party, even to a weekend abroad. Jeff Skinner 2014 Slide 31 Puridifys technology, FibroSelect a novel chromatography reagent, offers significant advantages across key performance attributes that not only allow chromatography associated costs to be reduced by up to 90% but are also well aligned to meet the industry demands today and as the market evolves Jeff Skinner 2014