Five things that Investors look for in Start Ups

Transcription

1 1 Five things that Investors look for in Start Ups Philip Alexander August 2013

2 2 What Do Early Stage Investors Look For?

3 5 KEY ISSUES The Management Team The Product/Service The Market Opportunity The Investment Terms The Exit

4 KEY INVESTOR QUESTIONS 1) The Management Team Do I love the team? Do I believe their vision? Do they have the skills and experience required? 2) The Product/Service Is this a great product/service? Why? What it is the problem you are solving? Will customers buy/use it? Why? 3) The Market Opportunity Do I understand the market? How big is it? 4) The Investment Terms Do I want to lead the investment? Who is willing to co-invest? How much should I invest? How much equity should I take? What are the comparables? 5) The Exit How will I realise my investment? When? How? On what terms? Can it be accessed? Can it make money?

5 5 TRACTION Users, user growth, repeat users Revenue (and repeat revenue) Acceleration Engagement e.g. online social network 100K+ users e.g. online advertising companies - revenue e.g. enterprise sales - handful of credible beta customers

6 6 CREDIBILITY Operating traction Social proof References PR

7 7 COACHABILITY Many early stage investors have a strong desire to mentor and help build businesses If you don t appear coachable, you ll scare potential investors away if they don t listen now, how will they behave when they have my money? Don t respond defensively to questions

8 8 INVESTMENT READINESS Be ready and able to tell a compelling story simple investment proposition share a plan which demonstrates you know what you need to do to achieve your aims demonstrate a capability to execute your plan show an understanding of the investment process

9 OVERALL PROCESS Get ready Get out there Get the money Capital Strategy Investor Questions Term Sheet Timing Credibility Negotiation Story Pitch Due Diligence Documents Selecting Investors Legals Financial Model NDA Issue Shares Valuation Sources of Capital Target Investor List Team 9

10 10 CAPITAL STRATEGY Capital Strategy How much do I need to raise? For what use? From which investors? On what terms?

11 11 TIMEFRAME Q: How long will it take me to raise capital? A. B. C. D. Less than 1 month One to six months More than six months Any of the above

12 12 DOCUMENTS Information Memorandum/ Opportunity Overview/ Business Plan Executive Summary Presentation Financial Forecasts NDA Term Sheet (prepare a draft)

13 13 PITCH DECK Intro/Elevator Pitch/The Big Idea 1 The Problem 1 The Solution 1 Team 1 Market/Opportunity 1 Business Model 1 Product/Technology 1 Competition 1 Traction/Validation/Numbers/Metrics 1 Ask 1

14 14 FINANCIAL FORECASTS Helps you to understand drivers of your business Allows you to explicitly show your assumptions Allows you to conduct scenario analyses Is required during due diligence Three year horizon

15 15 NDA Required (or not?) 1 pager or a 10 pager AVCAL Template

16 5-7 yr Return Risk 16 SOURCES OF CAPITAL Seed/Start-Up Stage Early Expansion Expansion Stage Later Stage 10x 5x 3x Founder, friends & family Seed Accelerators Angel Investors Venture Capital 2x Private Equity & non-financial corporations Equity Markets Av Raising Commercial Banks $50K $100K $200K $500K $1M $2M $5M $10M $20M $50M $100M $200M+ # Employees Source: Jeremy Colless, Sydney Angels Sidecar Fund presentation

17 17 SOURCES OF CAPITAL Source FFF Angels Seed Funds/Incubators Angel Investment Groups Investment Funds (family, corporate) Venture Capital Private Equity Markets/Marketplaces Example Rich uncle; your lawyer; ex-colleague Founders/Execs from Seek, Atlassian, Hitwise, Yahoo!, etc.., York Butter Factory, Blue Chilli, Startmate, PushStart, Pollenizer, Innovation Bay, Sydney Angels, Hunter Angels RF Capital, Tulla, Banksia Capital, Elevation Capital, Artesian Capital SXVP, Telstra AVG, Singtel Innov* ESVCLP (Yuuwa, OneVentures, Parallel, Carnegie, Constant Innovation, SydAngels Sidecar Fund) Champ, BlueSky, Quadrant, Wolseley, Archer ASX, ASSOB, Wholesale Investor

18 18 TARGET INVESTOR LIST Relevant to your business Offer advice/ support/ introductions

19 ANGELS Angel investors: invest their own money (to make a capital return) provide capital, strategic and operational expertise tend to be less sensitive to market cycles Formal angel investment is a small, but growing part of the AU landscape Over 15,000 Angels in Australia, have invested over $1.7b in over 5,000 companies, generating over 35,000 jobs, and so have delivered a leveraged investment in Australian innovation over $5bn (co-investment ratio of 5:1) 19

20 20 HOW MUCH DO I RAISE? Enough to get to the next (meaningful) milestone, plus a little more

21 21 MEANINGFUL MILESTONE $ Value Valuation Business risk Market risk Tech risk Time

22 22 SELECTING YOUR INVESTORS What other investments have they made? What expertise do they have? What industry knowledge do they have? What is their timeframe? What network do they bring? Can they provide advisory support? Will they be passive or active? Do they have capacity for follow-on funding?

23 TERM SHEET Term Type of Equity Amount of Capital Pro-rata rights Comments Ordinary shares, or perhaps simple preferred (1x, non-participating) Anything more at seed level is unusual, misaligns incentives, and will get amplified in subsequent rounds Indicate amount to be raised (but don t set a minimum) Current investors offered pro-rata opportunity to invest in subsequent rounds Founder vesting Founder shares vest over a few years Board 1 Founder, 1 Investor, I Independent 2 Founders, 2 Investor, 1 Independent Don t offer Board seat Salary/ies ESOP Slightly above subsistence not corporate level 10% (pre-investment) 23

24 24 TIPS AND THOUGHTS Pitch to the right person Angel groups (yes or no?) Advisers (yes or no?) Quick no is far better than a slow maybe Try to keep number of investors to a minimum Don t give up majority share of you company (at least until it is cash flow positive)

25 25 TIPS AND THOUGHTS, Be persistent - know when to keep going Be realistic - know when to give up Seek advice from those who have done it Pick investors who you really think understand you and your vision Articulate clear milestones Meet your milestones! Get your house in order (cash/accrual accounting practices, legals, etc.)

26 26 TIPS AND THOUGHTS, Raise money when you don t need it Learn about the capital raising process Know your bargaining position Look for more than money from the investor ABC, but assume the deal will never close Always have a back-up source of capital

27 27 REASONS FOR FAILURE Investors don t want what is being offered Investors don t get what is being offered Investors don t know what is being offered

28 28 REASONS FOR FAILURE Poor documentation and communication Lack of commitment Weak market analysis Overemphasis on product

29 29 THANK YOU PHILIP ALEXANDER Executive Director Venture Advisory