1 Raising Business Angel Investment EBAN Institute Bootcamp Moscow 2 nd October 2013
2 Executive summary Equity raising process Top three investment criteria Company executive summary Business plant 5 6 Funding requirements Valuation and terms of investment
3 Equity raising process A marriage with a planned divorce Dating process Understanding what an investor finds attractive
4 A marriage with a planned divorce The relationship between investor and entrepreneur is like a marriage but one with a planned divorce. Since their investment is unsecured, an investor needs to become very comfortable with the people they are backing.
5 Dating process The process starts with the dating process. This is about the entrepreneur building a robust business relationship with the investor. Understanding what makes your proposition attractive and not needy is key to securing an investment.
6 Understanding what an investor finds attractive Like any relationship, it is essential that you understand what a particular investor finds attractive. They all have different views so that just because one investor declines to invest in your company, it does not mean that you will be unsuccessful.
7 A typical angel investment process Deal sourcing Investment terms and negotiation Investment Deal screening Due diligence. Post-investment support Initial feedback coaching Company presentations
8 Investor due diligence Investors will undertake due diligence on your company prior to deciding to invest. Due diligence is a process that verifies and confirms statements and views about a business and its prospects. Due diligence normally includes: a competitive analysis, validation of product and IP, an assessment of the company s structure, financials and contracts, a check of compliance issues and reference checks on the team Entrepreneurs should be looking for smart money, that is, investors who have sufficient skills, experiences and networks to provide more-than-money to portfolio companies after investment.
9 Time to Investment You should allow a year from planning to completion of an equity investment. A typical time frame is three to six months. However, allowing a lengthy time period will help you. You do not want to be in a position where you need funding urgently and would be on the back foot when negotiating the terms of the investment being needy will put off an investor.
10 Executive summary Equity raising process Top three investment criteria Company executive summary Business plant 5 Funding requirements 6 Valuation and terms of investment
11 Top 3 Investment Criteria Management team This is the number one, most important criterion for investors. Investors (people) invest in people. Exit potential Question: how well would you need to know someone before you gave them 100,000 of your own money? Investors spend a great deal of time becoming comfortable with the management team and the business. For each team member Revenue potential provide a; profile s qualifications track record relevant experience role in the business other business interests shareholding Brief details about the directors and senior managers of your business should be included. The motivation of the management team should be outlined, highlighting their personal aims and incentives.
12 Top 3 Investment Criteria Exit potential Most investors invest for a capital gain at the end of the investment. Venture capital funds have a typical life of ten years. There are three main investor exits: Investor Exits Exit potential A share buyback is where the company or the other shareholders buy the investor s shares An IPO is listing the company s shares on a recognized stock exchange and, in theory, the investor is free to sell its shares on the open market. Problem Revenue potential s The investor wants the company to be valued as high as possible whilst the other shareholders will want the company valuation to be as low as possible Selling a significant amount of shares in a relatively young thinly-traded public company is likely to have a hugely negative impact on its share price. The best exit option to maximize investment sale proceeds is a trade sale for cash, where all shareholders exit at the same time as the entire company is sold to a third party. Everyone wins and is in stark contrast to the share buyback.
13 Top 3 Investment Criteria Evaluating Exit Strategy Section Bad No Exit strategy proposed Lack of credibility No estimates of return Too long term Too few options Only built to be sold and not a sustainable business Exit potential Revenue potential Good s Demonstrates understanding of funders needs/wants Includes thoughtful analysis Quantified Business grows to be cash flow positive and sustainable Clear plan for differentiation and fills gap in potential buyer s strategy Realistic numbers with examples if IPO, need to have enough size.
14 The exit One issue to consider on exit is vendor warranties. Warranties are legal statements that confirm certain issues are true as far as the warrantor knows. The vendors are usually expected to give warranties on a sale to the buyer. The issue is sometimes addressed by putting some of the sale proceeds into an escrow account for a limited time period to cover any claims against the warranties and/or taking out warranty insurance although the latter can be expensive and hard to obtain cover.
15 Top 3 Investment Criteria Revenue potential The revenue potential needs to demonstrate Exit potentialthat your company Revenue is scalable; potential scalable enough to yield the significant return sought by an investor. Anything that you can do to demonstrate this is important: 1. Stating the scale of your existing orders and sales funnel. 2. The size of the market it needs to be big enough to build a significant business. 3. Evidence of any other business in your industry showing similar growth to the growth that you are planning. Tip: the revenue potential of your company must demonstrate a scalable business that is capable of producing significant returns for an investor s
16 Executive summary 1 Equity raising process 2 3 Top three investment criteria Company executive summary Business plant 5 Funding requirements 6 Valuation and terms of investment
17 Company executive summary Key elements: 1. The Opener. Keep it specific and not woolly 2. The Problem. Explain clearly the pain point being experienced by your customers that you are proposing to solve. 3. The Solution. State what you are offering to whom. 4. The Market Opportunity. Explain the market (segmentation, size in value, growth, drivers and influences, how many customers and competitors) 5. Competitive Advantage: you have competition if you do not then there is no market for your solution. First mover advantage as your sole competitive advantage rarely convinces investors; you need to state clearly your unique benefits and advantages 6. The Management Team: the number one criterion used by investors. Explain why your team is destined to succeed. 7. The Reward: your summary financial projections need to demonstrate that a significant return will be achieved for your investors capital. 8. The Funding Requirement. State how much you are raising now.
18 Company executive summary THE EYE-CATCHING INTRO. The first paragraph of an Executive Summary should be compelling and capture the readers attention. BUSINESS DEFINITION. The second paragraph or section should define your business, leading off with a clear statement of what your product or service is, and for whom it is targeted. THE OFFERING HOW MUCH ARE YOU SEEKING? Right up front indicate how much capital you are seeking, and to what use the proceeds will be put to. This quickly allows the reader to assess the financial parameters of the deal and this puts in context what follows. FINANCIAL PERFORMANCE. Most investors want to know what the expectations are for the company in terms of how large will the firm become, and how soon will it be profitable. MARKET. You should briefly describe the market, referencing the source of each statistic or number you present for credibility
19 Company executive summary SALES & CUSTOMERS. Given the large number of pre-revenue companies seeking financing, if you have revenue, also mention this up near summary to catch the reader s attention the front of the executive TECHNOLOGY. For companies, in which technology is a key component, describe it and how you plan to remain current or ahead of the rest of the industry. CLOSING PARAGRAPH. The Executive Summary should conclude with a brief paragraph that invites action such as a meeting, a conference call, or a request for additional information.
20 Company executive summary Appearance The Executive Summary should be attractively presented, with the occasional and consistent application of bolding and italicized type, indenting, etc TARGET YOUR RECIPIENTS SEED STAGE (pre-revenue); Funding sought: $50, ,000; Sources: Management, families, friends, former co-workers, angel investors; EARLY STAGE: Funding sought: $250,000-1,000,000; Sources: Angels, Investor groups, very few venture funds EARLY EXPANSION OR FIRST STAGE: Funding sought: $1,000,000-5 million, the so-called Funding Gap between Angel and Institutional Investors; Sources: Early stage venture funds. SECOND STAGE: Funding sought: $5-10,000,000; Sources: Many Venture Funds THIRD STAGE: Funding sought: $250,000-1,000,000; Sources: $10,000,000+;
21 Company executive summary STRATEGIC (CORPORATE) INVESTORS Having a strategic investor as highly desirable, and would encourage a portfolio company to seek them out. THE WRITING STYLE Build credibility through frankness and a simple choice of words, presented in a direct, somewhat factual style. THE GOAL: SET UP A MEETING Your goal is to establish a relationship with investors and/or venture firms so that they will ultimately campaign on your behalf within their organization. DON T TALK ABOUT SECONDARY MATTERS AT LENGTH If you only have a few minutes, spend them explaining what your product does and why it's great. Second order issues like competitors or resumes should be single slides you go through quickly at the end.
22 Company executive summary PERSISTENCE IS ESSENTIAL The real secret of getting funded. It s to be persistent while somehow avoiding appearing annoying. THE TWO MINUTE TWO PARAGRAPH RULE Your executive summary should attempt to capture or engage the reader in the first two paragraphs. Therefore, your presentation should follow an equally compelling course in which your goal is to engage the individual or group during your first two minutes of presentation
23 Executive summary 1 Equity raising process 2 3 Top three investment criteria Company executive summary Business plant 5 Funding requirements 6 Valuation and terms of investment
24 Business plan Business Plans are a key tool in helping you to raise investment finance. Writing your business plan fulfils two main functions: One Internal It forces the management team of a company to set their objectives for their business. You will have to carefully consider how you will develop your business, what it is that your technology offers in terms of a product or service and how your team will work together to achieve this. Two External Your business plan need to expresses the essence of your business that is new, different or unique compared to your competitors. it should be long enough to do justice to your business while being concise enough to keep the reader interested
25 Business plan Simple Logical Flow for thinking out your Business Plan Founders values, goals, skills, interests and assets Entrepreneurial Marketing: Target customers, Product Definition, Value Propositions, Business Model Sales: Prospects, Customers, Customize Feedback, New Opportunities Engineering: Build it IP Feedback New Opportunities Finance: Measure and Track Resource Allocation Productivity Plan & Analysis Feedback
26 Business plan The Business Cube* is a simple and intuitive tool to aid in business planning. The principles of using The Business Cube to think about your business are as follows: Business plans should allow for continual refinement, consultation and improvement to iron out any wrinkles and reflect the evolving nature of a business idea You need to think holistically about the business even at the concept stage You should update your business plan at each of the key stages described in the Business Cube As you move to the next stage of a business idea you may need to change elements of the plan or address any imbalances that are highlighted. The Business Cube: Inter Trade Ireland: Equity network business planning tool, 2007
27 Business plan The components of the Cube Executive Summary Business Overview Market Opportunity Industry & Competition Product or Service Proposition Marketing Plan Management Team Operations Key Risks Financial Plan Funding Exit Strategy Summary Schedules Appendices
28 Executive summary 1 Equity raising process 2 3 Top three investment criteria Company executive summary 5 Business plant Funding requirements 6 Valuation and terms of investment
29 Funding requirements Historical trading information Standard financial information in the business plan would be summary historical profit and loss accounts and balance sheets for the years of trading to date. Financial projections The business plan should include projected profit and loss accounts and projected balance sheets along with cash flow statements Professional help with projections It is worthwhile getting professional assistance from an accountant to prepare financial reports and the projections but entrepreneurs still need to know what they mean. How much to raise? Costs are generally known but future revenue is not guaranteed so that any formula used to calculate monthly cash burn should give some assurance that the amount being raised will last 18 months.
30 Funding requirements Use of funds 000s 1 Development costs 250 Working capital 100 Business development 200 Capital expenditure 150 Headroom (contingency) 150 Total 850 Source of funds 000s 1 Status Promoters 250 Committed External equity private investors 250 Pitching External equity Business Angel coinvestment 250 Subject to matching funds or public investors Government agency grant 50 Subject to others Bank debt 50 Credit committee Total 850 Founders should have ideally had made or intend to make a cash equity investment in the company, i.e. have skin in the game
31 Executive summary 1 Equity raising process 2 3 Top three investment criteria Company executive summary Business plant 5 6 Funding requirements Valuation and terms of investment
32 Valuation The valuation needs to be low enough to ensure an investor can achieve an attractive return. It needs to high enough to keep existing shareholders incentivised. Degree of influence Have a realistic valuation expectation the investor has to make an attractive return on his investment Valuation multiples/metrics Where there is revenue and/or profits, various multiples or metrics can be applied to establish a valuation o A multiple of recurring revenue; o A multiple of EBITDA; o A multiple of profit after tax; o A sector markup; o A value for every active user/customer Pre-money valuation: 700k Post-money valuation: 1 million
33 Terms of Investment Investment terms and conditions include the following: Amount and use of investment; Percentage ownership; Equity and debt structure; Dividend and interest (if applicable) rights; Voting rights; Management incentive schemes; Exit arrangements; Management changes; Investor board representation; Investor veto rights; Reporting requirements and consequence of failure; Costs and confidentiality; and Steps to closing.
34 Legal Agreements The principal legal agreements are: Investment agreement (sometimes called a shareholders agreement); Articles of association (as amended); and Directors service agreements
35 Legal Agreements There are two types of liquidation preference: Soft liquidation preference : on a liquidity event, the holder of shares having a soft liquidation preference will have the right to receive the higher of their money back or the percentage shareholding that they hold in the company; Hard liquidation preference : on a liquidity event, the holder of shares having a hard liquidation preference will have the right to receive their money back plus the percentage shareholding that they hold in the company.
36 Legal Agreements The following table illustrates how each works. As the exit proceeds increase, the effective percentage of total proceeds attributable to the investor will fall.
37 Instruments types of shares The principal instruments are: Ordinary shares. Ordinary shares receive any dividends and exit proceeds after all creditors, debt and other share classes are paid. The amount received per share is pro-rata to the total number of ordinary shares in issue. The total number of ordinary shares that you hold divided by the total ordinary shares in issue gives your percentage ownership of the company. Preference shares. Preference shares provide the holder with a preference to dividends and exit proceeds over ordinary shareholders. Preferred ordinary shares. Venture capitalists use this type of share to provide the benefits of ordinary shares and preference shares in one instrument. Convertible loans. Cash can be invested as a loan that can be converted, usually at the holder s option, into shares at some point in the future.
38 Instruments types of shares The principal instruments are: Ordinary shares. Ordinary shares receive any dividends and exit proceeds after all creditors, debt and other share classes are paid. The amount received per share is pro-rata to the total number of ordinary shares in issue. The total number of ordinary shares that you hold divided by the total ordinary shares in issue gives your percentage ownership of the company. Preference shares. Preference shares provide the holder with a preference to dividends and exit proceeds over ordinary shareholders. Preferred ordinary shares. Venture capitalists use this type of share to provide the benefits of ordinary shares and preference shares in one instrument. Convertible loans. Cash can be invested as a loan that can be converted, usually at the holder s option, into shares at some point in the future.
39 Anti-dilution protection Particularly in the case of an agreed high valuation, investors will seek anti-dilution protection if there is a future down round. A down round is where a subsequent valuation per share is lower than the previous valuation. In this case, anti-dilution protection re-prices the previous round to the new round s valuation and will give the existing investor extra shares (at a nil or nominal price) as compensation.
40 Drag and tag provisions A drag provision compels other shareholders to sell their shares at the same price as the selling shareholders. For example, 51% of shareholders wish to sell their shares to a third party and as long as 51% is at or higher than the trigger level then the remaining shareholders can be compelled to sell on the same terms and conditions. A tag provision provides other shareholders with the ability to sell their shares at the same price as the selling shareholders. For example, 51% of shareholders wish to sell their shares to a third party and as long as 51% is at or higher than the trigger level then the remaining shareholders can join the selling shareholders and can sell their shares on the same terms and conditions.
41 The Typical Investment Process A Flowchart Planning Before approaching investors, companies need to have clear and executable business plans Connecting Connections with potential investors should be done by qualified introduction wherever possible Negotiating Once a connection has been made, the parties should try to negotiate on the headline terms of a deal - the detail will come later Evaluating The Investors will carry out due diligence on the Company to make sure it does not have any problems Implementing The Investors will typically propose investment documents (subscription agreement, shareholders' agreement etc ) to the Company for consideration Completion If all goes to plan the investors will complete the investment and the Company can get on with developing its business
42 Credits Raising Business Angel Investment - European Booklet for Entrepreneurs EBAN & HBAN, 2013
Investing in Investing Private Companies in Private Insights Companies for Insights Business for Business Angel Angel Investors Investors January 2013 January 2013 HBAN is a joint initiative of InterTradeIreland
Raising Business Angel Investment Insights for Entrepreneurs December 2012 HBAN 2012 HBAN is a joint initiative of InterTradeIreland and Enterprise Ireland Delivered in partnership with the Irish Business
Raising Business Angel Investment European Booklet for Entrepreneurs This publication is the result of an agreement signed between EBAN, HBAN and eplus Ecosystem with the purpose of serving the organisations
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