Veterans Capital Partners

Transcription

1 Veterans Capital Partners Creating networking and capital resources to help veteran entrepreneurs. February 14, 2014 Prepared by Tim O Neil Duc Vu Chris Elfering Laura Hoffman (A team of 1 st year full-time MBA students) An entry for the Acara Challenge 2014 Domestic Division Contact Information: Tim O Neil, onei0128@umn.edu,

2 Executive Summary Currently there are any number of programs, initiatives or declarations to increase the level of employment of our nation's veterans, each doing great work in their own right. However, when it comes to mentoring and financing entrepreneurial veterans the support system is patch work, difficult to navigate and exceedingly brief in its support when it does exist. As the armed forces begin, their contraction and our Nation s veterans make the transition out of uniform, it is exceedingly important to both veterans and our national economy that we ensure that the next generation of entrepreneurial veterans is aptly armed for success in the new phase of their life. Veterans Capital Partners (VCP) would provide that avenue through the creation of a nonprofit (501c3) private- equity fund, whose intent is to invest in entrepreneurial veterans looking to start, grow or buy their own business. This would be made into action through the providing of capital as well as access to an established and supportive advisor/mentor network. I. Veteran Entrepreneurial Need a New Resource: Framing the Concern Veterans need two things to be successful in starting their own business: mentorship and capital and as a consequence of the previous decade, our armed forces often do not have access to either. By definition the men and women of our armed forces live a transitory life as they rotate forward and back from deployment after deployment, or as their families move from state to state as the result of a change in duty station, where the only consistency is change. It is not uncommon for a service member to have spent, while in the operational forces, more than half their stay at a duty location forward deployed. Likewise, it is institutional (not for all, but most services) to move the entire family no less than every three years. Finally as one can imagine, even when in a relatively fixed location, the operational pace is demanding at such a level that a service- member has neither the time nor inclination to develop a support network that exists outside their immediate requirements. As a result of this fact, no service member can be expected to seek out and connect with successful advisors or mentors in the business community who would often be able to assist them in the twilight of their military- careers or the dawn of their entrepreneurial endeavors. There are a number of organizations that provide either capital or mentorship, but there are none that do both. VCP would look to transcend that gap in particular addressing the concerns facing entrepreneurial veterans in two distinct but complementary ways. First, by building an advisor/mentor network of professionals and experienced entrepreneurs who are willing to provide their time and expertise to veterans as they make the transition out of the uniform. The second dimension is to provide the veterans with the capital necessary to buy grow or start their own businesses. As a microcosm of existing resources, the Small Business Administration (SBA) offers Patriot Express loans, which provide a necessary capital injection to young businesses. The SBA does not, however, provide the advice a veteran transitioning from the military needs to be successful. Conversely, a nonprofit organization called American Corporate Partners (ACP) provides mentors to help veterans transition from the military to the world of business. An ACP mentor can help a veteran translate his/her skills learned 2

3 from the military into success in the business world. ACP mentors, however, do not provide the capital necessary for a young business to survive. (see appendix for product differentiation chart) We know now that despite consistent private and public efforts for increasing the level of importance of hiring veterans in nearly every category, post 9-11 veterans have a greater disposition to be unemployed than their non- veteran peers. Additionally, we know that veterans when compared to their non- veteran counterparts are nearly twice as likely pursue entrepreneurial endeavors. By providing the resources envisioned in the Veterans Capital Partners concept we believe we can have a direct impact on reducing the overall unemployment rate of post 9-11 veterans by enabling the creation of business by veterans and at the same time encouraging those veterans that do start businesses to be active in seeking, hiring and promoting transitioning veterans as they leave the service. As the armed forces continue their current drawdown and reorganization (from FY2011 to FY2017 the Army and Marine Corps will reduce their total troop end strength by approximately 20% or 200,000) the economy and country at large will experience a flood of newly minted veterans looking to earn a living. These post- 9/11 veterans are returning home and many are passionate about starting their own businesses. Veterans have the discipline and work ethic to be successful entrepreneurs, but many lack the two other ingredients to be successful. VCP provides these missing factors to allow veterans to achieve their dreams. II. Sustaining Over the Long- Run VCP has two key initial customer segments, the entrepreneurial veteran and as VCP is at least initially funded, through charitable donations, potential donors. First, to elaborate on the veteran entrepreneur, as a result of extensive research done by the Small Business Administration we know that the average veteran when compared with the non- veteran counterpart is twice as likely to pursue business ownership and the success rate of businesses they lead are nearly twice that of their non- veteran counterpart. (SBA 2008, 2012) Additionally we know that one in four veterans at the time of their transition out of the service looks to start a business and many if not all of them have high levels of self efficacy, a strong sense of comfort with autonomy and are experienced with making decisions in uncertain and dynamic situations. (SBA 2012, Syracuse University). As for the second customer the potential donor we know they exist from anecdotal meetings to grounded research; currently 9% of all, or 2.45 million, small businesses are owned/operated by a veteran. Representing, $1.2 trillion annually in revenue and employing 5.8 million people. However we know that this group is aging, at present 75% of veteran owned businesses are owned by a veteran that is 55 years or older (representing a group that will soon be looking to transition out of their businesses and capable of aiding in the mission of VCP). Moreover, we know that the country understands the dynamics afoot relative to veteran s transitioning out of the service as the number of programs that have been launched to provide veterans with a job are plenty (eg. US Chamber of Commerce Hire Our Heroes whose goal is to see 500,000 veterans hired). VCP in its role as a nonprofit private equity fund will initially seek to raise charitable donations for startup costs, Year 1 expenses and capital to invest in veteran 3

4 businesses. In the first year, we will seek to do this primarily through two avenues, first we will apply for a foundational award or grant to fund initial expenses and an early small investitures, this will provide a proof of concept and lend brand equity to VCP with the support of a notable foundation. (VCP is currently targeting the Bush Foundation Community Innovation Grant to provide this early injection however, there are several other similar type opportunities). After the first avenue, we will then use the success of the proof- of- concept investments to communicate the positive outcome a larger more robust fund could have and then will seek charitable contributions from individuals and corporations whose ideas and goals best align with VCP. Once fully capitalized VCP will begin steady- state operations as would a traditional private- equity fund, in doing so it would generate future revenue by making investments in exchange for the capital required for the veteran's business the fund would take either an equity stake in the invested in company or more commonly offer the capital as a debt offering best packaged for the success of the veteran company while being responsible to the long term interest of VCP. The return (generated from either the sale of the equity or the interest on the debt) would be no different than a traditional private- equity fund, nonprofit evergreen fund or foundation, the distinction comes in the form of the investment thesis centered on veterans and the fact that VCP is a nonprofit which means the expected rate of return would be considerably lower than existing market alternatives and with all other things being equal would ensure a higher probability of success of the invested in business because of the decreased cost of capital. III. We Will Help. (Social Impact) As previously mentioned, the country after ten plus years of war has begun a significant reduction in the size of the armed forces. Likewise, we know now that despite consistent private and public efforts for increasing the level of importance of hiring veterans in nearly every category Post 9-11 veterans have a greater disposition to be unemployed than their non- veteran peers. By providing the resources envisioned in the VCP concept we believe we can have a direct impact on reducing the overall unemployment rate of post 9-11 veterans by enabling the creation of business by veterans and at the same time encouraging those veterans that do start businesses to be active in seeking, hiring and promoting transitioning veterans as they leave the service. Unemployment rates for recent (Post 9-11) veterans are significantly higher than the rest of the population. At the end of 2013, it was at 10%, with 246,000 out of work. As this new wave of veterans returns home, many of them want to start their own business (as previously mentioned 1 in 4 veterans expects to start their own business) VCP provides the capital and mentorship necessary for these military veteran entrepreneurs to be successful when they otherwise might not be. Not only does VCP provide a direct service to these veterans, but by helping small businesses thrive, it provides employment to other members of society. According to the Small Business Administration, small firms accounted for 64% of the net new jobs between 1993 and 2011 (SBA 2012) The service VCP provides, therefore, has a ripple effect, benefiting not only veterans but all of society. (Washington Post 2013) IV. The Prospects for Tomorrow and Beyond (How Does it Scale) 4

5 We fully understand that VCP s ability to attract donors relies heavily on the success of investments we choose in the initial years. Early Stage Without the track record of success, early on, VCP will seek the support from the wide network of veterans. The focus group is veterans at the C- level of medium and large companies in addition to Vietnam era veterans who have successfully built and developed their own businesses. It is expected and initially proven correct, that both groups, who are willing and have the resources to fund the concept. VCP will also work to recruit any technical support in managing the donation fund, marketing and communication from these sponsoring organizations. The target of VCP in the early years is to attract at least one million USD per year from donation. We expect about 80% of that money to be used for capital investments and the remaining amount is used to cover other expenses and kept as provision for unexpected expenses. (See appendix for startup costs and Year 1 expenses) In order to limit the risk incurred in this critical stage, our strategy is to focus on small companies owned by veterans who are in need of capital to expand their businesses. These veterans will ideally have fundamental business experience additionally VCP is also able to evaluate their abilities handling business through historical data. The payback period for these types of projects is also shorter than that in traditional startups. For example, through our analysis of a typical small business owned by a veteran in Minneapolis/St Paul area, which has the annual revenue of about one million USD, the payback period for his proposed expansion project is prudently estimated at around months. (The example referenced is in fact an actual opportunity and with the use of a non- disclosure agreement we would be prepared to share more specific information about the investment opportunity) The money quickly paid back is very important for VCP in its early stage of lacking capital. Cash conversion cycle is expected to be between 4-6 years. With the economic expansion expected to continue, we are confident in our abilities to find and source investment opportunities as discussed above. If we can successfully support these veterans to expand their businesses, VCP will be at a good position to attract more funding from individuals, at the broader base. Expansion Stage As a nonprofit entity, VCP will seek to operate as efficiently as possible. VCP will implement the mentorship program in which donors not only provide funding but also act as mentors and consultants for invested companies. With the growing number of projects, donors will take part in supporting startups and ensuring that their operations are on the right direction. This program will reduce the number of staff VCP needs internally and will keep remaining costs low. In the long- run, VCP will act as a one- stop fund for veteran entrepreneurs. Besides providing funds for attractive projects, VCP, through the network of donors and investing companies, will provide advice and help connect veterans with new business ideas to people who are capable to nurture and support it. 5

6 V. The Team to See Execution Through The Team as it is Composed Today The core- team is principally composed of two veteran full time MBA students, Tim O Neil and Chris Elfering, who both have experience starting their own businesses in addition to two experienced business professionals, Rick Huckle and Mike Ray. Mike is the Managing Partner of Kreta Corporation, a management consultancy. Prior to his own consulting business he was Senior Director of Competitive Strategies, leading the international consumer insights team, competitive intelligence and strategies capabilities of Best Buy. Mike was also founder of the Best Buy Military Employee Business Network, a Best Buy sponsored and employee led outreach program. Rick is Chairman and Chief Executive Officer of Riverland Bancorporation. In his role as a bank founder, Rick was responsible for the successful capitalization and startup of the Company. Prior to starting the Bancorporation, Rick was Executive Director and provided leadership to global M&A teams engaged in power sector acquisitions at NRG Energy, Inc.; was responsible for project and acquisition financings in New York and London; headed investor relations; and led the divestiture of over $1.3 Billion of power/energy assets in Australia, India, and Taiwan. All four members of the core team have made a strong and lasting commitments to the success of VCP and each has a portion of the skill and personality needed to make sure VCP develops into a thriving and lasting operation. In addition to the students pledged to this Acara Challenge team (all of whom are 1 st Year full- time MBA students each with different background in finance, ventures or marketing), there are several more consistent and established active advisors who have a great deal of experience in the private equity, finance, angel and venture investing and have been absolutely committed (in the form of time) to the success of VCP. In addition, to the more dedicated efforts of the four people previously described VCP will also develop an investment committee and board of directors each of which will pledge quarterly support to advise on matters related to the strategic direction of the organization and individual investment opportunities. The Team of the Future The team as it is structured today is adequate for the short term (6 months) goals however as is the case with any growth or maturation oriented business an eye need be placed on the horizon for how best to develop the venture in the future. In the future VCP will be comprised of two governing bodies, a board of directors and an investment committee. The board of directors is critical in their understanding of the problem s facing entrepreneurial veterans however the critical component of this entire venture will be the investment committee s ability to assess, evaluate and make disciplined investments and at no point will or shall their obligation be taken lightly (because of the added level of responsibility of the investment committee we have structured the expense profile to provide a stipend to members of the investment committee). The ability to evaluate a new or growing business, that is by income and revenue measures, conventionally considered small is an acquired and practiced skill. It is exceedingly critical for Veterans Capital Partners to be successful to find, locate and recruit individuals with this know how. At present VCP is supported by way of pro- bono legal services by Christina McSparron of Winthrop & Weinstine. 6

7 VI. In Conclusion VCP provides a unique set of opportunities to our transitioning veterans (see appendix for service differentiation) by enabling access to advisor/mentors and then compounds that support with offering of capital to take their business to the next level. There is a clear need within the national- community for such a service and given the track of our country s men and women of uniform there is every reason to expect VCP to succeed in its mission. 7

8 VETERANS CAPITAL PARTNERS ARMED FOR ENTREPRENEURIAL SUCCESS All Volunteer Force, High Levels of Self-Efficacy, Strong Comfort with Autonomy and Uncertainty and Dynamic Decision Capability Success Rate of Veteran led Businesses is Near Double that of their Non-Veteran Counterparts Experience Working in Diverse Settings & Advanced Team Building Skills Institutional and Government Structures in Place to See Success (ex. Patriot Express Loans, Government Contracting Preference, VetBiz, Boots to Business) THE FORCE DISPOSITION: A TRACK RECORD OF ACHIEVEMENT 1 in 4 Veterans looks to start a business Veterans are twice as likely to pursue business ownership than non-veterans IMPACT ON THE COMMUNITY 75% > 75% Veteran Owned Businesses are Owned by Veterans over the Age of 55 (leaving an opportunity for them to sell and transition out of their businesses) 800k Capital Invested $800k 2.3mm Capital Invested $2.3mm 3.95mm Capital Invested $3.95mm

9 BY THE NUMBERS A FIVE YEAR PROJECTION YEAR CONTRIBUTIONS 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 RETURN 262,159 1,019,799 REVENUE 1,000,000 1,000,000 1,000,000 1,262,159 2,019,799 VC 800, , , ,000 1,050,000 GP 200, , , , ,799 FC 90, , , , ,136 EBIT 110, ,000 (1,600) 379, ,663 NOPAT 110, ,000 (1,600) 379, ,663 OCF 110, ,000 (1,600) 379, ,663 CAP EX (15,000) FCF (15,000) 110, ,000 (1,600) 379, , YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 NUMBER OF BUSINESSES INVESTED NUMBER OF BUSINESSES CURRENTLY INVESTED NUMBER OF JOBS CREATED

10 Existing Services and Product Offering Differentiation Information Hiring Our Heroes American Corporate Partners VETBIZ Syracuse University Bank Vetransfer Veterans Capital Partners SBA Patriot Express Loan Traditional PE Capital

11 Hiring Our Heroes: U.S. Chamber of Commerce Foundation program aimed at job placement for veterans and spouses through sponsorship of hiring fairs and networking. American Corporate Partners: Nonprofit organization assisting veterans with career placement through mentoring, career counseling, and networking opportunities. VETBIZ: U.S. Department of Veteran Affairs Syracuse University: Offers an entrepreneurship boot camp for veterans at the Whitman Business School Vetransfer: Provides focused training for veterans to develop their business model and a community of mentorship for veteran startups SBA Patriot Express Loan: Program providing financing to active duty military, veterans and spouses used for financing business acquisition, start ups, equipment, debt refinance, working capital, inventory and tenant improvement.

12 DCF Analysis Year Contributions 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Return ,159 1,019,799 Revenue 1,000,000 1,000,000 1,000,000 1,262,159 2,019,799 VC 800, , , ,000 1,050,000 GP 200, , , , ,799 FC 90, , , , ,136 Dep EBIT 110, ,000 (1,600) 379, ,663 Tax (0%) NOPAT 110, ,000 (1,600) 379, ,663 Dep OCF 110, ,000 (1,600) 379, ,663 Δ WC Cap Ex (15,000) FCF (15,000) 110, ,000 (1,600) 379, ,663 # of Business Invested # of Business Currently Invested # of Jobs Created

13 Assumptions: VC = Investment + Closing Costs, Closing Costs No depreciable assets, but in reality there will be No taxes Initial Capital Raise $ 1,000,000 Ongoing Annual Capital Raise $ 1,000,000 Rate of Return 7% NPV $ 1,030,665