Raising Capital, Doing Deals

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Amice Stewart
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1 January 28th, 2013 Raising Capital, Doing Deals Presentation to Saïd Business School, Building a Business Class Henry

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3 There are reasons not to raise capital

4 Reasons not to raise capital (1) Bootstrapping means you are the boss: Your percentage ownership remains high You have no one to answer to or targets you have to meet You can shape your vision You stop yourself from getting lazy You have to build something that works You have to sell it now Can help with first mover advantage Or maybe you don t Not having to answer to anyone is a motivator for many people who start their own companies 4

5 So why should you think about raising capital?

6 Reasons to raise capital (1) How ambitious are you? Investors want big returns and big opportunities Global domination requires global support Starting and growing a business costs money: Limited finances can constrain growth rates Exponential vs linear growth Running a business is lonely and hard Having someone to turn to for advice is helpful Not having to figure everything out alone is invaluable 6

7 When should you think about raising capital?

8 The stages in a company lifecycle You can finance your company at any stage and may need to at many stages Seed Development Go-to market Market expansion Harvest Develop business plan Create the product Getting traction (the chasm ) Rolling it out The cash cow Note: Thank you to Mark Leslie, who taught me at the Stanford GSB, for the above framework 8

9 Financing happens at all the stages Before any fundraising, you must ask: Have we reached a growth ceiling? Have we created all the value we can? How much money we need and why? 9

10 Where can you get capital?

11 Traditional sources of capital Friends & Family Universities Angel investors Incubators Often the first place people turn for initial capital. Comes with high personal risk though Offer R&D grants Spin-offs from research programs Typically affluent individuals who provide capital for in exchange for equity/debt Receive significant tax incentives in the UK Offer working community, advice and access to resources, typically in exchange for equity Venture Capital Invest in different stages of company lifecycle with a financial objective Banks Growth capital Buyout Offer small business loans and working capital financing Invest in mature companies looking for capital to expand or restructure operations, enter new markets or finance an acquisition without a change in control of the business Structure Buyout transaction, typically leveraged, in mainly mature companies Public markets Investors in publicly traded stocks 11

12 and when they are appropriate Company life cycle Source of funding Seed Development Go-to Market Market Expansion Harvest Mature company Business Angels, Friends & Family etc. Incubators Venture Capital Banks Growth Capital Buyout Funds Stock Market (IPO) Early stage Mid stage Late stage IPO / Buyout 12

Don t forget non-traditional sources Description / Examples Pros Cons Crowdfunding Easy to access You keep 100% equity All or nothing Fees P2P Lending Relatively cheap capital Obligation to make

13 Don t forget non-traditional sources Description / Examples Pros Cons Crowdfunding Easy to access You keep 100% equity All or nothing Fees P2P Lending Relatively cheap capital Obligation to make payments Microloans New SME Lenders Factoring Large variety of loans available Only need 1 year track record Quick and easy access to capital Don t understand tech co s Lots of bureaucracy Can be expensive Only e-commerce Personal Finance No need for any business track record Umm you are on the hook for it 13

14 How do you go about asking for traditional financing?

See the right people, the right way Carefully select the right investors There are lots of investors out there Spend time researching who invests in your space, your stage, your

15 See the right people, the right way Carefully select the right investors There are lots of investors out there Spend time researching who invests in your space, your stage, your geography Seek a warm introduction Cold s are a tough way to go Spend time marketing yourselves Approach with care Do your homework! Be prepared for a knockback (or seven) 15

16 Answer the right questions 1) Why did you start the business? 2) What are you doing? 3) Who else is doing it? 4) Why are you going to win? 5) How are you going to make money? 6) How will you track your progress? 16

17 How does a financing round work?

18 Where does the money go? Pre-Funding Investors Money After Capital Raise Founder(s) 4m, 100% + Investor(s) 1m 1m, 20% New Money 4m, 80% Note: This is an all Primary deal. Selling secondary, especially early in a company s life, is very unusual 18

19 Dollars and cents How much should you raise? As much as you need to get to next stage (backed by estimates) Not so much that you give away too much of your company How does valuation work? An art not a science Demand driven Parameters led by investors appetite: How much they want to invest and own Presentation Title Date Section Title 19

20 Term sheet: Key things to know 1. The type of instrument: Straight Equity / Preference Shares / Convertible Shares 2. Legal restrictions: When you can sell shares / issue equity / sell the company A shield for investors, not a sword 3. ESOP (Employee Share Option Plan): Lots of investors will require this It is a positive thing trust me! 4. Diligence requirements: Legal / financial / commercial 5. Liquidation Preference Can be complicated Presentation Title Date Section Title 20

21 What do you need in a financing? A good lawyer Presentation Title Date Section Title 21

22 How do you choose the right investors?

23 Structuring the syndicate Set the terms of the deal Lead the process and diligence Most likely to take the largest share Can influence which other investors join the syndicate Lead Investor Investor 2 Investor 3 Investor 4 Follow terms set by the lead Can be heavily involved in the company, especially if they take a board seat 23

24 Your investors should have Lead Investor Solid reputation Relevant expertise and good track record Breadth of network Useful resources available to you (hiring, PR, more money etc.) A Partner leading the deal who you trust Clear commitment to you Other Investors Will work well with the lead investor Sector expertise / deep knowledge of your company Ability to follow on in any subsequent round Presentation Title Date Section Title 24

25 How do you sign the deal? Probably with a pen Presentation Title Date Section Title 25

26 The takeaways from today

27 Take-aways Capital can be vital for a company to grow successfully Your company may need capital multiple times in its life There are a myriad of places to turn for capital Investors should be approached with care Beware the details in a financing round Pick investors you trust and that will be good for your company Presentation Title Date Section Title 27

28 Thank you

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