Financing Innovation: Accessing Private Capital. Innovation Conference June 27-28, 2017.

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1 Financing Innovation: Accessing Private Capital Innovation Conference June 27-28, 2017.

2 Traditional Sources of Equity Capital Risk/Reward Friends & Family Private Equity Public Equity Mezzanine Debt Public & Institutional Debt Bank Debt

3 Venture Capital is a Targeted Element of Private Equity Listed Companies Other Investors Equity Unlisted Companies Private Equity Venture Capital is medium to long term financing provided in return for an equity stake in early stage and potentially high growth unlisted companies Family Businesses Industrial Groups Seed Early Stage Expansion Buyout Venture Capital

4 The Financing Chain Exists Throughout a Company s Lifecycle Business Growth FIRST R&D BIRTH SURVIVAL SUCCESSES START UP MATURiTY Expansion Capital Venture Capital Seed Capital Markets Angel Investors Contests, Unsecured Loans, Incubators Time

5 Venture Capital Presents an Opportunity for Superior Risk Adjusted Returns US Venture Capital Index and Selected Benchmark Statistics (Dec 2014) Index 1-Yr 3-Yr 5-Yr 10-Yr 15-Yr 25-Yr 30-Yr Cambridge Associates LLC US VC Index US VC Early Stage Index US VC Late and Expansion Stage Index US VC Multi Stage Index Dow Jones Industrial Avg Index Dow Jones US Small Cap Index Nasdaq Composite Index NA NA S&P 500 Index

6 Investment Approach Identify dislocation of value Value Dislocation Emphasis on seeking out dislocations of value Find and extract embedded real options in investments Strong negotiations around price and terms Mitigate risks Insulate Returns From Market Hedge price risk to the extent prudent but retain opportunities to profit from favorable price changes Work to understand and minimize negative consequences of those risks that are un-hedgeable Reduce risk through thoughtful investment structuring Improve returns with management and financing Optimize investment exit Operational Alpha Maximize Returns Best in class management teams increase returns through accretive acquisitions, production increases, cost control and optimization of operational, regulatory and customer issues Investor can add structuring and financing expertise and industry and financial relationships Focus on intrinsic value creation Increased enterprise value will drive returns in any market Explore multiple exit opportunities where available

7 Venture Capital Provides More than Silent Capital Financial Support Raising new equity rounds and debt financing Financial planning and cost control. IFRS Introducing transparent reporting system Value Creation is an integral part of the VC strategy. Investees are given deep support from experienced professionals critical to success at early stages Operational Support Corporate Strategy M&A Support Preparing for IPO or Trade Sale Bring experienced people to the team Attracting independent board members and industry experts Motivational schemes implementation Development of tax and legal structures, IT systems Access to new partner and client network Optimization of business processes and internal decision making Business model adaptation to changing market conditions Implementing development plan and KPIs Developing M&A Strategy Search and evaluation of attractive targets Legal support and deal structuring Listing potential acquirers Improvement of corporate governance Preparation of info memos for sale

8 Proper Deal Structuring Key to Returns Proper deal structuring is key to align parties and establish downside protection. The following deal structuring elements could be used: Puts and call options, redemption rights Deferral condition and earn-outs Covenants Drag along and tag along Share ratchets Preferred shares and liquidation preference Right of first refusal Board representation and approval rights

9 Venture Capital Drives Innovation, as Well as Financial Returns Over the period , annual VC investment averaged US$27 Billion and accounted for 21% of GDP and 11% of private sector jobs More than 80% of revenues in sectors like biotechnology came from venture-backed companies This model can foster innovation, spawn new enterprises, build competitive capacity and transform countries in the Caribbean!

10 Financeability: Vision / Strategy Vision must be exciting, achievable and commercially viable Vision should be ambitious yet attainable Business as usual is boring (you are dealing with people!) Growth stories most saleable How will you change the game? Visions must be based in deep market knowledge and market realities Where are the real opportunities over the medium to long term If you are investing for growth you must have bread and butter business to pay the bills (CASH IS KING!) Current cost structure must allow you to profitably serve identified niches Think of how you can best leverage your assets Network of relationships Intellectual property/know how Physical assets (location, equipment) You may have valuable assets you do not recognize or actively manage 10

11 Financeability: Commercial Viability Can the venture meet return targets? The proof of the pudding is in the cash flows Cash must be sufficient to meet debt service and covenants with a good buffer Internal Rate of return over 5-10 years is key for equity providers Numbers must add up in a variety of scenarios How will risk be mitigated Commodity hedging? Input prices tied to output prices? The exit is more critical for equity players The public markets are a long shot in this environment 11

12 Financeability: Capacity to Execute Can the management team deliver? Workforce must have the right mix of skills from top to bottom Cannot afford to hire extra people to compensate for skills lacking in others Management incentives must be aligned with those of financiers (risk/reward sharing) structure and absolute $$ (skin in the game) 12

13 Corporate Governance Are you prepared to be fully transparent? Bringing in financial partners requires utmost transparency Financial reporting Taxes Personal expenses In most cases, autonomy of owner/ceo is decreased Must report to a Board versus be your own boss Consultation/communication required increases with more stakeholders Business processes subject to greater scrutiny Procurement Related party transactions Assumption of obligations on behalf of the Company Financial procedures and controls 13

14 New Digital Platforms are Providing Additional Sources of Private Capital Crowd funding allows entrepreneurs to raise seed funds from non-accredited investors (equity not offered) Every day on Indiegogo, 8000 small firms or individuals around the globe try to raise funds from members of the public Kickstarter has helped raise over US$1 billion to finance 58,000 projects SEEDRS recently received FSA approval in Europe Fundator in Asia operates under a similar model A local crowd funding outfit operates over local mobile platforms New FINTECH players, such as those providing automated payments etc. have also facilitated person to person loans

15 Summary VC has out performed the stock market in the long run VC gives investors access to high growth in unlisted companies VC offers some level of diversification for investment portfolios VC-backed companies drive economic growth and foster innovation But the investments are illiquid, returns are volatile and doing it RIGHT is KEY!