Private Equity Funding. Building an Investment Ready Business

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1 Private Equity Funding Building an Investment Ready Business 1

2 Ideas2deals.com

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5 Getting Financing Is

6 In preparing for battle I have always found that plans are useless, but planning is indispensable. - Dwight D. Eisenhower 6

7 Build A Business Make Meaning Make a difference Make Value If you succeed in building a business, either funding sources will be fighting to give you money or you won t need their money. 7

8 Business Planning Key to Writing an Operating Plan Do it for you. Keep it simple. Keep it real. Internalize it. Work it. 8

9 The key to funding is knowing your business and being honest about what you have. 9

10 Can you answer this: What do you do? 10

11 OK Can you put it in a box and sell it? 11

12 What Kind of Business Do You Have Scaleable, Exponential Growth, Defined Exit? Heavy Service Component, Slow/high Growth, No Exit? 12

13 Can You Answer This? Who is out there to buy our Product? How do we get them to buy our product? 13

14 Valuation What is it all Worth? 14

15 Key Valuation Issues Valuation of early-stage companies is a little short of random. Valuation is negotiated, there are no hard numbers especially for early-stage companies. Provide a good projection of future value at a potential, future liquidity date and discount back. Know comparables What other companies, similar to yours, have generated what multiples of sales at liquidity. Build value as you build the company ~ Focus on Value Inflection Points. Focus on dollars not percentage 10% of a $20 million company is worth more than 100% of a $1 million company. 15

16 Suggestions For CEO s Know what investors look for and expect. Make sure you and the investors are on the same page. Good investors will want you to have a fair percentage of the company. Know why these things are important to investors. Understand the factors that influence value Anticipate investor questions. Look at competitive deals. Learn from the process ~ Listen well 16

17 Cap Table Pre Investment Unit Holders Issued Valuation Pre-investment Post-investment John Doe 500k $500k 25% 19% Bill Smith 400k $400k 20% 15% Jane Brown 800k $800k 40% 31% ESO Pool 300k $300k 15% 15% Note ESO does not dilute Total Issued 2 mil $2 mil 100% 80% Post Investment Investors 500k $500k 0% 20% Total Issued 2.5 mil $2.5 mil 25% 100% 17

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19 Friends Family & Founder Bootstrapping is building the business from internally generated funds. You need to establish a foundation for your business. Build credibility and show that your business has customers and a product that people want to buy. Focus on customers and cash flow. Work hard and be creative in seeking ways to drive revenue while holding expenses down. 19

20 Angel Investors Angel investors are high net worth individuals who are interested in investing in emerging businesses. Two Types of Angel Investors Professional Strategic 20

21 Professional Investors The underlying reason that they will invest is return on their investment. They invest in spaces they know. They invest with people they know They invest based on referrals from people they know. Invest based on due diligence. Will require professional terms. Looking for a big payout based on a liquidity event. 21

22 Strategic Investors More interested in the product than the business. Invest based on gut reaction. May take common stock May not look for a liquidity event. May be the friends in FFF (or referred by FFF) 22

23 Key Points About Investors If you take someone else s money you have a partner. They will want to have some influence on the company to protect their investment. You will probably have to relinquish some level of control over the company. If you are unwilling to share leadership of the company, investors are not the option for you. 23

24 Institutional Venture Capital The only reason that they will invest is return on their investment. They only invest in spaces they know. They only invest with people they know They only invest based on referrals from people they know. Invest only based on due diligence. Will only require professional terms. They are only looking for a big payout based on a liquidity event. 24

25 Banks ~ Why They Exist To make money not to make loans. Lending is a tool to making money.

26 Commercial Banks Banks typically lend for stuff. Banks are a great option if you have history and are looking to expand. However, for an early stage company with limited history and minimal collateral, getting a loan could prove difficult.

27 Commercial Banks When the company is new the entrepreneur should establish a banking relationship and utilize this as far as it will go. The relationship with a bank will be very helpful in the future as the business becomes established. There is no 100% financing from a typical commercial bank.

28 Small Business Administration SBA is not in the business of making bad loans. Once the bank has agreed that the loan is good but in some way outside their guidelines they will seek an SBA guarantee. The SBA is there to help you with your cash flow. Longer term Lower down payment

29 What Do Banks Look For? Credit Credit Score should strive to be over Guard Your Credit Score

30 Build A Business Business Plan The business plan tells the bank how you are planning to repay the loan.

31 What Do Banks Look For? Collateral There is no 100% financing To a bank collateral is real estate or equipment.

32 Working Capital Short-term money to operate the business. Typically financed by a Line of Credit.

33 Getting The Banks To Say Yes Know your credit score going in. Establish a banking relationship Keep you plan tight, clear and easy to understand. Use common format, don t be creative. Help the banker say yes. Put yourself in the banker s shoes. Structure your ask. Separate working capital, equipment and real estate.

34 Seeking Investors Investors invest in people and teams that can execute. A teams with B markets will generally beat B teams with A markets. 34

35 Investor Summary Format Summary should be concise Summary should provide a clear description of the problem you solve. How you solve it. Your business model. The underlying magic of your product. Defensibility of your product. Summary should be no more than four-pages. 35

36 Pitching Question: How can you tell if an entrepreneur is pitching their business? Answer: Their lips are moving. 36

37 Tips For Pitching Explain what you do in the first minute. Clearly explain what you do in the first minute. Articulate the problem in the market and what you do to solve it. Purpose of a pitch is to stimulate interest not to close the deal. Keep it tight. 10 slides, 20 minutes, 30 point font. Speak to the audience s interest. 37

38 Presentation Deck Title Slide: This is where you tell what you do and give a simple to understand example. Problem: Describe the pain you are alleviating for your customers. Solution: Show how you solve the pain. Business model: Explain how you make money. The advantage you have: Why are you different than everyone else? Marketing and Sales: "Clearly" tell what your sales strategy is. Do not forget to discuss your pricing. 38

39 Presentation Deck Competition: Show there is enough of a market available to buy your product even with the competition. Management Team: You need to convince the investor that you have the team that can execute and will succeed. Financial Projections: You need a simplified, clear slide here. You need to justify your numbers. Current Status/Future Status: Show your use of funds and how that will drive the growth of the company. You do need to discuss exit options. Who are buyers and when. Don't hem-haw around. show the investor that they can not only expect the company to succeed (which is about you) but also that they can expect a return in a certain time frame (which is about them). 39

40 Investor s Interest How are you going to make money? How are you going to generate my return? Are you capable of executing? 40

41 Presentation Tips Don t try to BS the investor because they see through it. Get your value proposition across early in case you don t get to the end of the presentation. Don t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will. 41

42 Presentation Tips Don t ask for an NDA at initial meetings!!! Real investors are not in the business of stealing ideas and trying to develop them. You control what is in the summary and initial pitch. You don t need to disclose the secret sauce at this point. Investors will sign an NDA prior to due diligence. Get over it You re not that special 42

43 Recommended Readings 43

44 Resources for Assistance Ohio Small Business Development Center TechColumbus Ideas to Deals Blog 44

45 Everything is always impossible before it works. That is what entrepreneurs are all about doing what people have told them is impossible. 45

46 For Information on SBDC Activities The Ohio SBDC at Columbus State p

47 Pitching the Dream Mark Butterworth Innovation4ward

48 Agenda What investors looking for The pitch Deal structure 48

49 Angels Looking For A company where they believe can add value and make money (and have fun) An industry they understand and good management team Invest based on: Chemistry 49

50 Venture Capital Looking For A company where they can make lots of money (fun is not a factor) Big markets, sustainable differentiation and good management Invest based on: Management team 50

51 Good Management Ideal Experience in a start-up or launching a product within a large company Domain knowledge Relationships with key customers 51

52 Good Management Other Broad vision Ambitious Tremendous energy Good listener Adaptable Know that they don t know everything Hire people better than themselves 52

53 Investment Criteria: Other Sales and marketing strategy Competition Technology Financials Exit strategy 53

54 The Investor s Mindset Their time is more important than their money You must manage the process! 54

55 First Meeting Angel Investors Goal: Get a second meeting not a check Format: Short, non-technical PowerPoint Message: Within the first three minutes: The problem you are solving, How you solve the problem, and That you have the management team to execute 55

56 First Meeting - Other Do not assume: they have read the plan that you will get through presentation The product or technology is only 5% of the pitch in the first meeting One page summary financials Assumptions more important than numbers How the investor will make money! 56

57 After The First Meeting You must manage the process Anticipate the investors needs Submit your own Due Diligence Review Manual Don not tell them it is in the business plan Opportunity to customize to their hot buttons 57

58 Deal Structure Individual Angels: Security: Common stock Exit: Share buy-back, Sale or IPO Return: 15% to 20% Valuation: reasonable Organized Angel Funds and Venture Funds: Security: Preferred stock Exit: Sale or IPO Return: 30%+ compound annual Valuation: Tough but fair 58

59 Preferred vs. Common Stock Common Investors and management have same rights Preferred has additional rights: Liquidation preference get their money back first Anti-dilution provisions protection against reduction in valuation Redemption investment plus dividends back at predetermined time Dividends 5% to 8% annually Veto over strategic decisions (sale, liquidation, IPO) 59

60 Resources: Gerald A. Benjamin and Joel Margulis. Finding Your Wings (How to Locate Private Investors to Fund Your Venture). New York: John Wiley & Sons, Inc., David Gladstone. Venture Capital Handbook (An Entrepreneur s Guide to Obtaining Capital to Start a Business, or Expand an Existing Business). Englewood Cliffs: Prentice Hall, Pratt s Guide to Venture Capital Sources. New York: Securities Data Publishing,

61 For Information on SBDC Activities The Ohio SBDC at Columbus State p