Financing Tech Startups

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Kelley Wheeler
5 years ago
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1 Financing Tech Startups Margus Uudam Head of Private Equity Ambient Sound Investments

2 ASI profile Established in 2003 with the sole purpose to hold a minority stake in Skype Significant earnings in 2005 Skype acquired by 2.6 bln $ started investing proceeds of this transaction Total assets ~100 M Diverse portfolio EUR / US / Asia Around 20 investments into technology

3 ASI management Toivo Annus Ahti Heinla Jaan Tallinn Priit Kasesalu Managing Partner Partner Partner Partner Tauno Tats Margus Uudam CEO Head of Private Equity

4 ASI team Eileen Broch-Burbridge Investment Director Arko Kadajane Senior Analyst Kristi Hakkaja Investment Manager Kai Liiva Legal Counsel Indrek Jaaska Investment Manager Keiu Heinpalu Lawyer Kristjan Laanemaa Investment Manager Riina Einberg HR advisor Mari-Liis Lind Investment Associate Heleri Hinno Assistant

5 Seattle San Jose NEW YORK LONDON Helsinki Tartu Tallinn Moscow Gomel Paris Warsaw Tel Aviv Beijing Tokyo Hong Kong Taipei Singapore

6 ASI portfolio co example (web EE) Personalized news site Based on predictive content personalization technology Gives you interesting news right on signup doesn t need effort from you to describe your interests Self-learning Currently... EE start-up... in Closed Beta Stage (60 invited users) global news sources, 7500 incoming articles per day

7 ASI portfolio co example (tech FI) A novel touch interface technology Feelable clicks on touch screens Intuitive location of buttons and other onscreen objects Silent technology Currently FI start-up Prototyping phase Submitted nearly 20 patent applications internationally

8 Math behind the investment decision 20% probability Company Value 1st round e.g. 20% equity investment Later rounds: dilution Exit: Success! Company lifecycle On average: -2 success cases -4 walking deads -4 go bankrupt 40% probability Time 40% probability

9 Math behind the investment decision Input: Money to be invested by the investor $I Years to exit Y 5 Successful exit probability P 30% Cost of venture capital R vc 15% Target multiple of money on investment (how many times the investment should earn back by exit) M= (1 + R vc ) Y / P 6,7 Expected retention% (dilution of ownership caused by future rounds) retention 50% Proposed ownership today (% of the company to be given against invested money) proposed % 20% Exit valuation (expected value of the company at time of successful exit) $ exit valuation Output: Total valuation (the value of the company as of date) Total val = $ exit *retention/m Partial valuation (value of investor's share of the company) Partial val =proposed% * Total val Compare partial valuation to investment Decision: invest partial valuation > required investment partial valuation < required investment invest do not invest

10 Investment statistics ASI Industry avg pipeline screening 80 meeting Due diligence Investment 2 1

11 Startup Financing Sources Friends, fools, family (very early stage) Angel Investors VCs Public financing measures (Arengufond, EAS, KredEx, local initiatives)

12 Picking the right investor What added value you would like from the investor? Tech advice Business development Sales model Contact base Other? Check on the VC background What sectors are they investing in? How well financially backed they REALLY are? Do they have enough competences to help you out in areas where you are not the strongest?

13 Presenting your idea to ASI Slidedeck - Product / service - Technology - Market size - Competition - Business Model - Team - Financials Meeting(s) / call(s) with the team What we look at? - Technology - Competitive advantage - Team capability of delivering the project - Region / market - Investment size - Etc... Executive Summary Due Diligence Investment Decision Term Sheet

14 Executive Summary The Grab The Problem The solution The opportunity Your competitive advantage The business model The team The promise The ask a compelling statement why you have a really big idea what problem are you going to solve? your value proposition. what are you offering and to whom? describe the market you are addressing why are you better than competitors? how are you going to generate revenues? why are you specifically good to do this? what will you deliver for the investor (financial projections)? how much money are you looking for? Source:

15 Focus on What kind of a pain shall your product cure? How big market are you aiming at? Team competence Do you want to be a global leader? How large will your business grow? How do you stand out from competitors? Demonstrate the progress you have made by far

16 Shareholders Agreement (SHA) The following is agreed upon in the SHA Investors additional rights Measures to guarantee that the investment is used only for the development of the company (to execute the idea for which investment was sought for) SHA regulation Purpose of the investment (use of funds) Investor s additional rights (e.g. vetoright in shareholders meeting, board seat etc) Regulation to safeguard founders commitment, non-compete, nondisclosure, prohibition to sell shares, 2-3 y right of pre-emption, tag-along & drag-along rights) Other regulation (e.g. Options, next round investment etc)

17 Cooperation with VC regular (monthly / quarterly) reporting obligation investor will participate in the board support in management, business development, sales model determination, HR, legal issues possibility for follow-up investment and/or gateway to next round investors KEEP IN MIND Don t adhere the feeding-tube mentality! You need to bring your company to profitability

18 The right team for a start-up Often startups have a brilliant team of tech geniuses that come up with a great idea but lack knowledge on how to sell the product The tech guy, the sales guy, the financials guy

19 Pros Economic Downturn a good time to start? You ll have your product /service ready by the time the economy starts to pick up again. Easier & cheaper to find skilled manpower / talented managers at reasonable rates Cons Investment capital is tight, you need to plan for a very long runway Tough to find customers

20 Recommendations to starting Think big entrepreneurs Bootstrap as long as possible Aspire to bring change not just make money Still KEEP FOCUS on business & money don t overspend time on enhancing the features Don t be afraid to take risks Be prepared to step aside at one point consider whether you have what it takes to lead a big corporation

Idea to Liquidity & Beyond: Financing

Seminar Series: Startup Law 101 for Entrepreneurs Idea to Liquidity & Beyond: Financing Patrick Pohlen and Ben Potter, Latham & Watkins LLP October 10, 2017 Latham & Watkins operates worldwide as a limited