What Investors Look For_Serhat Görgün

Entrepreneurship (from Investor’s Perspective) Serhat Görgün Inovent Inc. General Manager 06.07.2009 METU, Ankara © Inovent 2009 - Confidential

AGENDA
Stages of Financing
The Process of A cquiring Financing
Investment Decision Criteria
Investment Turn-Offs
Attributes of Great Investors
Investors’ Contribution
© Inovent 2009 - Confidential

Stages Of Financing © Inovent 2009 - Confidential

Stages Of Financing
Seed stage financing
The venture is still in the idea formation stage and its product or service is not fully developed.
The founder/inventor is given a small amount of capital to come up with a working prototype.
It's rare for a venture capital firm to fund this stage.
In most cases, the money must come from the founder's own pocket, from the "3 Fs" (Family, Friends, and Fools), government grants, seed funds and occasionally from angel investors.

Stages Of Financing
Start up financing
The venture at this point has at least one commercial prototype and/or customer paid for the product/services.
The venture has at least one principal working full time.
The search is on for the other key management team members and work is being done on testing and finalizing the prototype for production .
Seed and early stage VC investors as well as angels invest at this stage

Stages Of Financing
First -stage financing
The venture has finally launched and achieved initial traction.
Sales are trending upwards.
A management team is in place along with employees
The funding from this stage is used to fuel sales, reach the breakeven point, increase productivity, cut unit costs, as well as build the corporate infrastructure and distribution system.
This stage is where VCs play active role in investment

Stages Of Financing
Second -stage financing
Sales at this point are starting to snowball.
The company is also rapidly accumulating accounts receivable and inventory.
Capital from this stage is used for funding expansion in all its forms from meeting increasing marketing expenses to entering new markets to financing rapidly increasing accounts receivable.
Venture capital firms specializing in later stage funding enter the picture at this point

Stages Of Financing
Mezzanine or Bridge financing
At this point the company is a proven winner and it is agreed to take it public within a defined period of time (eg 6 months) .
Mezzanine or bridge financing is a short term form of financing used to prepare a company for its IPO. This includes cleaning up the balance sheet to remove debt that may have accumulated, buy out early investors and founders deemed not strong enough to run a public company, and pay for various other costs stemming from going public.
The funding may come from a venture capital firm or bridge financing specialist. They are usually paid back from the proceeds of the IPO.

Stages Of Financing
Initial Public Offering (IPO)
The company finally achieves liquidity by being allowed to have its stock bought and sold by the public.
Founders sell off stock and often go back to the beginning with another startup.

Why Early Stage Investment is needed ?
Financing of product development
Financing of market penetration
Financing of investments
Working capital financing to secure operative continuity
Maintaining liquidity to be able to cover daily payments

Being in Need vs Being Ready
Entrepreneurs don't understand the difference between having a need for capital and being ready to ask for it. Because entrepreneurs are motivated to seek capital based on need, not readiness.
When an entrepreneur is driven by a strong sense of need, the message they send to an investor is one or more of the following:
I'm unwilling to invest any more of my money, so I need yours.
I haven't been able to raise money from anyone else, so I need you to save me.
On the other hand, when an entrepreneur has "done their homework" and truly understands what it takes to run a business, the message they send is:
I'm ready for a partner to help me take this to the next level.
I have a handle on my product, my market and my customers, and I'm ready to accept an investment that'll help me grow.
I've researched the various sources of capital available to me and I'm ready to work with you because you're the best match.

The Process of A cquiring Financing © Inovent 2009 - Confidential Introduction Meeting Due-diligence
Fast Pitch
Executive Summary
Quick view
Informal Dialogue
Informal Due-diligence
Formal Presentations
Business Plan
Investment Decision
Formal Due-Diligence
Closing Documents
Valuation
% 90 Fail 100 => 10 % 50 Fail 10 => 5 % 50 Fail 5 => 2-3 Investment Term-Sheet Shareholders’ Agreement

Introduction
This is the stage where most (about 90 %) of all proposed projects are rejected.
The initial assessment is made relatively rapidly and therefore the company should pay attention to two aspects:
a short description of the company (elevator pitch),
and/or
a well-prepared business plan summary is the best means of attracting and convincing the investor.

Introduction
Fast Pitch Checklist
1. Who We Are Profile your self and your team’s capabilities.
2. What We Got Describe your opportunity, market need/pain and solution. Specifically describe your traction in your market space. For example, letters of intent from marquee customers or recurring revenues.
3. Where We’re Going Overview of your growth benchmarks/milestones and the market potential of your technology.
4. What We Need Do not offer specific financial needs. Just be prepared to answer privately . Consantrate on non-financials.
5. Why Now State what has changed in the world that opens up the window to your particular opportunity.
6. What We Offer Describe a basic understanding of how you will provide a return on investors’ money.

Introduction
Executive Summary:
Very few Investors read detailed Business Plans in the very first stage. Instead you need a 1 or 2 page “Executive Summary” which includes such things as :
a company background,
a description of the business,
what problem you are solving,
what is special about the way you are solving it,
the management team,
details about the market you are addressing,
summary financial information ,
a technical presentation
you r business model.

Fast Pitch
Executive Summary
Quick view
Informal Dialogue
Business Plan
Investment Decision
Closing Documents
Valuation

Meeting
After you’ve made a great first impression, your next objective as an entrepreneur is to make an even better second, third, fourth and fifth impression s .
And this requires continuing to clearly communicate the value that you and your business idea bring to the table.
Should the investor decide that the investment request meets his criteria, the following step is a meeting arranged with the company management.
A presentation of the business is required.
Experience has shown that about half of the remaining companies are discarded at th is stage

Presentation:
1. Cover Slide This first slide and discussion should help position your venture so the investors have a framework for listening. - Include the name of your venture - The presenter’s name, the title - A concise one-sentence Value Line statement (”What we do”)
2. New Business Venture Opportunity and Analysis - Problem: describe the pain of the customer, why they need your product - Describe how the customer addresses the issue today - Solution: describe how your solutions, value proposition, makes the customer’s life better. - Market size: describe how much headroom is available, how big is the market? - Competitor analysis: what we do better, what they do better
3. Business Strategy and Competitive Advantage - Business Strategy ; Competitive A dvantage and Business Model
Meeting © Inovent 2009 - Confidential

Presentation:
4. Venture Team Development and Management - Founders and management - How came together, how funded - Board of directors and advisors
5. Controlling and Allocating Critical Capital Resources - Where are you in the product pipeline, roadmap? - Briefly discuss your product features - What kind of special resources required?
6. Market Entry Strategy - Prepare a simple “Value Map” - Describes how your product physically gets to the end customer

Presentation:
7. Marketing and Sales Strategies - Who is leading the venture team for sales? - Revenue Model: can describe it in 1 minute or less! - Revenue event, when? How?
8. Managing Rapid Growth - Which type of growth strategy? - How will you manage the growth (prevent a stall?) - How about going global?

Presentation:
9 . Financing Strategy - How much? (Answers: “what do you need to get this done?”) - When do you need the money? Other rounds down the road?
1 0 . Exit Strategy and Exit Goals - What are some potential exits? - What are some of the examples in the space? - What are you doing today for these to happen?
1 1 . Conclusion Slide - Focus on Why Now - Describe the inflection points in your industry - Describe recent trends that makes your solution viable today - How your company is set on capitalizing on the recent trends

Fast Pitch
Executive Summary
Quick view
Informal Dialogue
Business Plan
Investment Decision
Closing Documents
Valuation

Due Diligence
Due-Diligence stage (also called Negotiation Stage) , involves a thorough study of the target company by the investor who assesses the company on the basis of his own, weighted investment criteria.
At this stage it is critical to assess:
the market and the opportunity
the entrepreneur and the management team
the technology
competition
the financials

Due Diligence
Assessing the Opportunity
How big is the market?
How competitive is the space?
What’s the average product cycle time?
Will this define a market?
Where is the competition heading?
How hard is it to sell?

Due Diligence
Assessing the Entrepreneur and the Management Team
Understanding motivations
Determining commitment level
Determining willingness to sacrifice
J udg ing appetite for risk
Assessing expertise
Apprais ing entrepreneur’s leadership abilities and vision

Due Diligence
Assessing the Technology
Is it a breakthrough or just evolutionary?
Is it protectable?
How easy is it to replicate or substitute?
“ Nice to have” vs “Must have”
Is the success of the enterprise dependent on the success or uniqueness of the technology?
How mature is the technology?
What’s the time to market?
What’s the technical risk?

Due Diligence
Assessing the Competition
U nderstand where the competition is going, not just where it is today
Rate how innovative the competition is
Predict how they will respond to your offering
Compare leadership teams
Consider switching cost

Valuation:
Ea rly-stage valuation is an art, not a science.
Needs to be high enough to reward entrepreneurs for risk (quitting job, etc.)
Needs to be low enough to allow step-up at Series B round.
Irrational but true: Valuation depends on the amount of money being raised!
There are two approaches to making investment decisions by means of discounted cash flows. One is the net present value method (NPV), and the other is the internal rate of return (IRR) method.
Due Diligence © Inovent 2009 - Confidential

Fast Pitch
Executive Summary
Quick view
Informal Dialogue
Business Plan
Investment Decision
Closing Documents
Valuation

Investment Decision Criteria
Product-Market Factors:
Market Growth And Attractiveness
Uniqueness Of Product And Technology
Degree Market Already Established
Market Size
Seasonality Of Product-Market
Sensitivity To Economic Cycles

Investment Decision Criteria:
Strategic-Competitive Factors:
Ease Of Market Entry
Ability To Create Post-Entry Barriers
Sustained Share Competitive Position
Nature And Degree Of Competition
Strength Of Suppliers And Distributors

Management Team Factors:
Leadership Potential Of Management Team
Leadership Potential Of Lead Entrepreneur
Recognized Industry Expertise In Management Team
Track Record Of Lead Entrepreneur
Track Record Of Management Team
Management Competence Factors:
Marketing/Sales Capabilities Of Team
Process/Production Capabilities Of Team
Organizational/Administrative Capabilities Of Team
Financial/Accounting Capabilities Of Team
Investment Decision Criteria: © Inovent 2009 - Confidential

Financial Factors:
Time To Breakeven
Time To Payback
Expected Rate Of Return
Ability To Cash Out
Fund Factors:
Business Meets Fund Constraints
Business And Product Fit With Fund Portfolio
Ability Of Investors To Influence The Deal
Location Of Business Relative To The Fund

Deal Factors:
Stage Of Investment Required
Number And Nature Of Co-Investors In Deal
Ability To Syndicate Deal
Scale And Chance Of Later Rounds Of Financing
Importance Of Unclear Assumptions

Turn-offs
“ Me too”
Low Barriers to Entry
Entrepreneur’s willing to cash-out with the investment
“ Missionary”
Large follow - on capital needs
“ Keep the lights on” capital raise
Multiple target markets addressed at early stage of company

Post Investment Challenges
Developing the team
Bringing products to market
Use of Funds
Beating the competition
Focus on reliability and performance rather than features
Be responsive to customer needs and t ake the customer’s point of view

The Process of A cquiring Financing
In the end, the investment is made in about 2 to 3 % cases of all received investment requests.
The parties finally make a shareholder agreement to establish practical operating rules.
Investor ’s exit could be anything between liquidation and IPO.
The intention is to liquidate the shareholding in early phase companies after 4-8 years and in companies with follow-on funding after 1-3 years

Attributes of Great Investors
Bets on people not trends
Driven by the big idea
Looking for the big winner
Not afraid of failure
Knows how to thread the needle to get success
Understand how to develop and manage a portfolio of risk
Serves as a fantastic coach
Does his/her best work outside of the board room
Not waiting for validation from other Investor s

Strategic - Serve as a sounding board in crafting and flight testing ideas and strategies. - Business consultant with unique industry experience. - Developing, negotiati ng agreements, and executing strategic partnerships. - Developing and executing acquisition strateg ies . - Developing financial plans and assisting in follow-on rounds of funding. - Developing a global business strategy. - Negotiating licensing or royalty agreements.
Investor’s Contribution to Entrepreneur © Inovent 2009 - Confidential

Social and Supportive - Company building experience. - Can help manage the transition from entrepreneurial to professional management structures. - Been around in hard times, providing sound advice and encouragement. - Have a complete repertoire of mistakes and stories to share. - Knowledgeable of industry trends and exposed to insider knowledge seeing deals and plans. - Vital business coach, mentor and personal friend, confidant. - Support for, during and after initial public offerings or other liquidity events.

Network Effect - Credibility to venture team. - Helping recruit key management and board members. - Providing access to industry experts and knowledgeable advisors. - Providing access to the right professional service providers, e.g. legal and accounting firms. - Instrumental in opening doors to key marquee customers that otherwise might not take a new venture seriously. - Instrumental in opening doors to key suppliers. - Introducing the venture team to other private equity investors. - Providing access to the investment bankers for preparing a viable exit. - Providing access to executives overseas for strategic alliances, investments and resources. - Making key contacts with banks and leasing companies. - Providing a close-knit relationship with other ventures in the portfolio.

Due-Diligence (The Other Way Around)
Structure of an Investor
Questions to Ask About Investors
When in the entrepreneurial life cycle do they prefer to invest?
What business sectors/niches do they prefer?
How much do they typically invest per deal?
What is their average size of investment? Minimums and maximums.
Do they have any industry experts in their firm?
In which ventures in your space have they already invested?
How are their investments typically structured? Do they prefer to lead deals?
With whom have they completed conjoined deals?
What is their geographic focus?
Who are the key partners? What are their backgrounds (degrees, companies, etc.)?
What is their network effect potential?

THANK YOU Serhat Görgün Inovent Inc. General Manager Address: Hacı Muhittin Sk Kanlıca/Beykoz/İstanbul/Turkey 0 216 537 72 00 www.inovent.com.tr © Inovent 2009 - Confidential

Serhat Görgün Inovent A.Ş. Genel Müdür Adres: GOSB Teknokent High-Tech Bina 41480 Gebze/Kocaeli/Türkiye 0 262 678 89 00 www.inovent.com.tr 10/06/10 © Inovent 2009 - Confidential

What Investors Look For_Serhat Görgün

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