Source of FundsWhere will the money come from? How will we “harvest” the opportunity? Contributed by: Ed Rubesch Lecturer, Thammasat Business School, Thammasat University, Thailand
How to Approach Investors Research potential investors Only approach appropriate investors Prepare a very good Business Plan Prepare and rehearse a very good presentation (no set standard: 30 seconds / 40-45 mins) Be clear about what you need (how much, when, what for) and have some idea about what you’re prepared to offer (% of equity) Progress your venture as much as you can on your own before approaching investors
How to Approach Investors Ask potential investors about their investment style and expectations Spend time with investor’s other investee partners / companies Negotiate hard Ensure your interests are aligned with those of your investor. Agree a written business plan Hire professional help
Investment Opportunity in Thailand Investors looking at all stages and sizes of companies Lots of money looking to invest in Thailand Deals are few and far between problems with investors capabilities (e.g., access / protection) problems with investee capabilities (e.g., accountability / transparency) Everything takes a (very) long time Exits unclear
Typical New Venture FundingSources Who are they? What drives their investment decision? What do they expect to get? Where does their money come from?
Typical New Venture FundingSources Research Institutions Self-financed Angel Investors Venture Capitalists Private Equity Public Equity Banks
Research Institutions Who are they? Universities Private laboratories Government agencies What drives their investment decision? The desire to enhance the body of knowledge in a specific area of interest through research
Research Institutions What do they expect to get? The intellectual property that results from the research Patents Rights in property or process, even if not patented Where does their money come from? Endowments (sometimes with spending conditions) Grants General funding from government Student tuition
Self-financed From where? Family Friends The entrepreneur What drives their investment decision? Based on a belief in, or relationship with, the entrepreneur Based on a belief that the idea is at least feasible
Self-financed What do they expect to get? Their original investment returned Maybe interest Less often equity Where does their money come from? Usually funded from personal savings or new borrowings (mortgage on real estate)
Angel Investors Who are they? Wealthy individuals Often successful entrepreneurs What drives their investment decision? A belief that the entrepreneur has done her homework A belief that the idea holds great upside potential
Angel Investors What do they expect to get? Equity A large return on their investment (> 30% CAR) Where does their money come from? Usually funded from personal savings
Professional Investors They Include: Venture Capitalists, Private Equity, Public Equity, Banks What are they looking for (maturity): Significant shareholder value growth (“$”) for expansion capital or reliable cash earnings Consideration of: transparency, honesty, creativity, responsibility, ac countability, teamwork, etc. Appropriate industry, investment size, stage of company development – can vary depending on risk tolerance and desired ROI.
Desirable Investment Opportunities Demonstrable need for business, product, service and defensible market position Track record of execution capability Clearly defined business plan Appropriate equity participation Board representation, perhaps appointment of CFO Visible exit strategy
Desirable Investment Opportunities When companies want to: purchase new plant and equipment to expand capacity purchase new plant and equipment to enter new business line acquire competitor, customer or supplier raise new working capital
Desirable Investment Opportunities When owners want/need to: sell non-core/underperforming assets raise capital for new investments raise capital to restructure
Desirable Investment Opportunities When managers want to: become independent/become owners achieve satisfaction make lots of money!
Pros and Cons Advantages: allows companies to access situations otherwise closed to “high risk” investments someone to share the risk ensures better analytical discipline access to investor’s network of financiers, customers, suppliers advisers
Pros and Cons Disadvantages: high cost of funding if successful partial loss of control extra reporting requirements
Venture Capital Investors Who are they? Professionally managed investment vehicles Usually in the form of a limited partnership What drives their investment decision? A belief that the entrepreneur is very capable Management team Business model A belief that the idea and market conditions allow for significant revenue and profit growth
Venture Capital Investors What do they expect to get? Equity Significant return on investment (~ 30% CAR) A clearly pre-defined exit for 5 – 7 years later Where does their money come from? Pension funds Wealthy individuals
What is a Venture Capitalist? Investment fund for private equity Such as large pension funds that have long-term investment horizons Typically a VC fund lasts 10-12 years, before it is closed out Looking for larger returns than offered by world-wide stock and bond markets Require fast growth Require large market opportunities Rewards must outweigh risks VCs may reject 99% of all proposals.
What is a Venture Capitalist? General George Doriot Founded American Research & Development in 1946 Key investment principles: 1. New technology, new marketing concepts, and new product application possibilities. 2. A significant, although not necessarily controlling, participation by the investors in the company’s management. 3. Investment in ventures staffed by people of outstanding competence and integrity. 4. Products or processes which have passed through at least the early prototype stage and are adequately protected by patents, copyrights, or trade secrets. 5. Situations which show promise to mature within a few years to the point of an initial public offering or a sale of the entire company.
American Research & Development Company invested in over 100 positions during the 1960s. Interestingly, almost all of the Company’s returns came from two successful investments: Digital Equipment Corporation High Voltage Engineering
Think Big – Venture Capital Why do VC’s look for big opportunities to offset large risk. 40% will fail. 30% will become “living dead.” 30% will become successes. Most important: The failures almost always happen more quickly than the success! VC determine their exit strategy before they invest: Public offering Sale to a strategic partner
What Do VCs Offer? Investment money from pension funds or university endowments Suitable management or technical expertise Help finding strategic partners or customers Strategy planning In return: a large percentage of ownership, plus seats on the board
Can VC happen in Thailand Review the articles from Done Deals… What situations are similar to Thailand? What situations are different? What would need to happen: Government policy Thai culture Technical capability Other?
Private Equity Investors Who are they? Professionally managed investment vehicles Can be in the form of a limited partnership, also mutual funds What drives their investment decision? Track record of the business A belief that market conditions allow for expansion of the business
Private Equity Investors What do they expect to get? Equity Significant return on investment (up to 30% CAR) May or may not seek a pre-defined exit Where does their money come from? Pension funds Insurance companies Mutual funds University endowment funds
Public Equity Investors Who are they? Retail investors Individuals Institutional investors Pension funds, mutual funds, corporations What drives their investment decision? Retail investors Emotion, hot tips, their own analysis Institutional investors Investment policy (hurdle rates, sector & country allocations, etc.)
Public Equity Investors What do they expect to get? Shares Usually no role in management of the business Return on investment (??% CAR) Where does their money come from? Retail investors Personal savings or borrowings (mortgage on real estate, or margin on brokerage account) Institutional investors Pension contributions, insurance premiums, etc.
Banks Who are they? Lending institutions What drives their investment decision? The creditworthiness of the borrower Ability of the business to service the loan (make payments of interest & principal) Collateral (can be supplied by a third party)
Banks What do they expect to get? Their original loan returned Interest Where does their money come from? Depositors
Funds often are applied todifferent purposesSource PurposeResearch Institutions Basic research, inventionsSelf-Financed Initial start-up fundsAngel Investors Initial start-up fundsVenture Capitalists Just after start-upPrivate Equity Longer-term growth of an established companyPublic Equity Capital investment requirements of an established company, exit for VCsBanks Financing for most operating needs