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WBS Entrepreneurship Mentoring Workshop -28 July 2011 - Tim Powell
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WBS Entrepreneurship Mentoring Workshop -28 July 2011 - Tim Powell


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What investors look for in Early Stage Opportunities

What investors look for in Early Stage Opportunities

Published in: Business, Economy & Finance
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  • 1. Wake up Investor – I‘ve got a great proposition
  • 2. Tim PowellSenior Executive University of Warwick Science Park
    Director of the Minerva Private Investor Network and Access to Finance Programme
    024 7632 3114
  • 3. Minerva
    • Minerva is a Business Angel network operated by the University of Warwick Science Park since 1994
    • 4. We have 100+ members and operate two syndicates who meet monthly to consider opportunities
    • 5. In the last 15 months I have seen over 120 Business Plans- interviewed 54 companies and invited 36 to present of whom 15 received offers with 11completing deals attracting £1.07m from Minerva Investors whose money helped lever in another £2.6m
    • 6. Sectors invested into :- Clean Tech- Silicon Carbide, Health & Beauty Equipment Technologies, Medical Devices, Telecomm/Broadband, nano DNA technologies, Forensic Science, Software & IT, Automotive –Electric Diesel Turbocharger….and more to come
  • £10m+
    Venture Capital
    Regional Finance & Venture Capital Funds
    Specialist Funds Private Investors
    Friends & family
    Enterprise Finance,
    Factoring, other debt
    Public Funding
    Seed Funds, Grants etc
    Low Risk High Risk
    The “Funding & Equity” Landscape for early Stage Ventures today
  • 7. Can Private Investors fill the funding Gap ?
    Early Stage Ventures are considered HIGH RISK
    Seed Funding is in short supply & often sector limited
    Banks do not fund unsecured high risk ventures –
    Banks will fund revenue earning concerns & provide significant “ooomph” to aid growth
    Friends and family often carry the start up burden but are limited in funding, experience, time
    Angel Investment is filling the ever widening gap
    But with the supply of money limited it’s attract the early stage capital – a simple matter of supply & demand
    But the combination of Angel money plus expertise may be the difference between failure & success
  • 8. What do Private Investors/Business Angels do?
    Consider investing in pre-revenue early stage High Risk ventures in exchange for Shares in the business
    But HIGH RISK doesn’t mean Gamble or Speculate
    They anticipate a difficult journey but will have identified characteristics that suggests they might make a profit
    They buy “in low” and hope to “sell high”
    Some are passive - most will get involved individually or collectively through a group of investors
    Bringing expertise, experience & Contacts hopefully
    Drive towards a profitable exit – usually by attracting a trade sale/acquisition and/or “cash in” when the opportunity arises
  • 9. What do Angels look for in a proposition ?
    • A Business Plan that makes sense! -Viable, Achievable, Realistic, ,
    • 10. Well balanced team –if only for this stage of its development
    • 11. Product or technology that has some element of Proprietary ownership :- Patent, Design Rights, Niche …
    • 12. Pre-Revenue – validated time and cost of developing a market ready product - accurately documented and assumptions evidenced.
    • 13. Upto date Intelligence on the Market, Competition, Technology and evidence of demand/appetite – “Voice of the Customer “
    • 14. Sales & Marketing Realism – covering time & cost to enter, launch & penetrate the market.
    • 15. Financial forecast that reflects all the above and not wishful thinking
    • 16. Profit…….and
  • Is there any difference between what an Angel and an early stage fund look for ?
    A Fund makes equity investments on the basis of anticipated strong capital growth and high levels of return -Typically, expect a 5 to 10x increase on exit.
    Exit is fundamental most - likely through a strategic trade sale, occasionally through flotation
    Technology biased funds especially look for a strong focus on sector-specific, proprietary technology and innovation
    (i) clear evidence of significant technological innovation with respect to the company's commercial product(s);
    (ii) The company may be expected to operate within certain technology sectors eg:
    Medical & Healthcare, Advanced Materials, Clean Technologies, ICT & Digital Media
    (iv) protection for their proprietary technology through ownership of granted patents, pending patent applications, design rights, and other recognized forms of intellectual property rights (IPR);
    (v) An experienced management team in place ( ??) and/or internationally acclaimed technology founder(s); and
    (vi) A business plan that demonstrates a well-defined strategy capable of achieving strong capital growth and a highly profitable exit for investors within 6 years of an initial venture capital investment ..they hope!
    (this was taken from a fund web site ..Angels and Funds look largely for the same things)
  • 18. What do Angels want ?
    They don’t want is to lose money
    Honesty – No surprises
    They don’t want to run your business
    A realistic valuation ... and trust
    Dilution is OK if for the right reasons !
    You to have as much pain as they if it goes wrong
    EIS approval
    Profitability & Potential
    A shareholder agreement that underpins your relationship
    Clear descriptions of your roles, responsibilities and rewards
    They are backing your ability to deliver at least the first part of the plan so they will want to see plenty of :-
    Energy, Enthusiasm, Ambition, Focus and Direction
  • 19. Preparing for Investment
    If you have decided to go for investment
    Get professional advice – understand what it is you are giving up and what might be expected of you
    Build a business plan you believe in ….not dream about!
    Realism in everything …A problem shared can be solved
    A problem hidden will surface later when you least expect it!
    Identify & address the strengths and weaknesses
    Understand the “risks” ..the “what if’s” and the “pinch” points
    Validate and evidence assumptions – avoid the “ I think” syndrome
    Be ready for Investigation (“due diligence” ) it will take a lot of time
    Most investments take between 3-6 months to complete – so start asking for money before you need it!
  • 20. Getting Prepared – the “What” Questions
    What is the history of the business – how long established,
    What previous funding have you had?
    What have you invested in hard cash ?
    What have you done to date and what you intend to do ?
    What experience do you have about market
    What are the skills in the team and what is missing?
    What do you know about your competition?
    What exactly is your product/service & What IP do you have?
    What Resources do you need to launch/commercialise ?
    What are you going to spend the money on ?
    What are the time lines and what are the key risks?
    What do you want to achieve ?
    What’s the deal ?
  • 21. Getting Prepared – The “Who “ Questions
    Who prepared the plan
    Who prepared the forecasts
    Who has the Vision
    Who is the leader – driving force
    Who has most to lose
    Who owns the IP
    Who owns the shares
    Who does what – roles & responsibilities
    Who are your advisors/partners
    Who works full time in the business
    Who else is investing
  • 22. Ultimately it’s Management who deliver the results
    The team must be …
    Tell me again …
    What are we looking for?
  • 31. A mix of personalities & Skills is good …however there must be plenty of “doing”
    • An investor will help if you are floundering :-
    • 32. Finance & control
    • 33. Selling/Marketing
    • 34. Operations
    • 35. Raising more capital
    • 36. Executing the plan
    If there is a group of investors call on their
    collective experience knowledge and contacts
    Most investors are good at “doing” and where
    they are involved businesses
    tend to succeed quicker.
  • 37. What do you want in return for their money?
    You don’t want any surprises either – use the “Due Diligence “ period to
    get to know the investor :-
    The chemistry must be right
    The investor must be a good fit
    A shareholder can’t be sacked
    Don’t be short changed in Expertise
    You have surrendered shares and
    therefore some ownership – if you have got
    the forecasts horribly wrong you may have
    to sell more and with it may go control
    & ownership ….
  • 38. What does a typical deal look like
    EIS status approved & in place
    Angel must have Ordinary Shares with no special powers attached
    VC Funds may vary their stake with preference shares /debt aswell as Ordinary shares
    Angels are restricted on clauses in in the shareholder agreement – but a VC is not …
    There will be restrictions on what you can and can’t do
    You will have to negotiate a NEW employment contract
    Funding is often released in tranches against delivery of business plan milestones- so make sure milestones are realistic!!
    Some Investors will insist on following their money onto the board
    THE BIG QUESTION – how much of my equity will they want?
    THE ANSWER – One that reflects the risk and your potential !
  • 39. Finally
    • Private Investment & Venture Capital is a special type of finance.
    • 40. Early stage investment is usually seed or pump priming capital and therefore you will always be selling at a lower valuation than later but without the money and hopefully the added expertise would you make it to “later” ?
    • 41. Always consider the range of other types of funding
    • 42. Take advice, don’t rush, be prepared and start early if you want to raise money
    • 43. Financing a business is rarely a single stage process - it takes time to build and grow and along the way different types of finance are needed at different stages of development.
    • 44. The appropriate finance depends on the risk/reward profile of the business at each stage of financing.
  • Where to find Business Angels and more information on Angel Investment