The Art of Raising Money (Peter Kelly)


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Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.

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The Art of Raising Money (Peter Kelly)

  1. 1. The Art of Raising Money Dr Peter KellyDirector, Helsinki School of Creative Entrepreneurship
  2. 2. Business Plans = Sales Substance
  3. 3. Business Plans Sales Hype
  4. 4. Questions Your Business Plan Must Address1. Where is the company now?2. What is your product or service?3. What is your market?4. How will you reach the market?5. Who will you be competing against?6. How will your product be produced?7. Who are the people?8. What are your financial projections?9. How much money will you need?10. What are the risks?
  5. 5. Of What Use is a Business Plan? • it is a basis for convincing yourself (and others) of the underlying logic of the opportunity • compass • venture capitalists “need to have one on file” to signal competence to their funders
  6. 6. The Uniqueness “Trap”a supermarket typically carries 30.000 products20.000 new products are introduced each year 285 varieties of biscuits (21 types of chocolate chip biscuits) 75 different choices among iced tea 230 choices available of soups 120 different pasta sauces 175 versions of salad dressing 360 choices among shampoos, conditioners and the like 200 distinct offerings of tea bags ...
  7. 7. The Uniqueness “Trap”an electronic gadget store ... 74 types of stereo tuners 55 versions of CD players 32 tape players 50 sets of speakerswhich can be combined in 6.512.000 ways!
  8. 8. An Enlightening Read ...
  9. 9. You Need To Have CompetitorsWe have no competition ... (we arethat clever!) if there is none, there is no market and/or you have not done any background investigation at allIdentify them, then profile them what can we do that they can’t what can they do that we can’tStatus quo is competition
  10. 10. You Need to Keep “Odds” in Mind 2000 business plans 200 are moderately credible 100 are interesting enough to read 40 undergo due diligence 10 get 1 makes
  11. 11. Investors Read Exec Summaries Not Business PlansA good executive summary captures the reader’s interest and imagination conveys a clear picture of what you are trying to do highlights the salient features of the proposition establishes the management’s credentials at the outset encapsulates the financial opportunity and key projectionsAnd thus persuades the reader to keep reading !
  12. 12. You Need A Mantra two sentence max description “what we do” and “why should I care” (what / so what) 10 / 20 / 30 rule 10 slides 20 minutes 30 point font +
  13. 13. Ten Slides In A Nutshell ...1. Title slide2. Problem3. Solution4. Business model5. Underlying magic6. Marketing and sales7. Competition8. Management team9. Financial projections and key metrics10.Current status, milestones, timeline, use of capital
  14. 14. Backers Want To Know Why It Works? Printer Ink Priced Like Oil ... Brand Name Printer Ink $34 per ounce Chanel No 5 Perfume $29 Dom Perignon Champagne $13 22 yr old Single Scotch Malt $ 7 $30 from HP Franchisor that fills similar cartridges for $16.50
  15. 15. And Consider Why It Won’t Work?$4,995 + taxes
  16. 16. Muslim on Mobile phone designed for world’s Muslims (1,4 billion potential) loaded with Koran alerts user for prayers compass points direction to MeccaIkone Mobile Telecommunications
  17. 17. In Touch
  18. 18. Style Not Stink ventilated shoes smelly feet are global problem company has numerous patents 400 million in sales in 2004Geox Corporation
  19. 19. No More Hangovers “night before” sick leave costs business $150 billion a year Congress does not require proof of concept just proof of safety 50 remedies on market but few back claims with scientific proof $7 million sales growing at 160% per
  20. 20. Immortal Status You can’t apply for it! Need to spend at least $150.000 per year to keep it $2500 annual fee, 43 page manual personal concierge
  21. 21. Deals Fall Apart Because ofDivergent Valuation Expectations
  22. 22. The Law of ValuationEntrepreneurs always tend to place a high valueon what they do ... because ...Investors always tend to place a lower value onwhat an entrepreneur does ... because ...
  23. 23. Valuation In PerspectiveValue is created when you satisfy burningcustomer needs better than anyone else ...Value has much less to do with numbercrunching, spreadsheets, and sophisticatedfinancial engineering ...Ask yourself, “what value am I creating?”
  24. 24. What Value Am I Creating? Do I have something that? • I can claim exclusive rights over • actually works like we say it does • is in demand • can be exploited • is scalable & profitable
  25. 25. What Value Has Been Created? Do you have? • patentable claims • a working prototype • paying customers • a competitive advantage • scalable & efficient business model In the absence of any of this ... what is the value?
  26. 26. The Value of a Raw Idea In essence, you are trying to put a value on unknowns, or “thin air” ... As we all know, air is a free good, as such, the value of thin air is ZERO
  27. 27. ImplicationsIf outsiders see the value as zero, you have littlechoice but to prove yourself by yourselfFinancing yourself (bootstrapping) on mattersthat boost valuation ...Don’t obsess with spreadsheet modelling, getout and see if it sells ...
  28. 28. $50 Million Value on Your Head (1998) Investors throwing money at ... untested ideas unproven management team demonstrably unprofitable business models people with measurable pulses who utter “magic words”
  29. 29. $50 Million Valuation (2005)Individuals who have successfully built up anumber of entrepreneurial ventures, that grew inleaps and bounds ANDProduced enormous wealth for themselves, theirpartners, employees and investors in theprocess Been there done that, got several t-shirts!
  30. 30. Some Prudent Valuation AdviceStart on assumption that your idea’s value = 0Valuation is created by tangibly demonstrating you have something worth protecting (patent) you have something to sell (prototype) you have recruited (others buy into vision) you have sold something (customer buy in) you have a track record (able to show financial statements & projections NOT just projections) you over deliver (exceed objectives)
  31. 31. Milestone Valuation MethodBreak your project into “digestable bits” ... Investigating and filing a patent Development of a working prototype Securing a pilot customer Development of a “go to market” product Signing up x number of distributors Opening up x number of foreign officesEach “bit” needs to address technology, market orpeople risk (preferably all three at once!)
  32. 32. Valuation Working BackwardsWhat magnitude of capital is required for yourproject to really fly? 50 million + 10 million + 5 million + 1 million + ½ million + or less ...
  33. 33. Valuation Working BackwardsWhat magnitude of capital is required for yourproject to really fly Entrepreneur’s Stake 50 million + 10% or less 10 million + 20% or less 5 million + 40% or less 1 million + 60% or less ½ million + 75% or less or less ... 90% or less why is this?
  34. 34. Growth Requires Fuel (Capital)... Capital Requires ReturnEarly financiers of the company are typicallyyou, FFFs, and public sector bodiesBusiness angels and venture capital funds wantto see ... proof of concept proof of market (traction) scalability (business model) prospect of return (growth story)
  35. 35. AngelsInvest their own money and expertise earlyWant to see 5x return on capital in 5-7 yearsTypically invest with their mates up to 500,000for minority equity stake (<50%) My 500,000 for 25% of your firm has to create a business worth 12 million in 5 to 7 years’ time
  36. 36. Venture CapitalistsInvest other people’s money later onWant to see 5x return on capital in 3-5 yearsTypically invest 5 million and more with a majorstake in the business (often 50%+) My 5.000.000 for 50% of your firm has to create a business worth 50 million in 3 to 5 years’ time
  37. 37. Non Disclosure AgreementsFew investors actually agree to sign them ... never ask them to sign one to have a first meeting never ask if you want to discuss your idea circulate an executive summary and powerpoint pitch freely but do not reveal the “magic sauce” if the investor wants to discuss the “magic sauce” in detail, then insist upon an NDAThe best protection for an idea is superbimplementation of it (and perhaps a patent) ...
  38. 38. Valuation: Some Take AwaysEntrepreneur should consider the following ... how much money will it take to really fly? what milestones exist between push back and take off? how much is required to achieve each milestone? work backwards ...Valuations are negotiable particularly when ... you are a serial entrepreneur there are numerous bidders performance against milestones can be tangibly measuredGuy Kawasaki’s Law of PreMoney Valuation ... for every full time engineer (+$500,000) for every full time MBA (-$250,000)
  39. 39. HIGH RISK Founder, family, friends, fools Business Angels Venture Capitalists Corporates Public Equity Markets Commercial BanksLOW RISK START-UP MATURITY
  40. 40. Fund Raising AdviceThink small: what do I really need?Wear “investor eyeglasses”Specify milestonesDo your homework before approachingDo not be put off by the word “no”Respect Murphy’s Law of Venture Building