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Venture Capital 101 to BCIT Nov 08
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Venture Capital 101 to BCIT Nov 08

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  • F, F & EEs can be in the form of debt Best financing is still revenue from target customers
  • Should help all buyers understand your business and it’s value to them
  • PDF, available for download
  • PDF, available for download
  • Which is the most important assumption? Still need to know the market share and size of market
  • Which is the most important assumption? Still need to know the market share and size of market
  • This one will get me in trouble But you want to win the competition, so find a way
  • Transcript

    • 1. Entrepreneurship & Strategy Class Title
    • 2. My Bio
      • Entrepreneur – 3 meaningful startups
      • Corporate Finance – negotiated over 100 transactions, CIBC Investment Banking
      • Boards
        • Chair of a pre-revenue start-up
        • Founding director of MetroBridge, recent IPO
        • Director of fastest-growing local VC, BCAF
    • 3. About Stirling Mercantile
      • Sectors
      • Mid market financings
      • Early-stage VC financings
      • Mergers and acquisitions
      • Valuations and fairness opinions
      • Public market advisory services
    • 4. About Stirling Mercantile
    • 5.  
    • 6. www.stirlingmercantile.com
    • 7. BC Advantage Funds
        • $85 million under management
        • A Venture Capital Corporation (VCC) fund
          • 30% tax credit available
        • Invest in promising emerging life science and technology companies in British Columbia
        • 2006 CVCA "Deal of the Year" Winner
        • www.bcadvantagefunds.com
    • 8. Sources of Financing
      • Equity –family, employees, friends, angels, VCs, Private Equity
      • Debt – banks, subordinated lenders & others
      • Grants – governments and government supported agencies
      Background .
    • 9. The Financing Map F, F & E Seed, Angel Series A Series B Year 1 2 3 4 5 Beta Customers Early Adopters Crossing the Chasm Mainstream Growth Design Beta V. 1 V. 2 IP Roadmap Funding Roadmap Background .
    • 10. What happens when you bring in equity investors?
      • Dilution
      • More governance and oversight
      • Additional management
      • Capital to accelerate development
      • Access to broader network
      • Added business insight
      Background .
    • 11. Standard Terms
      • Preferential treatment:
        • First payment upon exit (acquisition or IPO)
        • Protection against dilution
        • Right to purchase more
        • Varying levels of control over business
      • Motivated solely by return on investment
      Background
    • 12. What Do VCs Need?
      • Strong team, with integrity
      • Clear, lucrative and sustainable value proposition
      • Large market opportunity and the ability to scale into it
      • Realistic valuation and deal terms
      .
    • 13. What Do VCs Want?
      • Traction from the target market
      • 2 or 3 independent board candidates
      • Appropriate deal size for their fund
      • Appropriate market sector for their fund
      • Transaction ready due diligence binder/site
      • Close proximity
      .
    • 14. What Should You Look For in a VC?
      • More than money
      • “Been there, done that” management
      • Corporate governance
      • Exit strategies
      .
    • 15. What Should You Look For in a VC?
      • More than money
      • Contacts
        • for additional management
        • for customers
        • for partnerships
      .
    • 16. Why VCs Need ‘Home Runs’
      • 40% return on a fund, which lasts about 7 to 10 years
    • 17. One in Ten
      • Some make a break-even or make a modest gain. Others die.
      $40m $100m
    • 18. Goals
      • Why build a business?
      • Lifestyle
        • freedom (choose your own 16 hours a day)
        • Equity – all the spoils of success, all the pain of defeat
        • salary (less than market)
      • OR
      • Build quickly for an exit – Sale or IPO
        • Probably involves investors, loss of control
        • Could allow for retirement (on second or third try)
    • 19. Valuations
      • Multiple of
        • Revenue (eg. $10m x 2 = $20m)
        • Profit or EBITDA (eg. $3m x 6 = $18m)
      • Discounted Cash Flow
      • All are better when company is growing
        • (Importance of timing)
    • 20. Relative Valuations
      • Big Co
      • Experienced management, board
      • Large revenues
      • Diversified customer base
      • Scaled Infrastructure
      • Worth 3 x Revenues
      • Small Co
      • Great founder, some holes on team
      • Small growing revenues
      • Concentrated customer base
      • Scalable infrastructure
      • Worth 1.5 x Revenues
    • 21. Deal Drivers
      • Accretive acquisitions
        • You must add to buyer’s valuation
        • For example:
          • Buyer: $100m Revenues x 3 = $300m market cap
          • Buys $10m Revenues x 1.5 = $15m cost, cash and stock
          • Adds $10m x 3 to valuation or $30m
    • 22. Deal Drivers
      • Strategic
        • Add value to other products or assets
        • Adds customers
        • Keep away from competitors
        • Product or geographic expansion
    • 23. Marketing the Exit
      • Plan the exit from the outset
      • Get to know your potential buyers early
      • Get to know your service providers early
    • 24. Think Like A Buyer
      • Strategic
        • Market share, keep away from competitor
      • Financial
        • Earnings, valuation multiples, accretive value to a stock price
      • Entrepreneur
        • Lifestyle
      .
    • 25. Think Like A Buyer
      • Spend money to…
      • … make money, or
      • … save money
      .
    • 26. Structuring
      • Understand leverage available to buyers
      • A profitable company can be purchased with a portion of subordinated debt, like 3 X EBITDA
      • The balance in equity
        • Ratios must also consider total debt to equity
        • Strategics may go to 4x or 5x
      $10m $2m $6m $4m Price EBITDA Sub-debt Equity
    • 27. Business Plan
      • Executive Summary
      • Product or Service Description
      • Industry and Opportunities
      • Marketing and Sales Plans
      • Competition, Competitive Advantages
      • Management and Board Members
      • Financials and ProFormas
      VCs Want
    • 28. Executive Summary
      • “Put it at the beginning but write it at the end”
      • Start with a simple description of who your clients are and why they will buy from you
      • Keep it down to about 2 pages – just enough to stimulate questions of interest
      . Background
    • 29. Science Proposition vs. Value Proposition
      • “We are making a next generation codec to bring the seventh layer of the OSI model to real-time online commerce”.
      • “Our software helps banks save money on processing cheques and transactions.”
    • 30. Position Value to Customer Sales Unit Volume You Comp Comp VCs Want
    • 31. Keep It Concise!
      • Use grade 8 English, and test it
      • Ask yourself if each paragraph helps to explain why this company has value
      . VCs Want
    • 32. Avoid Saying…
      • Our projections are conservative
      • We have no competition
      • We have a first mover advantage
      • We only need to capture x% of the market share
      . VCs Want
    • 33. Presentation
      • A picture tells a thousand words, but…
      • … don’t spend time or money on graphics and eye-candy
      • Docs in PDF, available for download from your site
      . Background
    • 34. Financial Models
      • Estimates your future value
      • Focus on price and unit sales
      • Be able to back it all up – this is your credibility
      . Packaging, Financials
    • 35. Bottom Up vs. Top Down
      • Market = 100,000,000
      • We will get 5%
      • At a price of $2,000
      • We will sell $10,000,000
      • Incredible!
      • Sales cycle = 60 days
      • Sales training = 60 days
      • We will hire 20 effective sales people…
      • … who will sell 21 per month
      • At a price of $2,000
      • We will sell $10,000,000
      • Credible!
      . Packaging, Financials
    • 36. Due Dilly Binder
      • All material contracts
      • Details of financials
        • Inventory and valuable assets
        • HR tables and analysis
        • Comments on liabilities or notes to the Financials
      • Don’t leave out anything salient
      . VCs Want
    • 37. Due Diligence Folder/Binder A great example of a due dilly map, made available in the root of the folder or binder Packaging
    • 38. Reading
      • Books
        • Good to Great
        • Art of the Start
        • The E Myth
        • 7 Habits of Highly Successful People
      • Blogs, RSS, Newsletters
        • CFO Executive
        • VC Experts
        • The Deal
        • Kedrosky
        • Wall Street Prep
      • Much more at Stirling Resources
    • 39. Thank you
      • A copy of this presentation is available at:
      • www.stirlingmercantile.com/speakers.htm
    • 40. Financial Models
      • “ Plans are useless, but planning is indispensable”
      • Dwight D. Eisenhower
      • Not intended to be carved in stone
      • Represents your plan, expected to change
      . Packaging, Financials
    • 41. Purpose
      • Explain how the company scales
      • Must clarify price and sales growth
      • Estimate how much capital will be required
      • Shows you can plan to be fiscally responsible
      . Packaging, Financials
    • 42. Price
      • Support your price based on competition
      • Get client validation, in writing if possible
      • Consider how your price may change going forward
      . Packaging, Financials
    • 43. Expenses
      • Spend a lot of time on being accurate about your cost of sales and profit margin
      • Spend very little time getting the fixed expenses right, unless your business is different
      • Showing losses in the first 2 years is ok, assuming you have the cash to do so
      . Packaging, Financials
    • 44. Cash Flows
      • Must detail working capital requirements
      • Must show how much money the company will need and when
      • Can be simply added to the bottom of the income projection
      . Packaging, Financials
    • 45. Scope
      • Run out 60 months
      • First two years for cash flow
      • Last three for size of opportunity
      • Show prior actuals if you have them
      . Packaging, Financials
    • 46. Bottom Up vs. Top Down
      • Market = 100,000,000
      • We will get 5%
      • At a price of $2,000
      • We will sell $10,000,000
      • Incredible!
      • Sales cycle = 60 days
      • Sales training = 60 days
      • We will hire 20 effective sales people…
      • … who will sell 21 per month
      • At a price of $2,000
      • We will sell $10,000,000
      • Credible!
      . Packaging, Financials
    • 47. Assumptions
      • Separate tab
      • Include most trigger cells on the same page for investor adjustment
      • First Things First
        • Highlight key assumptions
      . Packaging, Financials
    • 48. Packaging, Financials
    • 49. Packaging, Financials
    • 50. Formatting Suggestions
      • Use a different colour for triggers
      • Add simple graphs
      • Provide ratios
      . Packaging, Financials
    • 51. Sales Growth
      • Add a realistic monthly figure for unit sales growth in the first 18 to 24 months
      • Multiply that by your prices(s) to generate revenue
      • Scale it up in the last 3 years
      . Packaging, Financials
    • 52. Total Revenue
      • At critical mass, revenues should be significant
      • Don’t reverse engineer with unrealistic assumptions for sales growth
      • Find a way to get to $30 to $50 million in 5 to 7 years, with defendable assumptions, ie:
        • Expand your markets
        • Add value for a higher price
      . Packaging, Financials
    • 53. Format for the Presentation
      • One slide for assumptions
        • Identify the key variables, likely price and take-up
      • One slide for results
        • Include ratios
      • One slide for deal structure or closing cap table
      . Packaging, Financials
    • 54. Expenses
      • Be very accurate with your Cost Of Sales (so your margins are defendable)
      • Be accurate with SG&A and cash flows in first 24 months
      • Extrapolate the last 3 years
      • Scale expenses with revenue (EBITDA < 30%)
    • 55. Thank you
      • A copy of this presentation is available at:
      • www.stirlingmercantile.com/speakers.htm