42629 lecture 11 pt 3

Funding sources and strategies- Who has the money and how/when you should talk to them.

Why you need funding $ R&D (-$)•A mature company grows organically: SELL! (+$$$$) Mature PRODUCE (-$) Company – Reinvests share of earnings. – Often loan financed. OTHER COSTSInvestment (-$) R&D(+$$$$$$) (-$$$) •A startup is immature: SELL? PRODUCE – The viability of the cycle has Startup (+$$) (-$$$) not been proven. – (Several) investments are needed to establish a OTHER COSTS sustainable cycle. (-$$)2 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Who to go to at different stages INVESTOR TYPE FFF (Friends, Fools and Family) Crowd funding Public funds Innovation environments Business angels Private / corporate investors Venture Capitalists Banks Pension funds Stock investments INVESTMENT SIZE (DKK) 20.000 - 5 million 3 - 20 million 10-100 million >50 million IMPORTANT TASKS Visualize idea Test prototype Build production Optimize production Validate idea Identify customers Produce product Validate costs Optimize sourcing strategies Proof of concept Sell to pilot customer(s) 1st segment sales 2nd segment sales Continued expansion Describe market Proof of market Proof of traction R&D Estimate cost Formulate business model Formulate marketing strategy Ongoing marketing efforts Stage3 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Pre-seed / Seed stage• Pretty much everything needs to be described – The risk of failure is very high (66% according to litterature). – The value of the company is low.• Typical funding sources – FFF, Crowd funding, Business Angels, Public funds and innovation environments.• Investment criteria – The idea has great value. – The team is key. – Investors expect a high potential return on investment (ROI).4 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Pre-seed / Seed stage II• Typical characteristics for the phase: – Each task aims to validate critical points in the business plan. – Validation of technology and market means reduced risk. – Often, one critical factor can kill off the business. Pilot COSTS customer Market signs insights VALUE OF COMPANY Prototype works! LEVEL OF RISK Time • Investors are likely to invest between DKK 0.5-5 million. • Crowd funding and the FFF are typically in provide smaller investments.5 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Startup Phase• Important factors have been validated – Concept has been thoroughly tested. – Cost estimates have been validated or detailed. – Business plans have been validated with partners/customers. – First customer(s) have signed... something.• Typical funding sources – Private investors, Venture Capitalists (for high growth ventures), public funds.• Investment criteria – Market validated, ”the customers are waiting”. – The team is key. • The investor is likely to take an active roll in daily operations. – Sales and marketing are important issues.6 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Startup phase II• Typical characteristics for the phase: – Focus on getting to break even. – Sales, not written letters of intent. – Initial costs are high. – Through optimization, costs are reduced. VALUE OF COMPANY Pilot EARNINGS(!) customer First ”Real” signings sales COSTS Large Production costs LEVEL OF RISK Time Break even! • Typical investment of between DKK 3 and 20 million7 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

EDGEFLOWEDGEFLOWRevisited (slides courtesy of EdgeFlow Aps)

EDGEFLOWEdgeFlow’s ”Catch 22”A startup in the seed phase or a seed venture in the startup phase?• We have a proof of concept and a good understanding of themarket and costs involved in producing. Several customers haveshown an interest.•We are in dialogue with several investors who are saying: • ”We need letters of intent from customers!”•The customers are saying: •”Interesting, but we need more hours of operation”•And EDGEFLOW is saying: •”We need money to create a product that can run for long periods”

EDGEFLOWExercise 3Help your lecturer.• In your groups:• Spend 5 minutes discussing how Jakobshould handle his predicament. •Ask Jakob for clarification if needed.• Be ready to share your conclusions! (Thank you in advance!)

Growth phase (1st round -> pre-public)• ”Traction” has been shown in first segment(s) – The rollout strategy works – now it should be replicated. – Going into new segments requires significant investments. – Risk is much lower (cultural differences and such).• Typical funding sources – Private investors, Venture Capitalists (later stage), Banks, Pension funds. 3 1 2 1• Investment criteria 3 4 – Medium yield, low risk investment. 2 3 4 411 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Growth phase (1st round -> pre-public) II• Typical characteristics for the phase: – ”Hockey stick” time! – Growing from national/regional organisation til international. – Less need for entrepreneurs and more need for operational savvy. VALUE OF COMPANY EARNINGS Investments in new segments COSTS LEVEL OF RISK Time12 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Different investors – different termsType Risk Profile Expected return Equity Return multiple / shareholder timingFFF High Risk May vary Perhaps NoneBusiness angel High Risk Cash return Yes 10x / 5 yrs outInnovation env. High Risk Cash return + Yes 10x / 5 yrs out reportsPrivate investor Medium-High Cash return + Yes 5x / 5 yrs out knowhow/techVenture Medium Risk Cash return Yes 5-10x / 5 yrs outCapitalistPension Fund Medium-Low Cash return Yes 2-4x / 5 yrs outPublic fund High Risk Reports, knowledge No None ! (public)Banks* Low Risk Cash return No 1-3x / 5-10 yrsShareholders Medium-Low Cash return Yes 2-6x / 5 yrs outCrowd funder High Product/perk No None * Note that banks usually require collateral from the founders or board13 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

”Gearing” an investment• Investors tend to want as much as possible for as little as possible (good ”mileage”).• Also, an investor is often interested in sharing the investors with others (syndicating the investment).• A bigger investment means your company has to give away a larger share... • ... Unless you are able to establish some gearing for the investment: • Gearing can be created through public funds* that typically invest a max. of 40- 60% of the total funds required. * See www.innovationsradar.dk14 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Exercise 4:For each group: Spend five minutes searching www.innovationsradar.dk: Find at least one fund that is suitable for your business. When is the deadline for applying? Share your result with the class.15 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Additional notes on traditional investors• Modern equity taking investors tend to provide funding and knowhow. – A ”knowledge” investor is a very strong asset.• A single investor is rarely interested in getting a majority in the company16 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

A quick note on ”Why Crowd Funding rules”• As established earlier, investors are necessary to get the wheels rolling.• To invest, they have to see a potential for sales and earnings.• Crowd Funding does just that: It gets the wheels rolling AND it validates the market17 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

Introducing: Vaeksthus Greater Copenhagen• The Vaeksthus provides a host of useful services to entrepreneurs.• Kristian Lund (Project Consultant) will introduce some of these services right after the break.• See more on: http://www.startvaekst.dk/vhhr.dk18 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

19 Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product 2012 Development Department of Mechanical Engineering, The Technical University of Denmark

42629 lecture 11 pt 3

by Tom Howard on May 03, 2012

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