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Attracting Private Equity
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  • 1. How to become attractive to a PE firm? Presentation 13th March 2010 Neelesh, Hundekari
  • 2. Agenda  Need for PE funding & the funding process  Different perspectives  Critical success factors A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 2
  • 3. The business model of each new venture shows a significant upfront need of capital Cumulative Net 35 Cash Flow 25 Initial Cash Positive Cash Flow Deposit of founders Net Cash Flow 15 Operative Break-Even 5 -5 -15 Negative Cash Flow Total -25 Financing Need -35 -45 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1. Year 2. Year 3. Year 4. Year Example. Typical Cash Flow Curve of a Start-up A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 3
  • 4. Over the time a start-up goes through several stages of financing to satisfy its capital needs The Stages of financing of start ups Early Development/ Exit / IPO Expansion financing Expansion financing and buyouts Fuelling the Bringing a Funding expansion Creating concept mature of the liquidity to reality growth business Seed Second stage Initial Public Investments in the Offering business or new Start-up Mezzanine/third businesses stage Private sale of interest First stage Bridge solution/ Acquisitions restructuring Sales/merger providing cash, Buyouts liquid stocks or better liquidity Turn-around potential A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 4
  • 5. The new venture can tap into a range of different financing options – however, venture capital is the most important one Bringing a concept to reality Development financing Closing the gap First Second Bridge Mezzanine/ stage stage solution/ Seed Start up Third stage (1st VC (2nd VC Restructur (3rd VC round) round) round) ing Sales/ Friends & Family Substance Business Angels Incubators Venture Capitalist Industry Partner Banks (Debt Financing) A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 5
  • 6. One can become attractive to a PE only if one understands what is the VCs perspective and what can one do about it Deep and detailed understanding of the application process Efficient Mutual and dependence successful fundraising Careful and thorough preparation for the needs and expectations of the VC A start up should get to know VCs and the funding process well A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 6
  • 7. The Venture Capital Process is a rigorous process – often driven by the venture capitalist The Venture Capital Process Adapt Specify Present Supply Prepare BP and service Nego- Start-up VC Round initiate BP & infor- require- tiation Perspective Company mation Contact ment Executive Business Business Infor- Summary Plan Model mation NDA Term-Sheet Contract Venture Conver- Nego- Manage- Exit sation, Due tiation ment of Capitalist Screening Valuation divest- Interview diligence con- invest- ment Perspective Visits tracting ment Completion Date A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 7
  • 8. A VC‘s business is to wisely invest the investor‘s money and to benefit from management fees and carried interest The VC Motivation Investors  Idenfity and invest selectively in growth companies in certain Investments$$ $$ Profits industries which promise a high multiple Management  Manage and control the fee Harvesting the investments portfolio companies in $$ $$ • Stock market order to grow Management- VC- • Industry Player investment Company funds • Financial $$ $$ Investor  Receive management fee to cover day-to-day Carried Equity supply operational cost Interest  Harvest the investment $$ $$ $$ by exiting either through IPO or trade Selection, sale Consulting Portfolio  Direct investment and Companies capital gains back to Controlling, investors Realising  Keep part of the capital gains (carried interest) A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 8
  • 9. In the whole process, there are some inherent conflicts between the entrepreneurs and the investor. The Start-up Perspective The Venture Capitalist Perspective  Keep as many shares as  Adequate share on stocks possible  Certain influence on major  No second decision maker decision  Total freedom in terms of  If feasible no further capital future capital increases extensions  Highest possible evaluation of Conflict  Realistic or fair evaluation of the start-up the company value  As much time as possible for  Concrete and strict timeline return of investment for the payback  Realise a personnel business  Generate return of idea investment The conflicts cannot be solved but only be weakened ! A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 9
  • 10. The start-up should follow a structured process to enhance their chances of attracting investment Start-up perspective Specify Prepare Adapt BP and Present Supply service Negotiation VC Round initiate Contact BP & Company information requirement Work out Talk to Develop a Prepare the Contact requirements existing detailed material generation and needs investors action plan  Avoid  Has to define  Ask existing  Structure your  Contacts to unprofessional what kind of investors for venture capital Venture Capitalist appearance and VC it requires. additional capital approach can be generated interruptions  Must evaluate first  Dedicate a person in multiple ways.  The preparation of und explore  Include existing to drive the VC  Competition the necessary potential investors in the process intensity with materials is investors as capital raising  Develop a other start-ups essential well process structured  Support for the  Executive  Industry  Leverage the old approach to first Steps summary expertise investors contact the VCs  Establish  Business Plan  Reputation network and  Test the sales pitch personnel contact and reputation and involve the  Presentation  Speed of process references  Clarify any open whole team  Business model  Commitment equity or share  Define fall-back  Personnel agreements options if the VC  Financial prior to VC Resumes... process does not backbone… round work A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 10
  • 11. Likewise the VC tries to pick the winners from the losers who will maximise their returns VC perspective Manage- Due Nego- Screening Interview Valuation ment of Exit diligence tiation investment  Screening of  Generates a  Prior to  An in-depth  VC enters  Main issues  The documents is first personal defining a due into detailed  Active existence of the 1st step in contact with term sheet a diligence is negotiations. participation possible exit an evaluation the start-up company carried out  Only 2% of in the options is a team valuation is  supervisory key decision  Only 25% of Assessment the board the applicants  Main issues prepared as applicants criteria  Market Constant get through a basis for sign the deal  already  Get to know  Management coaching discussion before an  Main issues the people Team  Main issues  Main issues  Leverage of investment  Management  Business  Competition  Interest rate VC‘s contact is made. team– model  Consistency in debt network  Product  Possibility background,  Clarifying and Integrity offering  Number, type,  Leverge of experience, expectation of Biz Plan  Trade Sale to and mix of synergies motivation…  Implementati Industry  Figure out  Risk and stock and between on Investor  Business idea mismatches time span of debts portfolio and investment  Financial companies  IPO  Market  Clarifying commitment  Cash  Legal of the same attractiveness expectations  Divestment VC for additional to other VC  General fit to services… VC-Company  Management Buy-out A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 11
  • 12. Agenda  Need for PE funding & the funding process  Different perspectives  Critical success factors A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 12
  • 13. There are several critical success factors which go into a successful deal Critical Success Factors Key questions for a VC People  Is the industry attractive? Technology competences  Does the target have a robust presence in an attractive Market opportunity industry? Continuous and promising cash-flow  Are the forecasts sensible? Manageable need for capital  Can the numbers be trusted? Benchmarks  Are there any legal skeletons? Exit possibility  Will we be able to influence performance? Location protection  Are there exit options to realize the value? A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 13
  • 14. Key questions for a VC(1/4) Key questions for a VC Sub issues  Market size  Is the industry attractive?  Growth potential  Industry structure  Competitive Intensity  Cost structures and profit potential  Competitive landscape  Does the target have a robust presence in an attractive  Market share industry?  Strategy and business model  Differentiating capabilities A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 14
  • 15. Key questions for a VC(2/4) Key questions for a VC Sub issues  Current financial performance relative to  Are the forecasts sensible? benchmarks  Operating metrics relative to benchmarks  Robustness of the assumptions made in the business plan  Accepted standards of propriety  Can the numbers be trusted?  No surprises A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 15
  • 16. Key questions for a VC(3/4) Key questions for a VC Sub issues  Have all legal procedures been followed (e.g.  Are there any legal skeletons? Last capital increase)?  Are there any hidden legal obligations ?  Will we(VC) be able to influence  Start-up’s openness to offer a board seat performance?  Willingness to look at a VC for management advice  Management expertise that the VC can bring to bear A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 16
  • 17. Key questions for a VC(4/4) Key questions for a VC Sub issues(Options)  Trade Sale to Industry Investor  Are there exit options to realize the value?  IPO (mainly at new market)  Divestment to other VC (in subsequential VC round)  Management Buy-out A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 17