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Raising capital in uncertain times


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Keys to successful capital raising in uncertain times

Keys to successful capital raising in uncertain times

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  • 1. Successful capital raising in uncertain times Rod Douglas Michael Churchill 19 November 2009
  • 2. How do I succeed in a start-up? • “The answer is to sell, sell and sell some more. Never stop selling. Selling the product, selling the vision, selling the employees and prospective employees, selling the investors. The only way to win the race between breaking even point and going broke is to sell as though your life depended on it. As it does.” Ian Neil in Fast Thinking, Spring 2007, p32 2
  • 3. Introduction • New ventures focussed on commercialising technologies or business models in cleantech, food or water face significant uncertainty – particularly from the economic impact of the carbon economy. • Learning to love uncertainty is one of the challenges of the investment community and early-stage ventures in these sectors. • Being fundamentally risk-averse sees many investors taking a portfolio approach to risk: placing small bets on opportunities which present pay-offs in short time frames. This approach has been applied for decades by the pharmaceutical and oil exploration industries. • Early-stage ventures seeking to raise capital need to recognise the demands of the capital markets and develop business plans which: – articulate the compelling reason why the venture will succeed – establish clear and achievable milestones (learn to celebrate the small successes) – facilitate application of the AVCAL valuation guidelines • This presentation outlines some of the keys to success for early-stage ventures in the emerging cleantech and related markets and how a well-executed strategy will attract capital and create value for shareholders. 3
  • 4. Success and uncertainty • Uncertainty is not the problem ….its how you deal with it which is 4
  • 5. Early-stage ventures and uncertainty • Early-stage ventures and uncertainty are old friends. From biotech to dot com to nanotechnology and renewables, uncertainty abounds as – Customer demand is untested – The shape and time line of the adoption curve might be unknown – Regulatory regimes are often weak or untested – Manufacturing processes are unproven – The time required to complete product testing is vague – Distribution channels may need to be created – Competing technologies and offerings are simultaneously racing to achieve sales and gain first-mover advantage • …why is it then that business plans are written and financial models built as though we know that the product will be ready by Q2 FY10, the distribution channels will be available immediately, there will be no competitors and customers will pay $53 per unit? • History shows that nothing cripples the prospects of a capital raising or a share price than key milestones being consistently missed. Recognise the uncertainty, embed it in the strategy and reap the rewards. • How? 5
  • 6. Embedding uncertainty in the strategy • Early-stage ventures are confronted with as much choice as there is uncertainty. This is a great thing (without choices the uncertainty might be paralysing!) • The commercialisation spectrum ranges from DIY (make it, build the channel, sell it) to licensing (protect the IP and let someone else make it, build the channel and sell it) • For example, we might prefer to sell direct into the US but if we are stymied by access to the channel we might switch to distributorships or licenses. • Embedding uncertainty is as simple as having a tactical response to every outcome. • Every “what if” question that an investor might present must have a response. Role play and test the business plan on as many people (knowledgeable, naiive and experienced) as you can • Flexibility in the business plan and the capacity of management to take urgent action when an uncertainty goes against the business is critical. This is what investors look for (and that includes the big corporates): agile, nimble and lithe organisations that can rapidly adapt to the changing marketplace. • This is the advantage of the small, early-stage business: like a teenager, it is quick, match-fit and has an under-developed fear response. • The only thing that matters is success…at any cost. 6
  • 7. Aligning with investor perspectives on uncertainty • We know that a good strategy, executed well, will create profits. • Investors expect the profits to exceed the cost of capital so that they can exit with a capital gain. • This requires that the venture needs to have either: – A strategy which is better than merely “good” or – Exceptional execution • There are plenty of great ideas and great strategies in the market place – many are destroying shareholder value (i.e. the investors’ capital) at an alarming rate. • The key lies in the execution. • All too often we have heard that version 2 of the product is just months away and that the market will be spoiled if we release the “clunky” version 1 offering. • Wrong! Launch. Launch fast and get version 1 into the market. • … or we hear that we are the only company that can reliably manufacture the product • … or if someone else makes/distributes/sells the product our IP will be stolen • What would have happened to Bluetooth if CSIRO hadn’t licensed it? • The investor’s greatest fear is that their money is spent and … NOTHING HAPPENS! 7
  • 8. Small bets in a high stakes game • Investors – large or small, corporate or individual – will take a portfolio approach to investment in early-stage ventures: several small bets will be placed in strategically-aligned areas. • The experts at placing lots of small bets are the oil and gas and pharmaceutical companies. • So adept at placing little bets in the hope of massive payoffs that they actively seek out failure (the “fail fast” philosophy). Why? Because the sooner they prove something won’t work or that there is no oil down the hole they can stop wasting money and move to the next promising option. • There is merit in following this approach inside the business. 8
  • 9. Do one thing well vs all eggs in the one basket… • Single-product companies are susceptible to rapid and catastrophic demise if the single product fails. The corporate landscape is littered with single-product medical devices, drug compounds and others which placed the life savings of the investors on red 7 and the wheel stopped at black 12. • Equally, there are the one-in-one-thousand single-product companies which have hit the home run unfettered by mediocre performance of a portfolio of marginal products. • If your strategy is to bridge the commercialisation chasm and sell out to a corporate in the sector then that’s a valid strategy. Just don’t lose sight of the possibility that while you are busy succeeding someone else may be too! • The better strategy may be to pursue BOTH possibilities: develop the core product with an energy and pace which will literally scare potential competitors AND place a few small bets on offerings which might (for example) piggy-back the distribution channel you’ve created for the core product. 9
  • 10. Why will customers buy? • Articulating the compelling customer proposition in the business plan is absolutely critical. • The question is: why will a customer buy my product … and in clear preference to any substitute or direct competitor? • For example, why will a customer buy a PV energy source if the life cycle cost is 50% more than wind? Is it because there is an anticipated subsidy or grant? Too early to attribute value here The Early The Mainstream Market Market The Chasm Te Vi Pr C on Sk En chn sio a gm se e th ol na rv pt us og rie at a ic ia y s is tiv s sts ts es Value attributed to the high growth phase after forecast is subjective Clear signs of early adoption Forecast period Terminal value 10
  • 11. The importance of milestones • As much as early-stage ventures need to learn to love uncertainty, investors nonetheless want time frames and outcomes to which management can be held accountable • There is a great risk of under-estimating the time it will take to successfully achieve every single step of your commercialisation plan. • Failure to achieve milestones set out in the business plan will: – See investors getting nervous, possibly exercising put options to get out – Applying pressure on management by regularly calling to see if there is any update on whether Project X has successfully completed the latest engineering testing – Reduce the likelihood of attracting more capital from existing investors (or options being exercised) – Fundamentally undermine the progress you will have made along the belief-evidence spectrum as every bit of negative evidence is worth ten equivalent doses of belief • Prepare a timeline, check it, then add as much lee-way as the IRR will permit. If you can’t beat 25% IRR and give yourself some wriggle room, then you really need to check the attractiveness of the opportunity. • Its your money too…. 11
  • 12. Exit • Think ahead five years from today… • From inspiration, creation, perspiration and much frustration a germ of an idea has become a thriving cleantech business. • If this is the case, then like it or not, the external investors will be looking for an exit. • …and a capital gain of around 10 times the amount of capital invested. • If you are not comfortable with this, then best to not bring the capital in. • Typically the exit comes in one of two forms: – ASX listing – Trade sale to a larger corporate • ASX listing requires a relatively mature business model, robust governance structure and a management team which is ready to knuckle down to the business as usual phase • Large corporates are surprisingly natural buyers of smaller companies as they rarely have the patience or risk appetite for what you have successfully achieved. They are not nimble, agile, quick to respond to market uncertainties. They like the “development risk” to have been substantially borne by the founders and VC’s. • In the ideal world, you will know who you should sell to from the outset 12
  • 13. Some useful weblinks • CVC Sustainable Investments: • AVCAL cleantech fact sheet: • Cleantech Ventures: • Sustainable Asset Management: • Griffith Hack CleanIP: • Southern Cross Partners: australian-vc-in-silicon-valley/335 • AVCAL year in review: year-for-cleantech-venture-investments/333 • Cleantech industry maps: 13
  • 14. About Climate Capital Climate Capital is a sustainability investment bank. With a mission of rebalancing nature and humanity, Climate Capital provides Solutions, Project and Investing services which identify and execute opportunities to profitably direct capital to sustainable businesses. Solutions - Climate Capital provides specialised consultancy services to clients in the areas of Sustainability Risk, Strategy and Value services for corporates, Non-government Organsiations and fund managers Projects - Commercialisation and investment attraction services for the development of new business models and technologies Investing - Development of a fund and asset management capability to assist capital flow to profitable investment opportunities which aid the "rebalancing" objective 14
  • 15. Rod Douglas MBA MAICD Rod is a director of Greening Australia Ltd, and President of Greening Australia Queensland Ltd. He is a director or chairs the advisory board for 7 of his clients. His clients span leading ASX listed financial and industrial organizations through to professional services firms. As Chairman of Climate Capital, Rod is drawing on a lifetime of passion for sustainability and a belief that social entrepreneurship (the marriage of profit-seeking capital and social outcomes) is the basis for Climate Capital's success. 15
  • 16. Michael Churchill BAdmin Grad Dip MAICD CPA SFFin Michael is a founding director of Climate Capital and an executive director of Value Adviser Associates Pty Ltd, a leading business and securities valuation firm based in Melbourne. He has over 20 years' experience assessing the value of a diverse range of business, projects, technologies and commercialisation strategies. He is a former partner in the PricewaterhouseCoopers valuation and Applied Decision Analysis practice in Brisbane and Melbourne. Michael has been involved in valuation of carbon-intensive businesses (such as coal- and gas-fired generation), renewable energy (hydro and biogas) and the impact of emissions trading on all sectors of the economy. Michael has a particular interest in the development of commercialisation strategies for new technologies in emerging markets. As a founding director of Climate Capital, his primary objective is to match the talents of the Climate Capital community to the mobilisation of capital to support Climate Capital's objective of rebalancing humanity and nature. 16
  • 17. Level 23, Comalco Place, Brisbane, Qld Level 2, 65 Southbank Blvd, Southbank, Vic Telephone 1800 CLIMATE (1800 254 6283) Rod Douglas: 0409 553 335 Michael Churchill: 0412 066 019 17