Raising Capital - Venture Capital in Australia

An Information Memorandum that will raise capital
An Innovation Catalyst™ Seminar
Prepared and Presented by
Marcus Tarrant
Managing Director
Mission HQ Pty. Ltd. ATF the Innovate Trust

Contact Details
Marcus Tarrant
Managing Director
Mission HQ Pty. Ltd. ATF the Innovate Trust
Marcus.tarrant@missionhq.com.au
+61 3 9005 9710
www.missionhq.com.au
© Mission HQ Pty. Ltd. All Rights Reserved
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Copyright ©2010 Mission HQ.
The content, format, structure and communication technique utilised in this document are the intellectual property of Mission HQ Pty. Ltd.
This document is strictly classified as “Commercial in Confidence” and intended only for recipients expressly authorised by Mission HQ. Any modification or distribution under altered expression, by any means, in its entirety or in parts, to any person without written approval from Mission HQ is expressly prohibited.
Natural Persons or bodies corporate may not copy, retransmit, distribute, publish or otherwise transfer any copyrighted material to third parties or contractors without the express permission of Mission HQ.
This document is intended to reflect MISSION HQ’s high-level overview of information memorandum preparation. It does not constitute formal professional advice or a recommendation to potential licensors, tax advisors, inventors or other third parties as to a course of action in respect of the processes addressed, and should not be relied on as such. All care is taken in the preparation of this document but MISSION HQ bears no responsibility as to the contents of this document and disclaims any liability with respect to its use or misuse.
Intellectual Property & Disclaimer

Seminar Agenda
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What is investable?
No Risk
Substantial global market
Strong intellectual property (monopoly position)
10 X return in 3 years
Clear exit path
No technology risk
Ideal management team
In a sector I understand
Valuation reasonable
Clear value proposition and market entry strategy
The 1 in 100 are closer to the above than the 99
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A great reason to raise capital
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When not to raise capital
8

Do I really want to raise capital?
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But do I really, really want to raise capital?
6-12 months of pounding the pavement
Another board member
Reporting requirements
Forced exit – you don’t choose the timing or price
Milestones every six months or no more business
Dilution, dilution dilution
Expect to be replaced at some point against your will
Your baby is now my baby
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Beware the burn
A venture is a bit like a rocket, and funding is the rocket fuel.
Burn too slow the rocket goes nowhere
Burn too fast and you burn up
Burn just right and you might achieve your objectives.
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So what is an information memorandum?
The culmination of a lot of work, not a lot of work in itself
A document that describes a potential M&A or capital markets transaction (including project descriptions and financing details). It is used during the marketing and due diligence phase of a transaction.
It differs from a business plan in that it covers both past and future activity.
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What is an information memorandum used for?
Capital raising
Grant Funding
Mergers and Acquisitions
A Business or Intellectual Property transaction
Joint venture formation
Structured partnerships
13

So, where should I start?
Don’t start writing just yet...
Raising capital takes time, energy and money
A quick raising would take at least 3 months after completion of your IM
Most raisings take 6-9 months
Writing your IM or selecting a template is definitely not the best place to start the process.
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Background on Australian Venture Capital
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Venture Capital Transactions (No)
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Venture Capital Transactions (Value)
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Venture Capital by Sector
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A process that works
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Profiling your opportunity
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1. Select the appropriate source of capital for your opportunity

Typical round sizes in our experience
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Funding Sources
Different investor groups have their preferences.
Venture Capital Funds
Angel Investors
Individual Angels
Angel Groups
Capital Raising Schemes
ASSOB
Wholesale investor
FFR
Self Financing/Bootstrapping
Government grants (in combination with any of the above)
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Venture Capital Funds
Australian VC’s typically moving towards later stage investments
Pre-seed funds currently very limited
Required IRR of 30-35%
Be mindful of the fund lifecycle – it is not the VC investing but the fund.
IP IPIP – execution plays are generally not considered
Own the customer
Have a clear exit timeline
Not interested in Australian market except for as testing purposes
Usual take large minority interest
Not suited to highly capital intensive industries
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Angel Investors
Individual or Angel Groups
Angel investors are high net worth individuals
Successful entrepreneurs, technologists
Make personal investment decisions based on areas of comfort
Are often known to start-up founders, even if as remote acquaintances.
Depending on profile of investment background, understand the need for follow on rounds of funding
Can make high level introductions etc.
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Capital Raising Schemes
Assob & Wholesale Investor
Provides a structured and compliant approach to raising capital under and exception to the corporations act for small scale offerings.
Need to be come a public company (.Ltd rather than Pty.Ltd.)
Generally relies on your existing networks but provides a structures capital raising platform and associated credibility
Many and varied investment requirements
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Self Funding/Bootstrapping
Financing growth from previous cash flow and personal funds
Need to be in revenue to consider
Most bootstrapped companies come from services or consulting companies that are productising their offering
Usually close to existing customer and have a strong understanding of customer needs
Development is usually constrained by incoming cash flows
Can miss out on substantial opportunities as a result of not having access to substantial capital.
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Government Grants
Aus Industry
State Government Grants
Awards and Prizes
Most government funding is matching funding at the rate of 50/50.
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FFR
Friends
Fools
Relatives
A lunch and a strong relationship is usually enough
They invest in you rather than the venture.
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2. Use the Venture Diamond
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2. Use the Venture Diamond to select the best business model

Start with the venture diamond
Give the same idea to 10 different entrepreneurs and you will end up with 10 entirely different businesses.
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The venture diamond Model
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Market Size
Ownership of customer
Sustainability of Position
Value Chain Position

Mapping our Venture
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Market Size

Investor requirements
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Market Size
What are the requirements of our potential investors?
What do they want a business to look like?
What are some of their key go/no-go decision points?
Why are they investing?

Changing the business model
Enables us to target the venture profile to the preferred investor group (Choose the right diamond facet)
Provides a framework for the detailed documentation of the information memorandum
Establishes the key modelling assumptions and parameters for the financial model.
Enables us to ensure that the model is internally consistent prior to becoming bogged down in the detail
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So what does a business model look like
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The business model matrix
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Value Proposition – What are you offering?
Capabilities/Resources – What skills and capacity do you require?
Partnership – Who do you need to work with?
Activities – What will you do?
Costs – What are your significant costs likely to be?
Relationship – What formal and informal relationships are required
Channel – What are our channels to market?
Revenues – What will our customers pay for?
Customers – Who are our customers?

Creating a holistic business model
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Select between 3-4 alternative models
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Then Turn your business model into a visual story
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3. Prepare your documentation
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What to prepare
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Preparing your Teaser
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A. The 1 Page Teaser

Preparing the Pitch Pack
The next slides will discuss the key elements to be prepared as part of your pitch pack.
We will use a business I launched back in 1995 (Tuckertime) as a backdrop to the discussion
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B. The Pitch Pack

Tuckertime Spawned a new category
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B. The Pitch Pack

The Market
What is the size of the market?
Why is it really that big?
How are you viewing the market?
Justify your view of the market
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B. The Pitch Pack
Cheese
Vs Meat

The Problem
How big is the problem
Will people pay to solve it
Use key facts to define the problem on your terms
Develop a clear graphic to explain the solution.
Often the same graphic snapshot with some modification will suit the solution.
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B. The Pitch Pack

The Solution
The problems with existing solutions
How your solution works harder for the customer
Graphical or pictorial images helpful
This slide is to carefully craft your technologies USP. But in terms that are meaningful to the potential investor
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B. The Pitch Pack

The high level vision
Link your business intentions with your underlying technology
If possible let the potential investors visualise your potential technology “In Situ”
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B. The Pitch Pack
“To utilise our novel Nitrogen, CO2 Gas flush technology to enable the creation of a new food category, “Mini Meals”

The detailed vision (with 3 yrs)
Be specific about what you plan to achieve in the next three years.
You might not achieve your grand vision by you should achieve something significant that adds to the value of the enterprise.
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B. The Pitch Pack

Products and Services
Explain what it is that you are going to sell
How many different products?
Rationale for the range?
Any customer feedback on why the range of products or services is required.
Clearly explain exactly how you will connect your USP with your customer.
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B. The Pitch Pack

The business model
An image of the business model will generate interest and discussion in a pitch session. You will find that you come back to this over and over and over.
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B. The Pitch Pack

Value Chain
Where does your product fit into the industry value chain?
Do you own a “pinch point” or are you the one getting pinched?
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B. The Pitch Pack

Innovation Adoption Issues
Are there issues with adoption of your product by:
Suppliers
Buyers
Customers
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B. The Pitch Pack

The Investment Proposition
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B. The Pitch Pack

The Exit Path
How you plan to exit the business
Expected earnings multiple
Rationale for strategic exit
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B. The Pitch Pack

Enable Modelling of Assumptions
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C. Prepare The financial model

A Great Executive Summary
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D. Write the Executive Summary

Write the IM – Consistency is king
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E. Write the IM Document

Everything needs to be aligned
If you have undertaken the process to the best of your ability then assumptions will most likely be dis-connected
Your IM has a market size of $100 million and your financial model is showing $25m
Inconsistency
Reduces confidence
Makes understanding what you are saying impossible
Kills deals
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F. Align all documents

4. Creating the Buzz
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Tips from the street
The value of creating a “Buzz”
The “Buzz” created by an opportunity can be worth more than the opportunity itself.
Raising money is as much about having the right people say the right things about your opportunity as it is anything else.
A seat on the board
Clear exit path in 5-7 years (Depending on fund stage of life)
10x-30X Multiples
Not interested in pre money valuations above $5m
Minimum 10% equity
Strong intellectual property position
Product/disruptive rather than license to existing approach
Great team ideal, but dependent on venture stage of development.
Remember a VCis running a portfolio approach – a bit like a book maker! The book maker doesn’t know which horse will win.
Have a risk appetite but don’t want to take risks
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So what does a VC expect
A seat on the board
Clear exit path in 5-7 years (Depending on fund stage of life)
10x-30X Multiples
Not interested in pre money valuations above $5m
Minimum 10% equity
Strong intellectual property position
Product/distruptive rather than license to existing approach
Great team ideal, but dependent on venture stage of development.
Remember a vc is running a portfolio approach – a bit like a book maker! The book maker doesn’t know which horse will win.
Have a risk appetite but don’t want to take risks
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Conclusion
Raising capital is a substantial undertaking and should not be considered lightly
If you still want to raise capital then how can we help?
Advising on right capital raising path
Value Diamond workshops
Business model design
Creating Documentation that fits the VC model
Introductions
Thank you for your attendance.
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Raising Capital - Venture Capital in Australia

by Marcus Tarrant on May 23, 2010

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