walk through of high growth company finance issues event supported by SEMLEP, Velocity Hub, British Business Bank, NatWest Spark and Grant Thornton MK

1. 0300 01234 35
velocitygrowthhub.com
High Growth Start-Up
Funding
NatWest Entrepreneur Accelerator Hub, Milton
Keynes
30 October 2018, 9.30am - 12.30pm

2. This segment covers:
• A quick overview of the sorts of finance (debt and equity)
• What we mean by Angels and Funds (and who they are)
• What an investor is looking for in a funding proposition
• How an investor assesses opportunities

3. • What is the Founder objective?
• What is the company mission?
• What do other stakeholders want?
• Can you reach those objectives without external funding?
• How much more value will you create with external funding?
External funding is always a trade off between resources, costs, and control
External funding - for what purpose ?

4. Source: Enterprise Europe Network
Funding varies with scale

5. Need £m Stage of Growth Likely Source
0 - 0.1 Start up Angel / Crowdfund
0.1 – 0.5 Trading Angel Net / Referral net
0.5 – 2.0 Recently profitable Seed Funds
2.0 – 10.0 Sustained profits Traditional VC
10.0 – 100.0 Corporate action VC and PE
100.0+ Global expansion VC and PE
Equity choices?

6. Debt and Equity choices?

7. Balance of equity and debt
Equity helps to support debt, and debt can help improve the return on equity.
Knowing how to balance them and use them both is a key to business success.

8. How people (normally) think

9. How many Found where Benefits
Angel 525 BBAA + Angel List Are like you
Crowdfund 30 + Web Hands-off
Angel Network 8 + Web Syndicates
Referral network 12 + - Quick
Seed Fund 22 BVCA Focused
VC and PE 220 BVCA Connected
Private Family Office 80 + - Varies
How many investors are there?
SMEs in the UK numbered c. 1,300,000 in 2015. That year, 1,270 equity deals were
made with a total investment value of £3.5bn. These SMEs – representing 0.1% of
the total business count - raised an average of £2.7m each.
Data: Office for National Statistics and Beauhurst

10. Europe is a small place

11. Mindset of equity finance providers
Angels Venture Capital
Individuals (but may syndicate) Organisation
Scale – limited to personal appetite for
risk (smaller)
Scale – published investment range
(larger)
Experience – entrepreneurial or
domain
Experience – corporate finance >
managerial
Involvement – hands-on but limited
bandwidth
Involvement – points of challenge (next
round, exit, insolvency)
No set time limit Limited investment period (5-7 years
typically)
Whimsy & personal chemistry Investment policy and due diligence
Relationship-centric Financial return-centric

12. Making a return on investment

13. • If trading company takes 6 years to create a return at
20% IIR investors will expect to sell their shares for 3x
what they paid
• If they invest £1m for 25% of the company (meaning that
your company was worth £3m before they invested)
• They want £3m or more for their 25% in 6 years or
sooner
• So, company must sell for £12m, giving you £9m
… You earned £1.5m per year
Novice guide to investor expectations

14. Investment doesn’t always work

15. Where are the deals?

16. Who becomes an angel?

17. • What problem do you solve, for whom?
• Why you?
• Why hasn’t it already been done?
• What benefit for investors?
• How much will it cost them?
• When do they benefit?
Questioning the need for finance
Raising money is almost as much a sales and marketing problem as it is
a financial project.

18. Other factors affecting investment

19. Factor Effect Evidence
Things the investors understand High Strong
Things the investors have experience of High Strong
10 years of the investors experience can be used High Strong
The investors can assist with a more valuable exit Moderate Weak
The investors can add marketing / sales skills Moderate Weak
Their ‘investment brand’ has positive value Moderate Weak
Lead founder has succeeded in sector High Strong
Founder earned over £1m per year of effort Moderate Moderate
The founder is part of a diverse team Small Moderate
.. of 5 to 7 people Small Weak
.. with relevant experience High Strong
.. including national class technical or sales talent High Strong
The venture is already revenue generating Moderate Moderate
The venture has positive social impact Small Moderate
The venture has positive environmental impact Small Moderate
The venture is in a ‘rising tide’ segment or industry High Strong
The venture is in a ‘rising tide’ geography High Strong
Improving the odds

20. Your investor can change your outcome

21. • Entrepreneur lacks experience or track record
• Level of entrepreneur’s commitment is not sufficient
• Lack of focus
• No clear user case
• Upside of the business is not clear or sufficient
• Absence of comprehensive and credible market information
• Market is highly competitive
• No unique selling proposition
• Product/service doesn’t appear distinctive or superior to competition
• Not clear how any competitive advantage will be sustained
• Use of finance is not clear
These things will put off investors every time

22. Tea Break

23. Financial projections
12 slides to explain what really
matters

24. • Avoiding problems
• Paying bills on time (including tax)
• Working out what investment you need to succeed
• (forecast with and without investment)
• Working out what this investment is worth to you
• Working out what you can afford to pay for that
investment
• Dividends
• Interest
What is this all for ?

25. • Cash
(that’s pretty much all that matters in a growth business)
(Slightly important)
• Creation of assets
• Growth
• Risk
What matters ….

26. • Operating activities and working capital
• Debtors
• Creditors
• Stock and WIP
• VAT, NI and PAYE
• Returns on investments, servicing of finance and
equity dividends paid
• Taxation
• Capital expenditure and financial investment
• Fixed assets, and other acquisitions and disposals
• Management of liquid resources & Financing
Why profit isn’t the same as cash

27. Customers Suppliers
and Staff

28. Make your model work from EXTERNAL DRIVERS
• Know your sales funnel and sales drivers
• Link them to internal processes and activity
• Know your internal assumptions, cost and drivers
• Build up from real activities
P.S.
• You can also forecast individual products, investment
in equipment …
How to forecast

29. • Revenue, margins, reinvestment, cashflow
• Trends
• Growth rates
• Some key ratios
• Margins
• Liquidity ratios
• Returns on investment
• Ability to pay dividends
• Ability to pay interest on loans
• Resilience ratios
What investors are looking for

30. Please, don’t
• Use prebuilt forecasting tools
• Xero
• Sage
• Quickbooks
• Figurewizard
• Or pay someone else to do it for you
So, do you need a big spreadsheet ?

31. Element Year 1 Year 2 Year 3 Year 4 Year 5
Revenue £1,000 £2,000 £3,000 £4,000 £5,000
Cost of sales £500 £1,000 £1,500 £2,000 £2,500
Gross profit £500 £1,000 £1,500 £2,000 £2,500
Costs £450 £650 £750 £850 £950
EBITDA £50 £350 £750 £1,150 £1,550
Free cash (£150) £0 £550 £1,500 £2,850
A simple forecast
Nice steady growth, opening one new branch a year, reinvesting cash to grow,
clearly sustainable

32. A complex forecast

33. 1. Forecast
1. Profit and Loss
2. Balance Sheet
3. Cash Flow Statement
4. Equity capital table
5. Forecast enterprise (or project) value
2. Deviations from forecast
1. Historic management accounts
2. External financial and economic information for
context
3. Narrative to tell the story
In the forecast pack

34. As you get better at this, look at proper ‘grown up’
models:
• Sensitivity analysis
• Scenario analysis
• @RISK
• Monte Carlo Simulations
• Production and stock modelling
• Timing and variances in timing
Walk before you run

35. What a proper model starts with

36. Tea Break

37. An art not a science
• Discounted cashflows (“DCF”)
• Dividend yield
• Dividend valuation model (“DVM”)
• Listed company method
• Net assets
• Real world SME
Valuing Your Business

38. What is this on a standalone basis?
Calculate the value of a business by discounting at an
appropriate discount rate the value of all future positive
and negative cashflows to their present value
Also calculate a terminal value, which is a bit
complicated
Discounted cashflow valuation

39. • Predicting future cashflows
• Deciding on the discount rate(s)
• Non-cashflow items (depreciation, amortisation)
Considerations

40. Valuation per share = Gross dividend per share
Dividend yield
• Find the yield of a similar quoted company
• Increase the yield required to factor in higher risk of
smaller private company
• Apply the increased yield figure and the gross
dividend per share actually paid out to calculate the
price per share
Dividend Yield Valuation

41. • Predicting future dividend growth (“g”)
• Historic dividend levels
• What if no dividends are paid out?
• What if dividends have replaced salaries?
• What if dividend growth only starts in Year 3?
• Calculating the cost of equity (Ks)
• Relevance of similar quoted companies?
• Price per share =
– D0 (1+g) x 1 Yuk!
– Ks – g (1 + Ks) n-1
Considerations

42. Most popular method by listed company analysts.
This method considers not just the value of the
assets but also their intrinsic earning and cash
potential
Value of the business = PE Multiple x Shares in
Issue
PE Multiple = Price per Share / Earnings per Share
Listed Company Valuation Method

43. • Book value
• Does this reflect true current asset values?
• Net realisable value
• Normally the minimum a seller will accept
• Redundancy, liquidation, other closedown costs
too
• Replacement cost
• Normally the maximum a buyer / investor will
offer
• Synergies
Assets valuation

44. • Valuing intangible assets (brands, patents, trademarks)
• Valuation of other assets
• Plant & machinery
• Land & buildings
• Vehicles
• Trade debtors
• Stock
• Valuation of liabilities
• Provisions
• Contingent liabilities
Considerations

45. Equity value is
• Adjusted sustainable profit [EBITDA, EBITA or
EBIT] x Appropriate Multiple plus
• Property owned by the business plus
• Net Cash plus
• Actual Trading Working Capital less
• Target Trading Working Capital
‘Real world’ SME valuation method

46. • What multiple?
• Similar private company deals
• Similar listed companies (?)
• Sector outlook
• Management capabilities
• Business outlook - growth potential
• Customers
• Suppliers
• Buyer synergies – yes indeed!
Profit multiple

47. Two main methods
Short term – quick action plans
• Financial / Management / Legal / Tax
Longer term – vision and strategic planning
• Now / Where / How
Increasing business value

48. • Accounting policies – compare to competitors
• Working capital levels – be efficient
• Non recurring revenue or costs – adjust for them
• Capital expenditure – too much / too little
• Forecasts – be realistic
Short-term action plan - financial

49. • Easier to unlock value with a strong employee
management team
• Put key employee incentives in place (EMI, EBT etc)
• Reduce owners’ ongoing involvement and the
business’s reliance on the owners
Short-term action plan - management

50. • Material customer and supplier contracts
• Ownership of business assets
• Environmental consents and procedures adherence
• Companies House filings
• Trademarks and patents registration
• Key employee service contracts
Short-term action plan: legal

51. • Up-to-date, clean records:
• Corporation tax
• VAT
• PAYE
• NICs
• Inspection visits
Short-term action plan: taxation

52. • Plan well in advance
• Plan from a position of strength
• Get appropriate external advice
• Involve key personnel
Conclusion

54. Next week
Monday, 5
November9.30am – 12.30pm

55. Try-out your elevator pitch