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Funding of early stage companies

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A presentation by Andreas Schulze of Marsa Corporate finance to the DayOne Accelerator discussing Funding opportunities and approaches for startup companies.
If you would like a copy of the slides for download please contact andreas.schulze@marsaco.com

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Funding of early stage companies

  1. 1. Marsa Corporate Finance GmbH, Basel Switzerland Financing of Early-stage Companies Strictly private andconfidential April 2019 An Overview of Funding Facilities to baselarea.swiss DayOne Accelerator, 30.04.2019
  2. 2. 1 Introduction and Investment Thoughts 2 Development Stage of Companies 3 Life Cycle 4 Financing Means 4.1 Equity 4.2 Equity Investor Types 4.3 Loans 4.4 Loan Characteristics 4.5 Non-dilutive Funding 5 Investment Size and Expected Returns - IRR 6 Business Case Presentation 7 Contact Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 2 Contents
  3. 3. Introduction to Fund Raising for Early-stage Companies Valuation of early-stage companies Marsa Corporate Finance GmbH April 2019 3 1 Introduction and Investment Thoughts
  4. 4. Your Fund Raising Strategy should based on important parameters, such as • which round of financing is it? • which development phases is your startup/project in? • which is the investment size? • which future funds will the company/project need and when? • which type of funds should be applied for (Equity, non-Equity)? • which types of investors are best to approach? • which is the company’s offer to investors? Introduction 1 Introduction & InvestmentThoughts Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 4
  5. 5. Development stage of young companies 2 Early Stage Companies Role in theEconomy Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 5 Revenues Business/Product Idea No revenues, Operatinglosses Start-up companies No or small revenues, Increasing losses 2nd stage companies Growing revenues move towardsprofits Losses/earnings
  6. 6. ~ 8-14 20 YEARS RESEARCH & DEVELOPMENT PHASE RETURN PHASE EXPIRY REGISTRATION PHASEIII PHASEII PHASEI PRE-CLINICALSAFETY DOSE EFFICACY / APPROVAL “STAR” “CASH COW” “DOG”~10 % 10 -45% 40 - 65% ~80% BREAKEVE N ß RISK-ADJUSTED DISCOUNTED CASH FLOW à Chance of SUCCESS <5% ANIMALS ~10s ~ 100s ~ 100s – 1,000s PTS COSTS SALESp<0.05 P/E >20x P/E ~10-15x P/E > 6-10x “MATURE” P/E ~ 15x 0 LIFE CYCLE BIOTECHNOLOGY COMPANIES 00 Life cycle of young companies, e.g. Pharmaceutical 2 Early Stage Companies Role in theEconomy Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 6 Valuation Methods DCF, rNPV Multiples, Peer groups, other
  7. 7. Paid in at inception of the startup company by the founders: ◦ In GmbH CHF 20k ◦ In AG CHF 100k ◦ From founder shareholders ◦ Possible is some in-kind or partial pay-in (e.g. 50% = «Teil-Liberierung») ◦ Rapidly consumed Equity - Initial Share Capital Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 7 4 Financing Means
  8. 8. Early Stage: (50k – 500k) • FFF – pure money • Seed Investors, some early-stage VC • Business Angels – often with some «soft money» as contacts and support Expansion Phase • Venture Capital Investors Late Stage • Venture Capital Investors • Private Equity Investors Other types • Crowd Funding • Corporate Ventures • Family Offices Equity – Investors Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 8 4 Financing Means
  9. 9. Loans may come in various constructs with rather different implications and at different stages • Straight loans e.g. from banks or private investors (rather in a later stage) • Convertible loans (rather early, e.g. if no meaningful valuation is possible) • Option Debentures (rather unusual in early stage startups) • Warrants • .... Loans Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 9 4 Financing Means
  10. 10. Straight loans • Interest baring or without interest • Liabilities in balance sheet • Subordination possible to cure Convertible loans • Compare to straight loans, however can be converted into equity • Subordination possible to cure • «switch side» on balance sheet in case of over-indebtedness • Conversion triggers are important • Who holds right to convert and when? Loan Characteristics Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 10 4 Financing Means
  11. 11. Option debentures • Special form of convertible, not very common • type of debt instrument unsecured by collateral, hence rely on the creditworthiness and reputation of the issuer for support. • may pay periodic interest payments Warrants • do not represent actual ownership in the stock • holder has the right to buy stock from the company at a specified price within a designated time period • Dilution,because the exercise of a warrant will increase a company's outstanding shares Loan Characteristics Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 11 4 Financing Means
  12. 12. • Governmental or supra-national grants EU, Innosuisse, • Foundations offer project funding or individuals’ support Gebert Ruef, Hasler, etc. .... • Donations • Patient organisations • Refunds or reductions of Development Cost (EMA), Orphan, etc., ..... Non-dilutive Funding Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 12 4 Financing Means
  13. 13. Typical Investment Size – IRR Expectations 5 Investment Size and Expected Returns - IRR Investor Total Investment Size IRR Business Angel CHF 10k + n.a. FFF n.a. n.a. Early-stage VC CHF 0.5 -5.0m > 10% Late-stage VC CHF 5m + > 10% Private Equity CHF xxm > 12-16% Non-dilutive variable n.a. The internal rate of return (IRR) is the discount rate providing a net value of zero for a future series of cash flows. IRR and net present value (NPV) are used when selecting investments based on their returns. The main difference between IRR and NPV is that NPV is an actual amount while the IRR is the interest yield as a percentage expected from an investment.
  14. 14. Investors Expectations – ROI - Return Return in investment is the difference between Profits minus Cost in relation to Cost or: Example: Investor puts 50 € and yields at end of investment 70 €; Return = 40 %: Earnings – Cost Earnings Return = ---------------------- = -------------- -1 Cost Cost Profit Return = -------------------------- Invested Capital 70 – 50 20 Return = -------------- = ------- = 40% 50 50 5 Investment Size and Expected Returns - IRR
  15. 15. IRR Calculating IRR A company is deciding whether to purchase new equipment that costs $500,000. Life of the new asset to be 4 years generate an additional $160,000 of annual profits. In the 5. year, the company plans to sell the equipment for its salvage value of $50,000. Meanwhile, another similar investment option can generate a 10% return. This is higher than the company’s current hurdle rate of 8%. The goal is to make sure the company is making better use of its cash. To make a decision, the IRR for investing in the new equipment is calculated below. IRR of 13%, using the Excel function, =IRR(). From a financial standpoint, the company should make the purchase, because the IRR is both greater than the hurdle rate and the IRR for the alternative investment. 5 Investment Size and Expected Returns - IRR Find IRR and NPV functions as preset functions in MS Excel
  16. 16. Business Case Presentation Fund Raising Document Set consists of • Pitch Deck • Business Plan incl. Financial Plan (3+ years) PnL, CF, BS • IP Situtation and Strategy • Use of Funds – incl. Scenarios • Next Financing Needs (Timing, Size) • Supplement Documents Important Aspects • Consistency of all documents and messages • Be reliable and deliver • Communicate important events in timely manner – no surprises 6 Investment Size and Expected Returns - IRR
  17. 17. Thank you - Your contact at Marsa Corporate Finance GmbH 7 Contact Andreas J. Schulze, CEO Marsa Corporate Finance GmbH 4010 Basel www.marsaco.com +41 76 341 18 76 andreas.schulze@marsaco.com Financing of early-stage companies Marsa Corporate Finance GmbH April 2019 17

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