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Correlating Innovation, Business Models, Development Plans, Private Financing


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Correlating Innovation, Business Models, Development Plans, Private Financing

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Correlating Innovation, Business Models, Development Plans, Private Financing

  1. 1. Correlating Innovation, Business Models, Development Plans & Private Financing GameON: Finance Conference Toronto, Canada October 28-29, 2008 Tom Sweeney 514-865-2323
  2. 2. Discussion Topics Questions or discussion anytime, please! • Revisiting Innovation • Why Value Leadership and New Market innovation are better plays for early stage companies (in Canada) than Sustaining and Low-End • Business Models • The CEO’s #1 job is to actively manage reality • Read Confronting Reality by Larry Bossidy • Business Plans & Pitches • Do plans with your team, not (just with) consultants • 20-minute rule for pitches and 2 minutes for micro-pitch • Venture Economics & Development Plans • Not all companies are VC candidates • Use existing cash to achieve specific milestones that directly map to a financing timetable based on your realistic access to capital 2 © 2008. Tom Sweeney
  3. 3. Revisiting Innovation Why IP is so important to building sustainable companies...
  4. 4. Customers Pay for Perceived Value • For every product-market category, including video games, Customers decide based on a set of established “Value Metrics”, typically defined by the established players in that market • Example: • Bubble gum: chewing quality, size of bubble, smell, brand, etc • Pricing is a function of Perceived Value Established Customer Value Metrics Set Perceived Value Product - Market Price © 2008. Tom Sweeney 4
  5. 5. Value Innovation & IP’s Role Companies that go from a startup to market leadership have typically introduced one of four forms of Value Innovation. Sustaining Low-End Value Leadership New Market © 2008. Tom Sweeney 5
  6. 6. Sustaining Innovation Sustaining Innovation is when incremental improvements are made to one or more components in the existing customer Value Mix. This is a tough space, particularly for Canadian companies. The market is dominated by the established companies. Customer Value Mix Price © 2008. Tom Sweeney 6
  7. 7. Low-End Innovation Low End Innovation is when similar value can be sold at a dramatically lower price that incumbents can’t or won’t easily match. This usually requires either business model innovation or operational excellence to stay in business. It’s also a tough space for Canadian startups. Think of IKEA and Dell. Customer Value Mix Price © 2008. Tom Sweeney 7
  8. 8. Value Leadership Innovation Value Leadership Innovation is when new IP with proper protection is introduced to an established market and one or more new Value Metrics becomes the dominant reason why customers choose that product. Why do you use Google? Customer Value Mix New IP New IP Price © 2008. Tom Sweeney 8
  9. 9. New Market Innovation New Market Innovation is when a new product or service is introduced that makes it easier or more convenient for people to do what they previously had to go to experts to do for them. California and its ecosystem leads the world in repeatedly doing this. Steve Jobs is the master. New Customer Value Mix New IP New IP + New Product-Market Price © 2008. Tom Sweeney 9
  10. 10. Business Models What are they?
  11. 11. Business Models: Five People, Ten Definitions…. “I can’t define it, but I know what it is when I see it.” US Supreme Court Justice, Potter Stewart “Hire the world’s best athletes as spokespeople. Buy an enormous amount of advertising to get every sporting goods store to carry your products. Make the product overseas for very little money. Charge very high prices.” Excerpt from Seth Godin’s, Bootstrapper’s Bible “An organized and rigorous way of looking at the health and profitability of your business now and in the future. [A business model] is a statement of the current reality and its likely – as opposed to hoped for – future direction. It is an early warning system for real-world changes that pose threats or provide glimpses of opportunities. The business model is a blueprint for taking action.” Larry Bossidy & Ram Charan, Confronting Reality © 2008. Tom Sweeney 11
  12. 12. “Product-Marketing” is a Critical Concept that Needs a Remarkable Hyphen Bootstrapper’s Bible • Great way to spend $5.00 • Lighter approach to business models but lots of pointers for bootstrapping! Purple Cow • If your product is not remarkable in its (niche) market …… Blue Ocean Strategy • Deeper look at developing compelling and sustainable product-market positions © 2008. Tom Sweeney 12
  13. 13. Confronting Reality • Provides a very detailed look at how to develop your business model, evaluate it and constantly adapt it to reality • This book is the sequel to Execution: The Discipline of Getting Things Done • Talks about actively managing the reality of a business • Both books are excellent © 2008. Tom Sweeney 13
  14. 14. Business Models Have Three Main Components External Realities Internal Activities Financial history of your Strategy industry Operations Overall business environment People Customer base Organization Root-cause analysis Financial Targets Operating margins Cash flow Capital intensity Revenue growth Return on investment Source: Confronting Reality Repeated Iteration and Actively Managing Reality Produces Tested, Actionable Business Models © 2008. Tom Sweeney 14
  15. 15. The Truth About Business Plans & Investor Pitches What purpose do they serve….?
  16. 16. The Truth About Business Plans • The exercise to produce one is fundamentally important • VCs can spot plans done by consultants a mile away • Most companies spend too much time on generating a “complete” (long) document • Should be 12-15 pages that convey “deep and insightful” analysis based on “bottom-up” assumptions and a solid grasp of the business model • VCs typically don’t read business plans to be able to say “no” • Be ready with a clear and well thought-out summary • The first two or three paragraphs are critical • Don’t assume investors have read anything you have sent • Plan on having 20 minutes to make your case with no more than 10- 12 slides and around a 30-point font © 2008. Tom Sweeney 16
  17. 17. Ten (+2) Slides, 20 Minutes, 30 Point Font Obey the 10/20/30 rule. Stay high-level and hit the key points. Nobody writes a cheque based on your presentation, but they do say “no”. 1 2 3 4 Title Solution Elevator Pitch Problem & & & Speaker Company Key Benefits Customer Intros Overview 5 6 7 8 Business Competition Marketing Underlying Model & & Magic Advantages Sales 9 10 11 12 Status Summary Team & Projections Why Us? Timeline © 2008. Tom Sweeney 17
  18. 18. Venture Economics, Development Plans and Use of Cash The core drivers of due diligence….
  19. 19. Venture capital is a specialized form of private equity, characterized chiefly by high-risk investments in new or young companies PRIVATE EQUITY Venture Capital Mezzanine Buyout Angels Early Stage Later Stage Capital Capital TSX Public Equity Markets (TSX Venture, TSX, etc.) Ventures Preferred Shares “C” Round (>$15 million) Value Creation and Paid-In Capital 5-7 Years Preferred Shares “B” Round (>$5 million) 3-4 Years Preferred Shares “A” Round ($3-5 million) Convertible Debt or Common Shares 2-3 Years (<$500 K) 1 Year Angel Seed Start-Up Early Stage Later Stage Mezzanine IPO Company Lifespan and Venture Capital Stage © 2008. Tom Sweeney 19
  20. 20. Business Models and Venture Financing • VC must generate high internal rates of returns to their LPs • Portfolio theory: winners cover the losers • Early stage VCs target high multiples (10X +) and IRRs of >50% • A company’s development plan and its internal “clock-speed” must be obsessed to use investment cash to achieve specific milestones on a competitive schedule What is a “4X Multiple” ? What is “30% IRR”? • The increase in a VCs investment • Considers how much was returned by a when there is a liquidity event liquidity event and how long it took (M&A, IPO, MBO, RTO). “We • Invested $1M and got $4M back in 3 years ~ invested $1M and made $4M.” 59% IRR (great) • Invested $1M and got $4M back in 7 years ~ 19% IRR (weaker) Silicon Valley’s Entrepreneurial “Clock Speed” • The 10-year IRR for early-stage Silicon Valley VCs is 54.9%. The average in Canada for the same period is -3% © 2008. Tom Sweeney 20
  21. 21. Start-Up Business Model: Bootstrap With a Plan to Achieve Specific & Important Milestones Receiver’s Wall First Closing Pitch ($$) VC Due Diligence Process Director’s Wall Under-funded company Family & Grants SR&ED Angels Properly funded company Bootstrap and Seed Syndicate 6-12 months New Money Due Diligence Traction The Idea Deposited Milestone Milestone Traction Milestone: achieve this key milestone before starting a financing round (gives investor confidence you’ve done something “important” already) Due Diligence Milestone: achieve this second key milestone during financing (tell VC about it in “First Pitch”, hit the milestone, tell VC you did it) © 2008. Tom Sweeney 21
  22. 22. Financing Stages & Development $4.0 on $8.0 million pre Total Cash Paid-In to Company (two tranches) Acquisition $1.5 on $2.0 million pre (two tranches) Bootstrap First Round VC Second Round VC (Series “A”) (Series “B”) Example Shareholder Equity at Acquisition •Bootstrap to achieve working prototype prior to “A” round •Secure $1.5M participating preferred on $2.0M pre-money 33% 38% Common •Achieve product and early revenue Series quot;Aquot; •Secure $4M on $8M pre-money Series quot;Bquot; •“A” round VC participates in “B” round 29% © 2008. Tom Sweeney 22
  23. 23. =XIRR is a Formula You Should Learn VCs want “C1” (their fully converted equity) to be large and “T5” (time to exit) to be as short as possible “B” Round Second Tranche B2 “B” Round First Tranche Cash Invested B1 Acquisition “A” Round Second Tranche “A” Round C1 A2 First Tranche A1 T5 Time T4 T2 T3 T1 =XIRR((-A1,-A2,-B1,-B2,C1),(T1,T2,T3,T4,T5)) © 2008. Tom Sweeney 23
  24. 24. Excellent VC Deal Terms Reference Book © 2008. Tom Sweeney 24
  25. 25. Correlating Innovation, Business Models, & Development Plans with Private Financing GameON: Finance Conference Toronto, Canada October 28-29, 2008 Tom Sweeney 514-865-2323