Ideas To Deals 8 27


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How to prepare to seek and pitch investors from Ideas to Deals Live, 8-27-09

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Ideas To Deals 8 27

  1. 1. Ideas to Deals Building an Investment Ready Business
  2. 2. <ul><li>“ In preparing for battle I have always found that plans are useless, but planning is indispensable.” </li></ul><ul><li>- Dwight D. Eisenhower </li></ul>
  3. 3. <ul><li>Build A Business </li></ul><ul><li>Make Meaning </li></ul><ul><li>Make a difference </li></ul><ul><li>Make Value </li></ul><ul><li>If you succeed in building a business, either funding sources will be fighting to give you money or you won’t need their money. </li></ul>
  4. 4. <ul><li>Key to Writing an Operating Plan </li></ul><ul><ul><li>Do it for you. </li></ul></ul><ul><ul><li>Keep it simple. </li></ul></ul><ul><ul><li>Keep it real. </li></ul></ul><ul><ul><li>Internalize it. </li></ul></ul><ul><ul><li>Work it. </li></ul></ul>
  5. 5. <ul><li>The key to funding is knowing your business and being honest about what you have. </li></ul>
  6. 6. <ul><li>Can you answer this: </li></ul><ul><li>What do you do? </li></ul>
  7. 7. <ul><li>OK… </li></ul><ul><li>Can you put it in a box and sell it? </li></ul>
  8. 8. <ul><li>What kind of Business Do </li></ul><ul><li>You Have? </li></ul><ul><li>Scaleable, Exponential Growth, Defined Exit? </li></ul><ul><li>Heavy Service Component, Slow/high Growth, No Exit? </li></ul>
  9. 9. <ul><li>Who is out there to buy our Product? </li></ul><ul><li>How do we get them to buy our product? </li></ul>
  10. 10. <ul><ul><li>What is it all Worth? </li></ul></ul><ul><ul><ul><li>Valuation </li></ul></ul></ul>
  11. 11. <ul><ul><ul><li>Valuation of early-stage companies is a little short of random. </li></ul></ul></ul><ul><ul><ul><li>Valuation is negotiated, there are no hard numbers especially for early-stage companies. </li></ul></ul></ul><ul><ul><ul><li>Provide a good projection of future value at a potential, future liquidity date and discount back. </li></ul></ul></ul><ul><ul><ul><li>Know comparables…What other companies, similar to yours, have generated what multiples of sales at liquidity. </li></ul></ul></ul><ul><ul><ul><li>Build value as you build the company ~ Focus on “Value Inflection Points”. </li></ul></ul></ul><ul><ul><ul><li>Focus on dollars not percentage </li></ul></ul></ul><ul><ul><ul><ul><li>10% of a $20 million company is worth more than 100% of a $1 million company. </li></ul></ul></ul></ul><ul><ul><ul><li>Key Valuation Issues </li></ul></ul></ul>
  12. 12. <ul><ul><ul><li>Know what investors look for and expect. </li></ul></ul></ul><ul><ul><ul><li>Make sure you and the investors are on the same page. Good investors will want you to have a fair percentage of the company. </li></ul></ul></ul><ul><ul><ul><li>Know why these things are important to investors. </li></ul></ul></ul><ul><ul><ul><li>Understand the factors that influence value </li></ul></ul></ul><ul><ul><ul><li>Anticipate investor questions. </li></ul></ul></ul><ul><ul><ul><li>Look at competitive deals. </li></ul></ul></ul><ul><ul><ul><li>Learn from the process ~ Listen well </li></ul></ul></ul><ul><ul><ul><li>Suggestions for CEO’s </li></ul></ul></ul>
  13. 13. <ul><li>Pre Investment </li></ul><ul><li>Unit Holders Issued Valuation Pre-investment Post-investment </li></ul><ul><li>John Doe 500k $500k 25% 19% </li></ul><ul><li>Bill Smith 400k $400k 20% 15% </li></ul><ul><li>Jane Brown 800k $800k 40% 31% </li></ul><ul><li>ESO Pool 300k $300k 15% 15% </li></ul><ul><li>Note…ESO does not dilute </li></ul><ul><li>Total Issued $2 mil $2 mil 100% 80% </li></ul><ul><li>Post Investment </li></ul><ul><li>Investors 500k $500k 0% 20% </li></ul><ul><li>Total Issued $2.5 mil $2.5 mil 25% 100% </li></ul><ul><ul><ul><li>Cap Table Example </li></ul></ul></ul>
  14. 14. <ul><li>Pre Investment </li></ul><ul><li>Unit Holders Issued Valuation Pre-investment Post-investment </li></ul><ul><li>John Doe 481,250 $240,625 19% 11.5% </li></ul><ul><li>Bill Smith 381,250 $190,625 15% 9.5% </li></ul><ul><li>Jane Brown 781,520 $390,625 31% 19% </li></ul><ul><li>ESO Pool 375,000 $187,500 15% 15% </li></ul><ul><li>Investors 481,250 $240,625 20% 11.5% </li></ul><ul><li>Total Issued $2.5 mil $1,250,000 100% 62.5% </li></ul><ul><li>Post Investment </li></ul><ul><li>Investors Rd 2 1,500,000 $1,250,000 0% 37.5% </li></ul><ul><li>Total Issued $4 mil $2.5 mil 100% </li></ul><ul><li>$750,000 raised at $.50 per share; decrease in valuation of 50% </li></ul><ul><ul><ul><li>“ Cram Down” Example </li></ul></ul></ul>
  15. 16. <ul><li>Friends, Family, Founder </li></ul><ul><li>Bootstrapping is building the business from internally generated funds. </li></ul><ul><ul><li>You need to establish a foundation for your business. </li></ul></ul><ul><ul><li>Build credibility and show that your business has customers and a product that people want to buy. </li></ul></ul><ul><ul><li>Focus on customers and cash flow. </li></ul></ul><ul><ul><li>Work hard and be creative in seeking ways to drive revenue while holding expenses down. </li></ul></ul>
  16. 17. <ul><ul><ul><li>Angel Investors </li></ul></ul></ul><ul><ul><li>Angel investors are high net worth </li></ul></ul><ul><ul><li>individuals who are interested in investing in </li></ul></ul><ul><ul><li>emerging businesses. </li></ul></ul><ul><ul><ul><li>Two Types of Angel Investors </li></ul></ul></ul><ul><ul><ul><li>Professional </li></ul></ul></ul><ul><ul><ul><li>Strategic </li></ul></ul></ul>
  17. 18. <ul><li>Professional Investors </li></ul><ul><ul><ul><li>The underlying reason that they will invest is return on their investment. </li></ul></ul></ul><ul><ul><ul><li>They invest in spaces they know. </li></ul></ul></ul><ul><ul><ul><li>They invest with people they know </li></ul></ul></ul><ul><ul><ul><li>They invest based on referrals from people they know. </li></ul></ul></ul><ul><ul><ul><li>Invest based on due diligence. </li></ul></ul></ul><ul><ul><ul><li>Will require professional terms. </li></ul></ul></ul><ul><ul><ul><li>Looking for a big payout based on a liquidity event. </li></ul></ul></ul>
  18. 19. <ul><li>Strategic Investors </li></ul><ul><ul><ul><li>More interested in the product than the business. </li></ul></ul></ul><ul><ul><ul><li>Invest based on gut reaction. </li></ul></ul></ul><ul><ul><ul><li>May take common stock </li></ul></ul></ul><ul><ul><ul><li>May not look for a liquidity event. </li></ul></ul></ul><ul><ul><ul><li>May be the friends in FFF (or referred by FFF) </li></ul></ul></ul>
  19. 20. <ul><ul><ul><li>Key points About Investors </li></ul></ul></ul><ul><ul><ul><li>If you take someone else’s money you have a partner. They will want to have some influence on the company to protect their investment. </li></ul></ul></ul><ul><ul><ul><li>You will probably have to relinquish some level of control over the company. </li></ul></ul></ul><ul><ul><ul><li>If you are unwilling to share leadership of the company, investors are not the option for you. </li></ul></ul></ul>
  20. 21. <ul><ul><ul><ul><li>Institutional Venture Capital </li></ul></ul></ul></ul><ul><ul><ul><li>The only reason that they will invest is return on their investment. </li></ul></ul></ul><ul><ul><ul><li>They only invest in spaces they know. </li></ul></ul></ul><ul><ul><ul><li>They only invest with people they know </li></ul></ul></ul><ul><ul><ul><li>They only invest based on referrals from people they know. </li></ul></ul></ul><ul><ul><ul><li>Invest only based on due diligence. </li></ul></ul></ul><ul><ul><ul><li>Will only require professional terms. </li></ul></ul></ul><ul><ul><ul><li>They are only looking for a big payout based on a liquidity event. </li></ul></ul></ul>
  21. 22. <ul><li>Seeking Investors </li></ul><ul><li>Investors invest in people and teams that can execute. </li></ul><ul><li>“ A” teams with “B” markets will generally beat “B” teams with “A” markets. </li></ul>
  22. 23. <ul><li>Investor Business Plan Summary Format </li></ul><ul><li>Summary should be “concise” </li></ul><ul><li>Summary should provide a clear description of the problem you solve. </li></ul><ul><li>How you solve it. </li></ul><ul><li>Your business model. </li></ul><ul><li>The underlying magic of your product. </li></ul><ul><li>Defensibility of your product. </li></ul><ul><li>Summary should be no more than “ four-pages” . </li></ul>
  23. 24. <ul><li>Pitching </li></ul><ul><ul><li>Question: How can you tell if an entrepreneur is pitching their business? </li></ul></ul><ul><ul><li>Answer: Their lips are moving. </li></ul></ul>
  24. 25. <ul><li>Tips for Pitching </li></ul><ul><li>Explain what you do in the first minute. </li></ul><ul><li>“ Clearly” explain what you do in the first minute. </li></ul><ul><li>Articulate the problem in the market and what you do to solve it. </li></ul><ul><li>Purpose of a pitch is to “stimulate interest” not to close the deal. </li></ul><ul><li>Keep it tight. 10 slides, 20 minutes, 30 point font. </li></ul><ul><li>Speak to the audience’s interest. </li></ul>
  25. 26. <ul><li>Title Slide: This is where you tell what you do and give a simple to understand example. </li></ul><ul><li>Problem: Describe the pain you are alleviating for your customers. </li></ul><ul><li>Solution: Show how you solve the pain. </li></ul><ul><li>Business model: Explain how you make money. </li></ul><ul><li>The advantage you have:   Why are you different than everyone else? </li></ul><ul><li>Marketing and Sales: &quot;Clearly&quot; tell what your sales strategy is. Do not forget to discuss your pricing.  </li></ul>Pitching Plan
  26. 27. <ul><li>Competition: Show there is enough of a market available to buy your product even with the competition. </li></ul><ul><li>Management Team: You need to convince the investor that you have the team that can execute and will succeed. </li></ul><ul><li>Financial Projections: You need a simplified, clear slide here. You need to justify your numbers. </li></ul><ul><li>Current Status/Future Status: Show your use of funds and how that will drive the growth of the company. You do need to discuss exit options. Who are buyers and when. Don't hem-haw around.  show the investor that they can not only expect the company to succeed (which is about you) but also that they can expect a return in a certain time frame (which is about them). </li></ul>Pitching Plan
  27. 28. <ul><li>Investors’ Interest </li></ul><ul><li>How are you going to make money? </li></ul><ul><li>How are you going to generate my return? </li></ul><ul><li>Are you capable of “executing”? </li></ul>
  28. 29. <ul><li>Don’t When Speaking to Investors. </li></ul><ul><li>Don’t try to BS the investor because they see through it. </li></ul><ul><li>Get your value proposition across early in case you don’t get to the end of the presentation. </li></ul><ul><li>Don’t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will. </li></ul>
  29. 30. <ul><li>Don’t When Speaking to Investors. </li></ul><ul><li>Don’t ask for an NDA at initial meetings!!! </li></ul><ul><ul><li>Real investors are not in the business of stealing ideas and trying to develop them. </li></ul></ul><ul><ul><li>You control what is in the summary and initial pitch. You don’t need to disclose the “secret sauce” at this point. </li></ul></ul><ul><ul><li>Investors will sign an NDA prior to due diligence. </li></ul></ul><ul><ul><li>Get over it…You’re not that special </li></ul></ul>
  30. 31. Recommended Readings
  31. 32. Resources for Assistance <ul><li>Ohio Small Business Development Center </li></ul><ul><li>http:// , </li></ul><ul><li>614-287-5294 </li></ul><ul><li>TechColumbus </li></ul><ul><li> , </li></ul><ul><li>614-487-3700 </li></ul><ul><li>Ideas to Deals Blog </li></ul><ul><li> </li></ul>
  32. 33. <ul><li>Everything is always impossible </li></ul><ul><li>before it works. </li></ul><ul><li>That is what entrepreneurs are all </li></ul><ul><li>about – doing what people have told </li></ul><ul><li>them is impossible. </li></ul>
  33. 34. The Ohio SBDC at Columbus State p. 614-287-5294 For Information on SBDC Activities
  34. 35. “ Pitching the Dream” Mark Butterworth Innovation4ward
  35. 36. Agenda <ul><li>What investors looking for </li></ul><ul><li>The pitch </li></ul><ul><li>Deal structure </li></ul>
  36. 37. Angels – Looking For <ul><li>A company where they believe can add value and make money (and have fun) </li></ul><ul><li>An industry they understand and good management team </li></ul><ul><li>Invest based on: Chemistry </li></ul>
  37. 38. Venture Capital – Looking For <ul><li>A company where they can make lots of money (fun is not a factor) </li></ul><ul><li>Big markets, sustainable differentiation and good management </li></ul><ul><li>Invest based on: Management team </li></ul>
  38. 39. Good Management – Ideal <ul><li>Experience in a start-up or launching a product within a large company </li></ul><ul><li>Domain knowledge </li></ul><ul><li>Relationships with key customers </li></ul>
  39. 40. Good Management – Other <ul><li>Broad vision </li></ul><ul><li>Ambitious </li></ul><ul><li>Tremendous energy </li></ul><ul><li>Good listener </li></ul><ul><li>Adaptable </li></ul><ul><li>Know that they don’t know everything </li></ul><ul><li>Hire people better than themselves </li></ul>
  40. 41. Investment Criteria: Other <ul><li>Sales and marketing strategy </li></ul><ul><li>Competition </li></ul><ul><li>Technology </li></ul><ul><li>Financials </li></ul><ul><li>Exit strategy </li></ul>
  41. 42. The Investor’s Mindset <ul><li>Their time is more important than their money </li></ul><ul><li>You must manage the process! </li></ul>
  42. 43. First Meeting – Angel Investors <ul><li>Goal: Get a second meeting not a check </li></ul><ul><li>Format: Short, non-technical PowerPoint </li></ul><ul><li>Message: Within the first three minutes: </li></ul><ul><ul><li>The problem you are solving, </li></ul></ul><ul><ul><li>How you solve the problem, and </li></ul></ul><ul><ul><li>That you have the management team to execute </li></ul></ul>
  43. 44. First Meeting - Other <ul><li>Do not assume: </li></ul><ul><ul><li>they have read the plan </li></ul></ul><ul><ul><li>that you will get through presentation </li></ul></ul><ul><li>The product or technology is only 5% of the pitch in the first meeting </li></ul><ul><li>One page summary financials </li></ul><ul><ul><li>Assumptions more important than numbers </li></ul></ul><ul><li>How the investor will make money! </li></ul>
  44. 45. After The First Meeting <ul><li>You must manage the process </li></ul><ul><li>Anticipate the investors needs </li></ul><ul><li>Submit your own Due Diligence Review Manual </li></ul><ul><li>Don not tell them “it is in the business plan” </li></ul><ul><ul><li>Opportunity to customize to their “hot buttons” </li></ul></ul>
  45. 46. Deal Structure <ul><li>Individual Angels: </li></ul><ul><ul><li>Security: Common stock </li></ul></ul><ul><ul><li>Exit: Share buy-back , Sale or IPO </li></ul></ul><ul><ul><li>Return: 15% to 20% </li></ul></ul><ul><ul><li>Valuation: reasonable </li></ul></ul><ul><li>Organized Angel Funds and Venture Funds : </li></ul><ul><ul><li>Security: Preferred stock </li></ul></ul><ul><ul><li>Exit: Sale or IPO </li></ul></ul><ul><ul><li>Return: 30%+ compound annual </li></ul></ul><ul><ul><li>Valuation: Tough but fair </li></ul></ul>
  46. 47. Preferred vs. Common Stock <ul><li>Common  Investors and management have same rights </li></ul><ul><li>Preferred has additional rights: </li></ul><ul><li>Liquidation preference – get their money back first </li></ul><ul><ul><ul><li>Anti-dilution provisions – protection against reduction in valuation </li></ul></ul></ul><ul><ul><ul><li>Redemption – investment plus dividends back at predetermined time </li></ul></ul></ul><ul><ul><ul><li>Dividends – 5% to 8% annually </li></ul></ul></ul><ul><ul><ul><li>Veto over strategic decisions (sale, liquidation, IPO) </li></ul></ul></ul>
  47. 48. Resources: <ul><li>Gerald A. Benjamin and Joel Margulis. Finding Your Wings (How to Locate Private Investors to Fund Your Venture). New York: John Wiley & Sons, Inc. , 1996. </li></ul><ul><li>David Gladstone. Venture Capital Handbook (An Entrepreneur’s Guide to Obtaining Capital to Start a Business, or Expand an Existing Business). Englewood Cliffs: Prentice Hall, 1998. </li></ul><ul><li>Pratt’s Guide to Venture Capital Sources . New York: Securities Data Publishing, 2000. </li></ul><ul><li> </li></ul>
  48. 49. The Ohio SBDC at Columbus State p. 614-287-5294 For Information on SBDC Activities