Successful capital raising in
19 November 2009
How do I succeed in a start-up?
• “The answer is to sell, sell and sell some more. Never stop
selling. Selling the product, selling the vision, selling the
employees and prospective employees, selling the
investors. The only way to win the race between
breaking even point and going broke is to sell as though
your life depended on it. As it does.”
Ian Neil in Fast Thinking, Spring 2007, p32
• New ventures focussed on commercialising technologies or business models in cleantech,
food or water face significant uncertainty – particularly from the economic impact of the
• Learning to love uncertainty is one of the challenges of the investment community and
early-stage ventures in these sectors.
• Being fundamentally risk-averse sees many investors taking a portfolio approach to risk:
placing small bets on opportunities which present pay-offs in short time frames. This
approach has been applied for decades by the pharmaceutical and oil exploration
• Early-stage ventures seeking to raise capital need to recognise the demands of the
capital markets and develop business plans which:
– articulate the compelling reason why the venture will succeed
– establish clear and achievable milestones (learn to celebrate the small successes)
– facilitate application of the AVCAL valuation guidelines
• This presentation outlines some of the keys to success for early-stage ventures in the
emerging cleantech and related markets and how a well-executed strategy
will attract capital and create value for shareholders.
Success and uncertainty
• Uncertainty is not the problem
….its how you deal with it which is
Early-stage ventures and
• Early-stage ventures and uncertainty are old friends. From biotech to dot com to
nanotechnology and renewables, uncertainty abounds as
– Customer demand is untested
– The shape and time line of the adoption curve might be unknown
– Regulatory regimes are often weak or untested
– Manufacturing processes are unproven
– The time required to complete product testing is vague
– Distribution channels may need to be created
– Competing technologies and offerings are simultaneously racing to achieve sales and
gain first-mover advantage
• …why is it then that business plans are written and financial models built as though we
know that the product will be ready by Q2 FY10, the distribution channels will be available
immediately, there will be no competitors and customers will pay $53 per unit?
• History shows that nothing cripples the prospects of a capital raising or a share price than
key milestones being consistently missed. Recognise the uncertainty, embed it in the
strategy and reap the rewards.
Embedding uncertainty in the
• Early-stage ventures are confronted with as much choice as there is uncertainty. This is a
great thing (without choices the uncertainty might be paralysing!)
• The commercialisation spectrum ranges from DIY (make it, build the channel, sell it) to
licensing (protect the IP and let someone else make it, build the channel and sell it)
• For example, we might prefer to sell direct into the US but if we are stymied by access to
the channel we might switch to distributorships or licenses.
• Embedding uncertainty is as simple as having a tactical response to every outcome.
• Every “what if” question that an investor might present must have a response. Role play
and test the business plan on as many people (knowledgeable, naiive and experienced)
as you can
• Flexibility in the business plan and the capacity of management to take urgent action
when an uncertainty goes against the business is critical. This is what investors look for (and
that includes the big corporates): agile, nimble and lithe organisations that can rapidly
adapt to the changing marketplace.
• This is the advantage of the small, early-stage business: like a teenager, it is quick, match-fit
and has an under-developed fear response.
• The only thing that matters is success…at any cost.
Aligning with investor
perspectives on uncertainty
• We know that a good strategy, executed well, will create profits.
• Investors expect the profits to exceed the cost of capital so that they can exit with a
• This requires that the venture needs to have either:
– A strategy which is better than merely “good” or
– Exceptional execution
• There are plenty of great ideas and great strategies in the market place – many are
destroying shareholder value (i.e. the investors’ capital) at an alarming rate.
• The key lies in the execution.
• All too often we have heard that version 2 of the product is just months away and that the
market will be spoiled if we release the “clunky” version 1 offering.
• Wrong! Launch. Launch fast and get version 1 into the market.
• … or we hear that we are the only company that can reliably manufacture the product
• … or if someone else makes/distributes/sells the product our IP will be stolen
• What would have happened to Bluetooth if CSIRO hadn’t licensed it?
• The investor’s greatest fear is that their money is spent and …
Small bets in a high stakes game
• Investors – large or small, corporate or individual – will take a portfolio approach to
investment in early-stage ventures: several small bets will be placed in strategically-aligned
• The experts at placing lots of small bets are the oil and gas and pharmaceutical
• So adept at placing little bets in the hope of massive payoffs that they actively seek out
failure (the “fail fast” philosophy). Why? Because the sooner they prove something won’t
work or that there is no oil down the hole they can stop wasting money and move to the
next promising option.
• There is merit in following this approach inside the business.
Do one thing well vs all eggs in
the one basket…
• Single-product companies are susceptible to rapid and catastrophic demise if the single
product fails. The corporate landscape is littered with single-product medical devices,
drug compounds and others which placed the life savings of the investors on red 7 and
the wheel stopped at black 12.
• Equally, there are the one-in-one-thousand single-product companies which have hit the
home run unfettered by mediocre performance of a portfolio of marginal products.
• If your strategy is to bridge the commercialisation chasm and sell out to a corporate in the
sector then that’s a valid strategy. Just don’t lose sight of the possibility that while you are
busy succeeding someone else may be too!
• The better strategy may be to pursue BOTH possibilities: develop the core product with an
energy and pace which will literally scare potential competitors AND place a few small
bets on offerings which might (for example) piggy-back the distribution channel you’ve
created for the core product.
Why will customers buy?
• Articulating the compelling customer proposition in the business plan is absolutely critical.
• The question is: why will a customer buy my product … and in clear preference to any
substitute or direct competitor?
• For example, why will a customer buy a PV energy source if the life cycle cost is 50% more
than wind? Is it because there is an anticipated subsidy or grant?
Too early to attribute value here
The Early The Mainstream
Te Vi Pr C
En chn sio a gm se e
th ol na rv pt
us og rie at a ic
ia y s is tiv s
sts ts es
Value attributed to the high growth
phase after forecast is subjective
Clear signs of early adoption
Forecast period Terminal value
The importance of milestones
• As much as early-stage ventures need to learn to love uncertainty, investors
nonetheless want time frames and outcomes to which management can be held
• There is a great risk of under-estimating the time it will take to successfully achieve
every single step of your commercialisation plan.
• Failure to achieve milestones set out in the business plan will:
– See investors getting nervous, possibly exercising put options to get out
– Applying pressure on management by regularly calling to see if there is any update on
whether Project X has successfully completed the latest engineering testing
– Reduce the likelihood of attracting more capital from existing investors (or options being
– Fundamentally undermine the progress you will have made along the belief-evidence
spectrum as every bit of negative evidence is worth ten equivalent doses of belief
• Prepare a timeline, check it, then add as much lee-way as the IRR will permit. If you
can’t beat 25% IRR and give yourself some wriggle room, then you really need to
check the attractiveness of the opportunity.
• Its your money too….
• Think ahead five years from today…
• From inspiration, creation, perspiration and much frustration a germ of an idea has
become a thriving cleantech business.
• If this is the case, then like it or not, the external investors will be looking for an exit.
• …and a capital gain of around 10 times the amount of capital invested.
• If you are not comfortable with this, then best to not bring the capital in.
• Typically the exit comes in one of two forms:
– ASX listing
– Trade sale to a larger corporate
• ASX listing requires a relatively mature business model, robust governance structure and a
management team which is ready to knuckle down to the business as usual phase
• Large corporates are surprisingly natural buyers of smaller companies as they rarely have
the patience or risk appetite for what you have successfully achieved. They are not
nimble, agile, quick to respond to market uncertainties. They like the “development risk” to
have been substantially borne by the founders and VC’s.
• In the ideal world, you will know who you should sell to from the outset
About Climate Capital
Climate Capital is a sustainability investment bank. With a mission of rebalancing nature and
humanity, Climate Capital provides Solutions, Project and Investing services which identify and
execute opportunities to profitably direct capital to sustainable businesses.
Solutions - Climate Capital provides specialised consultancy services to clients in the areas of
Sustainability Risk, Strategy and Value services for corporates, Non-government Organsiations
and fund managers
Projects - Commercialisation and investment attraction services for the development of new
business models and technologies
Investing - Development of a fund and asset management capability to assist capital flow to
profitable investment opportunities which aid the "rebalancing" objective
Rod is a director of Greening Australia Ltd, and President of Greening Australia Queensland
Ltd. He is a director or chairs the advisory board for 7 of his clients. His clients span leading ASX
listed financial and industrial organizations through to professional services firms.
As Chairman of Climate Capital, Rod is drawing on a lifetime of passion for sustainability and a
belief that social entrepreneurship (the marriage of profit-seeking capital and social outcomes) is
the basis for Climate Capital's success.
BAdmin Grad Dip MAICD CPA SFFin
Michael is a founding director of Climate Capital and an executive director of Value Adviser
Associates Pty Ltd, a leading business and securities valuation firm based in Melbourne. He has
over 20 years' experience assessing the value of a diverse range of business, projects,
technologies and commercialisation strategies.
He is a former partner in the PricewaterhouseCoopers valuation and Applied Decision Analysis
practice in Brisbane and Melbourne. Michael has been involved in valuation of carbon-intensive
businesses (such as coal- and gas-fired generation), renewable energy (hydro and biogas) and
the impact of emissions trading on all sectors of the economy.
Michael has a particular interest in the development of commercialisation strategies for new
technologies in emerging markets. As a founding director of Climate Capital, his primary
objective is to match the talents of the Climate Capital community to the mobilisation of capital
to support Climate Capital's objective of rebalancing humanity and nature.