Raising Capital

Raising Capital
DOs and DONTs when raising capital and/or looking for investors for your start-up, project or young company.
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marted 26 luglio 2011
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Main Focus Points

Blend these elements harmonically to Raise the funds your business need Business & Management Psychology 1,2,3 Finance 1,2,3 Financials 1,2 Relations 1,2,3 Time and Execution Estimating You Needs
Valuation Pre & Post Money Geography (Value of Location) Shareholder Agreement Investor Selection and Identication (Professionals Vs HNWI) Type of Investors and Funding Sources
Business
One of the most important things is having your business scope, mid and long term plan in mind and ON PAPER. It is of utmost importance that the ON PAPER version is readable and understandable to any reader who might NOT have a specic expertise, data should be backed up by research and data possibly presented both graphically and explained in writing.
General Should/Must Haves>

Your Business must be scalable as it grows and the HOW it grows must be clearly explained Your plan must show demand and/or show to be able to create demand (proof of concept where applicable) Your business model must show enough prot margin to distribute to investors and/or an appealing company value increase It must have a selected team or skilled entrepreneur behind it It should propose some degree of innovation (even if in the process instead of the product)
Business 2
General Should/Must Haves>

Design> Both in Service-based (Web or Marketing material) and in Productbased businesses appealing design is always a great plus Management: Leadership skills, Determination, Motivation, Enthusiasm and Specic skills or previous relevant experience Location: Some business are mostly or ALL about location Well budgeted expenses (especially if you have already spent) you want to show you spent carefully but strategically well Show clearly HOW you differentiate from your competitors/substitutes (if any)
Business 3
Business Planning
Budgeting Useful Considerations
!Type of Business > Are you selling to consumers (B2C) or other businesses (B2B)? Depending on your target customers you will have to budget your marketing activities differently. Generally consumer goods require a higher marketing budget. Annual Revenue How much revenue do you forecast to generate per year? The Marketing budget will adjust as you grow your business. While starting your operations you do not have signicant revenue streams yet, thus, You might have to invest more into marketing than a mature business. Internet as Sales channel: The internet can be a very important sales channel or lead generator for most businesses (SEM, SEO SMM see next slides) Total Lifetime transactions per customer: Do you have/plan to have repeat business, or do your customers normally buy only once from you? Always consider an average number of transactions for your customers. Average Prot per transaction What is your average prot per sale? and How does it increase or decrease as your business grows in size.(Lower Cost of Supplies, higher cost of staff)
Business Planning
Budgeting Marketing on the Net
Internet as Sales channel The internet can be a very important sales channel or lead generator for most businesses (SEM, SEO SMM see next slides) Lead Conversion Rate How many visitors do you need to get to your website to generate 1 lead? A lead conversion rate of about 40 is average for most businesses, but of course you need to constantly monitor your lead conversion rate and optimize your sales funnel. Keyword Competition Are your desired keywords competitive? Obviously there is much more competition for a keyword like "Search Engines" than for "buy luxury Apt in Durban".
Business Planning
Budgeting Marketing on the Net B2B
Total 50000 Marketing Internet SEM & Email SEO Viral*
Annual Projected Revenue 1 million

5% of Annual Rev.
B2C
15% of Annual Rev.
Total 150000 Marketing Internet SEM & Email SEO Viral* 30000 12000 4800 2400
10000 5000 4000 1000
20% of Total Marketing 50% of Internet Marketing 40% of Internet Marketing 10% of Internet Marketing
20% of Total Marketing 40% of Internet Marketing 40% of Internet Marketing 20% of Internet Marketing
* Viral can be constituted by a number of activities, such as blogging, viral video distribution depending on your industry, market, and target customers habits
Business Timeliness
Leonardo Da Vinci invented the Helicopter Unfortunately IT WAS slightly TOO EARLY ;)
Time
Innovation is GOOD but be careful the relationship between Technology and Market is a delicate one!! The Element to consider is LEARNING CURVE, and PERCEIVED INNOVATION vs RESISTANCE TO CHANGE (or market Resistance) When Capital Raising, A Cash investor at very very early stage with 20k is more valuable than 1 million 2 years later on DO NOT snob a small investor overestimating your pre-money business
Psychology 1
Do Not fall in LOVE with your business Idea or project or even business BE REALISTIC - It is Useless to feed a dead horse Investors especially at an Early Stage are Not sacks of $$, the want to perceive reliability, competence, human skills, as they invest in people who carry out business they are NOT buying a piece of real estate!!
Psychology 2
Every investor is different get some info before presenting and try to understand him/her or the whole team. It is a good idea even to ask directly about their interest to better understand elements you can leverage upon. (Passion for technology, sports, geographical area were biz take place, etc..) We have seen investors allocating cash to investments they knew they were unlikely to bring results but they had fun in the process (vanity investor) and it was enough for them to take the risk
Psychology 3
Those who are NOT investing their own $$ instead have a different approach (Pamper them but be careful) and put numbers rst once those satisfy it will be downhill although still bumpy. Those that come from 1 or more entrepreneurial successes will want to be involved much more be listened to and in certain cases treated reverentially (Success is always an ego booster)
Psychology 4
Be serious and professional, (when you speak, dress, and even when you joke be also sure YOU avoid sarcasm) But DO NOT forget to communicate (transmit) your enthusiasm as any investor or established serial entrepreneur knows that Enthusiasm is the fuel to go through the hard start-up phase and survive to it and lead a team successful
Financial Topics
Company Valuation Start-up, Recurring, and Incremental Expenses Revenues EBITDA (earnings before interest taxes depreciation amortization) Tax - Fiscal Jurisdiction/s Exit Strategy (Options)
Financials Company Valuation

At early stage (aka: pre-money) or even at any point before break-even Company Valuation is ALWAYS debatable Be exible but try to understand NOT only the monetary value of an investor but also the strategic one (E.G.> former owner/decision maker of largest potential client you can think of)
Start-up - project seed investment - MVP If you look for an investor at the a project stage you might want to show availability to invest yourself (proportionally to your personal nances) to demonstrate your condence in the project In technology start-ups it is strategically useful to present proof of concept or MVP (minimum viable product) which clealry require a certain degree of investment that can be coming from a seed funding round (family and friends)
Financials
Do your Homework and be prepared!

If the level of initial investment is too high you are better off at investing in bullet proof supporting research and professional services for business planning, presentation, and/or mock-up modeling etc.. in order to be able to present to potential investor with a high level of accuracy and professionalism while supporting you business concept with solid research material Where applicable, provisional patents (process, product etc..), patents pending are very appreciated by any type of investors.
Financials
Gross Margin & Revenues

Your operating margin should be high that is one of the rst thing that attracts attention however, it should be REALISTICALLY high growing in the nancial projections as economies of scale applies. If your rst margin is below 40% it will be hard to keep investor attention unless the market is so large that it justies a lower margin, BUT, a large market or one with low barriers to entry is also, usually, a very competitive one and that is where investors look at how defendable potential investment (with: Patents, Special permits, geographic exclusive sales rights etc..) It is attractive multiple revenue streams in any 3-4 year Business Plan or if applicable right from the start (Note: More streams=more management)
Financials
Financials Exit Strategy Options

Investors wont stay forever so you have to plan one or more exit strategy option/s to present Private Equity usually consider 1-4 years (depending on industry and investment philosophy of the specic fund) Exits Can be made via IPO (company going public), Mergers & Acqusitions, or BuyBack plan from original entrepreneur/founder/s A Risky investment is not even considered by professional investors if there is no way out of it (possibly turning a prot rather than a loss although the possibility to reduce, limit, offset the loss in case things go wrong or dont go as well as expected is also appreciated)
Revenues in investor eyes

High protability (IPO potential or protable M&A) It moves appetites Sustainability - Viability Mitigated investment risk
Question Marks
Dogs
Cash Cows
Financials Tax and Legal Jurisdiction

Unless you are dealing with very sophisticated investors your tax outlook and/or the geography of your business or at least the holding company has its relevance Low or No taxes means more prot BUT it sometimes can give the idea of easy run or shady dealings, if you speak to an investor that you do not have an established relation with you might want to make sure the place of business and/or jurisdiction you will operate under is one heshe/they are comfortable with For Example often U.S. middle market investors are more at ease dealing with U.S. legal entities
Financials Tax and Legal Jurisdiction

In any case you can always have a strategy on paper to lower your scal burden during a later stage. Sophisticated investors are very well aware of the aforementioned fact If you are speaking to an investor that currently owns a business under high taxation jurisdiction, and your start-up is under a low one (or tax free) YOU CAN LEVERAGE this element to make your investment a more appealing one, However, the latter is usually based on trust, ergo, you will need to earn the investor trust.
Finance Where, How

Among the vast number of ways to nance a business there are some that are more REALISTIC and of EASIER ACCESS and some that are harder but more suitable for a longer term commitment It all depends on the size, type of business, stage of growth (if any) and the entrepreneurial style of the owner/s - founder/s. There isnt a one-size-ts all unless you can self nance the whole business and growth (which we DO NOT suggest in any case) Valuation is critical to both the investor and company in private equity/ venture capital (pe/vc) nancing.
Valuation Pre-money Valuation

The VC (Venture Capital) method for evaluating companies involves figuring out what the company is going to be worth at the point of IPO, and by reverse reasoning what the company should be worth at valuation time (early stage), at a very high discount rate. VCs need high IRRs on their investments in order to compensate for their risks in order to ensure good returns for their investors. Assuming a discount rate of 60% (which is about the figure VCs usually use), it means that the investment is suppose to grow by 60% a year. In 5 years, the company needs to be worth 10.48 times more. If I round the number to 10 (to make things easier now), it means the company is worth at terminal value, after the VCs investment, $10M. The reason is that this is the companies' worth after the investment is that without the initial investment, the company would have not be able to grow and reach the $100M goal.
Valuation Pre-money Valuation 2

In the previous slide assuming that the company needs to raise $2M in order to reach its goals of being worth $100M company in 5 years. $10M - $2M = $8M => the pre-money valuation. The VC will receive 20% of the company (2/10) which will be worth $10M. This assumes one round of financing. In case more rounds are planned, the VC will require a larger share so that it retains the ownership it expects after the additional rounds have been raised (every additional round increases the number of stock and dilutes all existing owners). The calculations are different if the VC plans on participating in the additional rounds, which they often do.
Valuation Post-money Valuation

Investor A invests US$2,000,000 into Company Tech Ltd. in a Series A financing. Therefore, the post-money valuation of Company Tech Ltd. will be US$(4,000,000 + 2,000,000) = US$6,000,000. Number of new shares issued to Investor A in the Series A round: Since each share is valued at $0.8, Investor A gets ($2,000,000/$0.8) = 2,500,000 Series A shares. Post-financing capitalization (calculated on a fully diluted basis - i.e., including ESOP): Percentage of ownership of founders is diluted from 100% to 53.33% (4,000,000 / 7,500,000). Percentage ownership of Investor A = 2,500,000 / 7,500,000 = 33.33%. Percentage of *ESOP in relation to the number of fully-diluted shares = 13.33%Total: 53.33% + 33.33% + 13.33% = 100%
* Employee Share Ownership Plan
Valuation Post-money Valuation 2

Post-financing capitalization (calculated not on a fully-diluted basis - i.e., excluding *ESOP): Percentage ownership of founders is diluted from 100% to 61.54% (4,000,000 / 6,500,000). Percentage ownership of Investor A = 38.46% (2,500,000 / 6,500,000 ). Total: 61.54% + 38.46% = 100%
* Employee Share Ownership Plan

Investors & Funding Sources

Worldwide and Country Specics
Family & Friends (Equity) Structured Self Finance (Equity & Debt) HNWI (High Net Worth Individuals) V-HNWI (Very), U-HNWI (Ultra) Venture Capital Funds [Specialist or Not] (Equity) Public Funds like EU funds, U.S., AU or State Local Funds for growth, Developing Countries Crowd Funding [On or Ofine](Equity)

Investment Banks - Banks in general (Equity & Debt) Mezzanine Funds (*Equity) Hedge Funds (*Equity) Sponsorships and Competitions Private Equity Funds [Specialist or Not] (*Equity) Industrial Investor [Larger Company in your industry](Equity & Debt)
*although some of these types of professional investors largely use debt to nance part of their investment THEY ARE NOT TO BE considered DEBT on the Start-up unless specically so such as in the case of leveraged buyouts...

Reverse Mergers on Capital Markets with a well skilled team of investment bankers (Equity); This is a method that is particularly expensive for a start-up and although it is a very structured method and can support the growth of the company beyond start-up it is usually more applicable to young companies with a large nancial need and a well structured team. Some countries/markets are more suitable than others also depending on the industry you are playing in.

If still at project stage it will be harder to speak to a professional investor (especially if you are NOT a serial entrepreneur with a solid track record) Opt for Family & Friends or Structured Self-Finance rst When you present to an investor do your research on WHO is the person you are going to meet (even at personal level) Do NOT underestimate the Vanity/Success Factor
Investors Selection
Relations
Who you know sometimes is more important than what you know If you want to meet potential investors you have plenty of options to meet them and build your network in the next slide we will list some relevant ones
Where, How..some of your options Apart from vacationing,yachting,playing golf, etc.. in very expensive locations that still is however a great way to meet potential investors there are a number more structured options such as; Private Equity Summits and Investor Matching Events Hiring rms like (just to name one) Rodriquez Consulting Ltd. to conduct Capital Raising
Relations
Where, How..some of your options Organizing a dedicated event to present your business inviting a number of potential investors in one or multiple locations (Aka: Road Show) Participate to start-up clubs and start-up competitions (Microsoft, HSBC, Telecom Italia, are just some examples of those that sponsors these types of competitions) Local or InternationalTrade Fairs (Industry Specic Investors)
Relations
Where, How..some of your options
Relations
Professional or Dedicated Social Networks and relevant groups (LinkedIn, BankersAvenue etc..) Web Based Crowd Funding Platforms Local or International Trade Fairs (Industry Specic Investors)
Shareholder Agreement Better to agree on what to expect!

It is important to agree on what he/she/they will be doing and what to reciprocally expect . Specically if your future shareholders are going to be somewhat active at the operational level (very likely in start-up) Propose a shareholder agreement by which you agree on how the relations between shareholders and the company and among the shareholders are regulated for the good of business and for ease of management.
Estimating Your Needs

A bag of Cash on a table doesnt spontaneously become a business !!
Estimating Business Needs PROPERLY is extremely important the typical mistake is considering nancial needs as the only ones and/ or considering the latter as solvers to all other business needs CONTACTS, STAFF, ACTION PLAN, TIME, CONSUMER CONFIDENCE, are just some those needs that are often underestimated which can be largely counterproductive in capital raising, especially if the investors you will be dealing with are sophisticated and/or professional ones
Estimating Your Needs

Execution
Action Plan means to an investor how you will spend his/her/their money Realistic Financial needs at project stage should be aimed at delivering MVP (minimum viable product) of the business which should than allow soft launch In certain cases (in very competitive environments) marketing to a critical mass of targeted individuals is essential to deliver proof of concept and prove the business to be viable to receive more investment. (Multiple Rounds of Financing is usually an option)
Investment Schedule
Execution
Why Do Great Business Models & Great Business Concepts turn into failing businesses? Set up an Investment Schedule with set execution goals, this will allow you (as an manager/entrepreneur) to keep a close eye on whether the goals are met while communicating confidence to investors who will be more keen to keep supporting your business start-up as you demonstrate that you deliver as planned The Investment Schedule will have to take into account the Cash flow (iF any) and the projected expenses on R&D and its milestones and should be balanced to allow the start-up/project to keep a margin for execution mistakes that can burn extra time and financial resources.
We hope this will be useful to you

If you wish to know more or have specic questions e-mail us info@RodriquezConsulting.com

Raising Capital

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Raising Capital

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Raising Capital

Main Focus Points

General Should/Must Haves>

General Should/Must Haves>

Annual Projected Revenue 1 million

10000 5000 4000 1000

marted 26 luglio 2011

Financials Company Valuation

marted 26 luglio 2011

marted 26 luglio 2011

Do your Homework and be prepared!

Gross Margin & Revenues

Financials Exit Strategy Options

Revenues in investor eyes

marted 26 luglio 2011

Financials Tax and Legal Jurisdiction

Financials Tax and Legal Jurisdiction

Finance Where, How

Valuation Pre-money Valuation

Valuation Pre-money Valuation 2

Valuation Post-money Valuation

Valuation Post-money Valuation 2

* Employee Share Ownership Plan

Investors & Funding Sources

Investors & Funding Sources

Investors & Funding Sources

Worldwide and Country Specics

marted 26 luglio 2011

Where, How..some of your options

marted 26 luglio 2011

Shareholder Agreement Better to agree on what to expect!

Estimating Your Needs

Estimating Your Needs

We hope this will be useful to you

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