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Private Equity Funding Building an Investment Ready
Business
Ideas2deals.com
www.SBDCColumbus.com
www.youtube.com/ohiosbdc
Getting Financing Is…
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“In preparing for battle I have always found that plans are
useless, but planning is indispensable.”
- Dwight D. Eisenhower
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Make Meaning Make a difference Make Value
If you succeed in building a business,
either funding sources will be fighting to give you money or you won’t need their money.
Build A Business
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Key to Writing an Operating Plan
Do it for you.
Keep it simple.
Keep it real.
Internalize it.
Work it.
Business Planning
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The key to funding is knowing your business and being honest about
what you have.
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Can you answer this:
What do you do?
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OK…
Can you put it in a box and sell it?
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Scaleable, Exponential Growth, Defined Exit?
Heavy Service Component, Slow/high Growth, No Exit?
What Kind of Business Do You Have
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Who is out there to buy our Product?
How do we get them to buy our product?
Can You Answer This?
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What is it all Worth?
Valuation
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Valuation of early-stage companies is a little short of random.
Valuation is negotiated, there are no hard numbers especially for early-stage companies.
Provide a good projection of future value at a potential, future liquidity date and discount back.
Know comparables…What other companies, similar to yours, have generated what multiples of sales at liquidity.
Build value as you build the company ~ Focus on “Value Inflection Points”.
Focus on dollars not percentage 10% of a $20 million company is worth more than
100% of a $1 million company.
Key Valuation Issues
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Know what investors look for and expect.
Make sure you and the investors are on the same page. Good investors will want you to have a fair percentage of the company.
Know why these things are important to investors.
Understand the factors that influence value
Anticipate investor questions.
Look at competitive deals.
Learn from the process ~ Listen well
Suggestions For CEO’s
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Pre Investment
Unit Holders Issued Valuation Pre-investment Post-investment
John Doe 500k $500k 25% 19%
Bill Smith 400k $400k 20% 15%
Jane Brown 800k $800k 40% 31%
ESO Pool 300k $300k 15% 15%
Note…ESO does not dilute
Total Issued 2 mil $2 mil 100% 80%
Post Investment
Investors 500k $500k 0% 20%
Total Issued 2.5 mil $2.5 mil 25% 100%
Cap Table
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Bootstrapping is building the business from internally generated funds.
• You need to establish a foundation for your
business.
• Build credibility and show that your business has customers and a product that people want to buy.
• Focus on customers and cash flow.
• Work hard and be creative in seeking ways to drive revenue while holding expenses down.
Friends Family & Founder
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Angel investors are high net worth individuals who are interested in investing in emerging businesses.
Two Types of Angel Investors Professional Strategic
Angel Investors
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The underlying reason that they will invest is return on their investment.
They invest in spaces they know. They invest with people they know They invest based on referrals from
people they know. Invest based on due diligence. Will require professional terms. Looking for a big payout based on a
liquidity event.
Professional Investors
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More interested in the product than the business.
Invest based on gut reaction.
May take common stock
May not look for a liquidity event.
May be the friends in FFF (or referred by FFF)
Strategic Investors
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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.
You will probably have to relinquish some level of control over the company.
If you are unwilling to share leadership of the company, investors are not the option for you.
Key Points About Investors
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The only reason that they will invest is return on their investment.
They only invest in spaces they know.
They only invest with people they know
They only invest based on referrals from people they know.
Invest only based on due diligence.
Will only require professional terms.
They are only looking for a big payout based on a liquidity event.
Institutional Venture Capital
To make money not to make loans.
Lending is a tool to making money.
Banks ~ Why They Exist
Banks typically lend for “stuff”.
Banks are a great option if you have history and are looking to expand. However, for an early stage company with limited history and minimal collateral, getting a loan could prove difficult.
Commercial Banks
When the company is new the entrepreneur should establish a banking relationship and utilize this as far as it will go. The relationship with a bank will be very helpful in the future as the business becomes established.
There is no 100% financing from a typical commercial bank.
Commercial Banks
SBA is not in the business of making bad loans.
Once the bank has agreed that the loan is good but in some way outside their guidelines they will seek an SBA guarantee.
The SBA is there to help you with your cash flow.
Longer term Lower down payment
Small Business Administration
Credit Credit Score should strive to be over
710 +
Guard Your Credit Score
What Do Banks Look For?
Business Plan
The business plan tells the bank how you are planning to repay the loan.
Build A Business
Collateral
There is no 100% financing
To a bank collateral is real estate or equipment.
What Do Banks Look For?
Short-term money to operate the
business.
Typically financed by a Line of
Credit.
Working Capital
Know your credit score going in.
Establish a banking relationship
Keep you plan tight, clear and easy to understand.
Use common format, don’t be creative.
Help the banker say yes. Put yourself in the banker’s shoes.
Structure your ask. Separate working capital, equipment and real estate.
Getting The Banks To Say Yes
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Investors invest in people and teams that can execute.
“A” teams with “B” markets will generally beat “B” teams with “A” markets.
Seeking Investors
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Summary should be “concise”
Summary should provide a clear description of the problem you solve.
How you solve it.
Your business model.
The underlying magic of your product.
Defensibility of your product.
Summary should be no more than “four-pages”.
Investor Summary Format
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Question: How can you tell if an entrepreneur is pitching their business?
Answer: Their lips are moving.
Pitching
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Explain what you do in the first minute.
“Clearly” explain what you do in the first minute.
Articulate the problem in the market and what you do to solve it.
Purpose of a pitch is to “stimulate interest” not to close the deal.
Keep it tight. 10 slides, 20 minutes, 30 point font.
Speak to the audience’s interest.
Tips For Pitching
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Title Slide: This is where you tell what you do and give a simple to understand example.
Problem: Describe the pain you are alleviating for your customers.
Solution: Show how you solve the pain.
Business model: Explain how you make money.
The advantage you have: Why are you different than everyone else?
Marketing and Sales: "Clearly" tell what your sales strategy is. Do not forget to discuss your pricing.
Presentation Deck
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Competition: Show there is enough of a market available to buy your product even with the competition.
Management Team: You need to convince the investor that you have the team that can execute and will succeed.
Financial Projections: You need a simplified, clear slide here. You need to justify your numbers.
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).
Presentation Deck
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How are you going to make money?
How are you going to generate my return?
Are you capable of “executing”?
Investor’s Interest
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Don’t try to BS the investor because they see through it.
Get your value proposition across early in case you don’t get to the end of the presentation.
Don’t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will.
Presentation Tips
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Don’t ask for an NDA at initial meetings!!! Real investors are not in the business of
stealing ideas and trying to develop them.
You control what is in the summary and initial pitch. You don’t need to disclose the “secret sauce” at this point.
Investors will sign an NDA prior to due diligence.
Get over it…You’re not that special
Presentation Tips
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Recommended Readings
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Ohio Small Business Development Center
www.SBDCColumbus.com
614-287-5294
TechColumbus
www.techcolumbus.org
614-487-3700
Ideas to Deals Blog
www.ideas2deals.com
Resources for Assistance
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Everything is always impossible
before it works.
That is what entrepreneurs are all
about – doing what people have told
them is impossible.
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The Ohio SBDC at Columbus State
p. 614-287-5294
www.SBDCcolumbus.com
For Information on SBDC Activities
“Pitching the Dream”
Mark Butterworth
Innovation4ward
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Agenda
What investors looking for
The pitch
Deal structure
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Angels – Looking For
A company where they believe can add value and make money (and have fun)
An industry they understand and good management team
Invest based on: Chemistry
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Venture Capital – Looking For
A company where they can make lots of money (fun is not a factor)
Big markets, sustainable differentiation and good management
Invest based on: Management team
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Good Management – Ideal
Experience in a start-up or launching a product within a large company
Domain knowledge
Relationships with key customers
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Good Management – Other
Broad vision
Ambitious
Tremendous energy
Good listener
Adaptable
Know that they don’t know everything
Hire people better than themselves
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Investment Criteria: Other
Sales and marketing strategy
Competition
Technology
Financials
Exit strategy
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The Investor’s Mindset
Their time is more important than their money
You must manage the process!
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First Meeting – Angel Investors
Goal: Get a second meeting not a check
Format: Short, non-technical PowerPoint
Message: Within the first three minutes:
The problem you are solving,
How you solve the problem, and
That you have the management team to execute
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First Meeting - Other
Do not assume: they have read the plan
that you will get through presentation
The product or technology is only 5% of the pitch in the first meeting
One page summary financials Assumptions more important than
numbers
How the investor will make money!
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After The First Meeting
You must manage the process
Anticipate the investors needs
Submit your own Due Diligence Review Manual
Don not tell them “it is in the business plan”
Opportunity to customize to their “hot buttons”
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Deal Structure
Individual Angels: Security: Common stock Exit: Share buy-back, Sale or IPO Return: 15% to 20% Valuation: reasonable
Organized Angel Funds and Venture Funds: Security: Preferred stock Exit: Sale or IPO Return: 30%+ compound annual Valuation: Tough but fair
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Preferred vs. Common Stock
Common Investors and management have same
rights
Preferred has additional rights:
Liquidation preference – get their money back first
Anti-dilution provisions – protection against reduction in valuation
Redemption – investment plus dividends back at predetermined time
Dividends – 5% to 8% annually
Veto over strategic decisions (sale, liquidation, IPO)
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Resources:
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.
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.
Pratt’s Guide to Venture Capital Sources. New York: Securities Data Publishing, 2000.
www.pwcMoneyTree.com
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The Ohio SBDC at Columbus State
p. 614-287-5294
www.SBDCcolumbus.com
For Information on SBDC Activities
