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Entrepreneurism-American Style Entrepreneurism-American Style

““the art of raising capital”the art of raising capital”

January 25, 2008January 25, 2008Paul A. DeRidder, MD,MBAPaul A. DeRidder, MD,MBA

www.paulderidderMD.comwww.paulderidderMD.com

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Incubation

Transition

Rapid growth

Stages of Growth & Funding

“I have an idea”

“I have nailed the fundamentals:

third-party validation”

“This venture is ready to grow

very, very rapidly”

Sweat equity, friends, family, fools, customers

Angels, customers

VCs, customers

Liquidity

Event

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What are Angel Investors?What are Angel Investors?• Invest own capitalInvest own capital

• Variety of backgroundsVariety of backgrounds– CEO’s, Founders, VC’s, CEO’s, Founders, VC’s,

Sr. Exec’s, Professionals Sr. Exec’s, Professionals

• Active vs. PassiveActive vs. Passive– Extensive networks and Extensive networks and

resourcesresources– Interested in your businessInterested in your business– Can devote time and add Can devote time and add

substantial valuesubstantial value

• Limited financial Limited financial resourcesresources

• Networks e.g. TCA, CVANNetworks e.g. TCA, CVAN

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TCA OverviewTCA Overview

• Founded in 1997Founded in 1997

• One of largest angel One of largest angel groups in USgroups in US

• 270 members270 members

• Regional NetworksRegional Networks

• Individual investorsIndividual investors

• Organized process for Organized process for collaborationcollaboration

Los AngelesOrange CountySan Diego

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Searching For:Searching For:

• ManagementManagement• Track recordTrack record• Domain expertiseDomain expertise• Not necessarily a complete team – at least a CEONot necessarily a complete team – at least a CEO

• ““Big idea” vs. “lifestyle” business Big idea” vs. “lifestyle” business • Painkillers vs. vitaminsPainkillers vs. vitamins• Clearly defined market and business modelClearly defined market and business model• Sustainable competitive advantageSustainable competitive advantage

• Technology, patentsTechnology, patents• RelationshipsRelationships• Market positionMarket position

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Searching For:Searching For:

• Third party validationThird party validation• CustomersCustomers• PartnersPartners

• Liquidity event potential in 2 - 5 yearsLiquidity event potential in 2 - 5 years• Attractive valuation Attractive valuation

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Goals and ObjectivesGoals and Objectives

• Build a great Build a great companycompany

• Retain controlRetain control• Run the companyRun the company• Make a ton of Make a ton of

moneymoney• Change the worldChange the world

• Build a great Build a great companycompany

• Make a ton of Make a ton of moneymoney

Of Entrepreneur Of Investor

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Merchant Bankers to Emerging Healthcare Merchant Bankers to Emerging Healthcare and Technology Companiesand Technology Companies

Private PlacementsPrivate Placements• SENIOR DEBTSENIOR DEBT• PROJECT FINANCEPROJECT FINANCE• ASSET-BACKED DEBTASSET-BACKED DEBT• SUBORDINATED DEBTSUBORDINATED DEBT• COMMON EQUITYCOMMON EQUITY• PREFERRED EQUITYPREFERRED EQUITY

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Merchant Bankers to Emerging Healthcare Merchant Bankers to Emerging Healthcare and Technology Companiesand Technology Companies

Mergers and Acquisitions Mergers and Acquisitions (M&A)(M&A)

• Sell-Side AdvisorySell-Side Advisory• Buy-Side AdvisoryBuy-Side Advisory• Strategic Alternative AnalysesStrategic Alternative Analyses• Management BuyoutsManagement Buyouts• Strategic InvestmentsStrategic Investments

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M&A: Primary Exit Strategy M&A: Primary Exit Strategy for Private Companiesfor Private Companies

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Valuation of Your Business for Valuation of Your Business for A Liquidity EventA Liquidity EventMaking A Grand ExitMaking A Grand Exit

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Key Factors that Maximize Key Factors that Maximize ValuationValuation • Level of day-to-day commitment Level of day-to-day commitment

• Ability to convey a compelling story Ability to convey a compelling story

• Strong understanding of potential buyers Strong understanding of potential buyers and valuation drivers and valuation drivers

• Ability to create competition among buyersAbility to create competition among buyers

• Quality of overall executionQuality of overall execution

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How Much Is The Business How Much Is The Business

Worth?Worth? Depends upon…Depends upon…• Stage of product and customer development Stage of product and customer development • Dominance and defensibility in marketDominance and defensibility in market• Type of potential buyer identified Type of potential buyer identified • •FinancialFinancial • • StrategicStrategic • •Emotional Emotional • Appearance of quality in management, Appearance of quality in management,

accounting and operation accounting and operation • Competition among potential buyersCompetition among potential buyers

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Methods of ValuationMethods of Valuation

1.1.Multiple of revenues (1/2 to 4x)Multiple of revenues (1/2 to 4x)2.2.Price / earnings ratio (5 to 30)Price / earnings ratio (5 to 30)3.3.Free cash flow (5-8x available cash)Free cash flow (5-8x available cash)4.4.Book value (1-3x)Book value (1-3x)5.5.Liquidation or salvage value (floor Liquidation or salvage value (floor

value)value)6.6.Replacement valueReplacement value

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Methods of valuation (2)Methods of valuation (2)

• Similar company transactions Similar company transactions

• Recent same-company transaction Recent same-company transaction price (share sales) price (share sales)

• Internal rate of return (discount Internal rate of return (discount future to present) future to present)

• Comparable public company Comparable public company valuations. valuations.

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Controlled ProcessControlled Process

• Having a formal process is only true way to know Having a formal process is only true way to know buyer interest buyer interest

• Everyone must be on the same page at all times Everyone must be on the same page at all times IInvestment banker, management, investorsnvestment banker, management, investors

• Don’Don’tt let buyers dictate pace let buyers dictate pace • Keep process moving quickly to minimize rumorsKeep process moving quickly to minimize rumors• Give all buyers the same deadlines Give all buyers the same deadlines

AAvoid void PPhase I hase I aand nd PPhase II, hase II, bbuyer listsuyer lists • Avoid wasting time with Avoid wasting time with ttire kickersire kickers • Contact direct competitors last Contact direct competitors last • Avoid exclusivity as long as possible, then give only 3-Avoid exclusivity as long as possible, then give only 3-

4 weeks4 weeks

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Driving the Deal to CloseDriving the Deal to Close

• Maintain momentum and urgency Maintain momentum and urgency

• 1 day delay = 1 day longer to close 1 day delay = 1 day longer to close

• Anything unexpected can happen in 1 day Anything unexpected can happen in 1 day

• Your only leverage left at this point is expiration Your only leverage left at this point is expiration of exclusivity of exclusivity

• Prepare a detailed schedule to close once you Prepare a detailed schedule to close once you go exclusive go exclusive

• Time is now your enemy...Time is now your enemy...

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Top 10 List –Negotiation RulesTop 10 List –Negotiation Rules

• Hire the best M&A attorney, Investment Hire the best M&A attorney, Investment Banker, not your friends Banker, not your friends

• Momentum is key...take your foot off the gas Momentum is key...take your foot off the gas and the car stops and the car stops

• When bluffing, ask yourself, “How would I act When bluffing, ask yourself, “How would I act if I had a better offer?” if I had a better offer?”

• “ “Aloof”is more powerful than “Confrontational” Aloof”is more powerful than “Confrontational”

• Less is always more when talking to buyersLess is always more when talking to buyers

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Top 10 List –Negotiation RulesTop 10 List –Negotiation Rules

• If the buyer is truly interested, they wonIf the buyer is truly interested, they won’’tt walk away walk away

• Being friends with the buyer = lower price Being friends with the buyer = lower price

• Understand each buyerUnderstand each buyer’’ss worst worst competitive nightmare competitive nightmare

• Carefully coordinate and script all Carefully coordinate and script all communication communication

• Never answer your own phoneNever answer your own phone

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Marriage ???Marriage ???

• Are objectives mutual?Are objectives mutual?• Is the price right?Is the price right?• Are the terms right? Are the terms right? • Can we make this work? Can we make this work?

Give Incentive to Management to Close the Give Incentive to Management to Close the Deal!Deal!