Entrepreneurship from Investors Perspective

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Entrepreneurship (from Investors Perspective)

• Serhat Görgün
• General Manager
• 07.07.2008
• METU, Ankara

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AGENDA

• Stages of Financing
• The Process of Acquiring Financing
• Investment Decision Criteria
• Investment Turn-Offs
• Attributes of Great Investors
• Investors Contribution

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Stages Of Financing
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Stages Of Financing

• Seed stage financing
• The venture is still in the idea formation stage
  and its product or service is not fully
  developed.
• The founder/inventor is given a small amount of
  capital to come up with a working prototype.
• It's rare for a venture capital firm to fund this
  stage.
• In most cases, the money must come from the
  founder's own pocket, from the "3 Fs" (Family,
  Friends, and Fools), and occasionally from angel
  investors.

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Stages Of Financing

• Start up financing
• The venture at this point has at least one
  commercial prototype and/or customer paid for the
  product/services.
• The venture has at least one principal working
  full time.
• The search is on for the other key management
  team members and work is being done on testing
  and finalizing the prototype for production.
• Early stage VC investors and angels invest at
  this stage

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Stages Of Financing

• First -stage financing
• The venture has finally launched and achieved
  initial traction.
• Sales are trending upwards.
• A management team is in place along with
  employees
• The funding from this stage is used to fuel
  sales, reach the breakeven point, increase
  productivity, cut unit costs, as well as build
  the corporate infrastructure and distribution
  system.
• This stage is where VCs play active role in
  investment

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Stages Of Financing

• Second -stage financing
• Sales at this point are starting to snowball.
• The company is also rapidly accumulating accounts
  receivable and inventory.
• Capital from this stage is used for funding
  expansion in all its forms from meeting
  increasing marketing expenses to entering new
  markets to financing rapidly increasing accounts
  receivable.
• Venture capital firms specializing in later stage
  funding enter the picture at this point

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Stages Of Financing

• Mezzanine or Bridge financing
• At this point the company is a proven winner and
  investment bankers have agreed to take it public
  within a defined period of time (eg 6 months).
• Mezzanine or bridge financing is a short term
  form of financing used to prepare a company for
  its IPO. This includes cleaning up the balance
  sheet to remove debt that may have accumulated,
  buy out early investors and founders deemed not
  strong enough to run a public company, and pay
  for various other costs stemming from going
  public.
• The funding may come from a venture capital firm
  or bridge financing specialist. They are usually
  paid back from the proceeds of the IPO.

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Stages Of Financing

• Initial Public Offering (IPO)
• The company finally achieves liquidity by being
  allowed to have its stock bought and sold by the
  public.
• Founders sell off stock and often go back to the
  beginning with another startup.

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Why Early Stage Investment is needed?

• Financing of product development
• Financing of market penetration
• Financing of investments
• Working capital financing to secure operative
  continuity
• Maintaining liquidity to be able to cover daily
  payments

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Being in Need vs Being Ready

• Entrepreneurs don't understand the difference
  between having a need for capital and being ready
  to ask for it. Because entrepreneurs are
  motivated to seek capital based on need, not
  readiness.
• When an entrepreneur is driven by a strong sense
  of need, the message they send to an investor is
  one or more of the following
• I'm unwilling to invest any more of my money, so
  I need yours.
• I haven't been able to raise money from anyone
  else, so I need you to save me.
• On the other hand, when an entrepreneur has "done
  their homework" and truly understands what it
  takes to run a business, the message they send
  is
• I'm ready for a partner to help me take this to
  the next level.
• I have a handle on my product, my market and my
  customers, and I'm ready to accept an investment
  that'll help me grow.
• I've researched the various sources of capital
  available to me and I'm ready to work with you
  because you're the best match.

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The Process of Acquiring Financing
INVESTMENT
Introduction
Meeting
Due-diligence
Term-Sheet
Shareholders Agreement

• Quick view
• Informal Dialogue
• Informal Due-diligence
• Formal Presentations
• Business Plan

• Fast Pitch
• Executive Summary

• Investment Decision
• Formal Due-Diligence
• Closing Documents
• Valuation

50 Fail 10 gt 5
50 Fail 5 gt 2-3
90 Fail 100 gt 10
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Introduction

• This is the stage where most (about 90 ) of all
  proposed projects are rejected.
• The initial assessment is made relatively rapidly
  and therefore the company should pay attention to
  two aspects
• a short description of the company (elevator
  pitch),
• and/or
• a well-prepared business plan summary is the best
  means of attracting and convincing the investor.

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Introduction

• Fast Pitch Checklist
• 1. Who We AreProfile yourself and your teams
  capabilities.
• 2. What We GotDescribe your opportunity, market
  need/pain and solution. Specifically describe
  your traction in your market space. For example,
  letters of intent from marquee customers or
  recurring revenues.
• 3. Where Were GoingOverview of your growth
  benchmarks/milestones and the market potential of
  your technology.
• 4. What We NeedDo not offer specific financial
  needs. Just be prepared to answer privately.
  Consantrate on non-financials.
• 5. Why NowState what has changed in the world
  that opens up the window to your particular
  opportunity.
• 6. What We OfferDescribe a basic understanding
  of how you will provide a return on investors
  money.

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Introduction

• Executive Summary
• Very few Investors read detailed Business Plans
  in the very first stage. Instead you need a 1 or
  2 page Executive Summary which includes such
  things as
• a company background,
• a description of the business,
• what problem you are solving,
• what is special about the way you are solving it,
  
• the management team,
• details about the market you are addressing,
• summary financial information,
• a technical presentation
• your business model. 

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The Process of Acquiring Financing
INVESTMENT
Introduction
Meeting
Due-diligence
Term-Sheet
Shareholders Agreement

• Quick view
• Informal Dialogue
• Informal Due-diligence
• Formal Presentations
• Business Plan

• Fast Pitch
• Executive Summary

• Investment Decision
• Formal Due-Diligence
• Closing Documents
• Valuation

50 Fail 10 gt 5
50 Fail 5 gt 2-3
90 Fail 100 gt 10
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Meeting

• After youve made a great first impression, your
  next objective as an entrepreneur is to make an
  even better second, third, fourth and fifth
  impressions.
• And this requires continuing to clearly
  communicate the value that you and your business
  idea bring to the table.
• Should the investor decide that the investment
  request meets his criteria, the following step is
  a meeting arranged with the company management.
• A presentation of the business is required.
• Experience has shown that about half of the
  remaining companies are discarded at this stage

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Meeting

• Presentation
• 1. Cover SlideThis first slide and discussion
  should help position your venture so the
  investors have a framework for listening. -
  Include the name of your venture - The
  presenters name, the title - A concise
  one-sentence Value Line statement (What we do)
• 2. New Business Venture Opportunity and
  Analysis - Problem describe the pain of the
  customer, why they need your product - Describe
  how the customer addresses the issue today -
  Solution describe how your solutions, value
  proposition, makes the customers life better. -
  Market size describe how much headroom is
  available, how big is the market? - Competitor
  analysis what we do better, what they do better
• 3. Business Strategy and Competitive Advantage -
  Business Strategy Competitive advantage and
  Business Model

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Meeting

• Presentation
• 4. Venture Team Development and Management -
  Founders and management - How came together, how
  funded - Board of directors and advisors 5.
  Controlling and Allocating Critical Capital
  Resources - Where are you in the product
  pipeline, roadmap? - Briefly discuss your
  product features - What kind of special
  resources required?
• 6. Market Entry Strategy - Prepare a simple
  Value Map - Describes how your product
  physically gets to the end customer

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Meeting

• Presentation
• 7. Marketing and Sales Strategies - Who is
  leading the venture team for sales? - Revenue
  Model can describe it in 1 minute or less! -
  Revenue event, when? How?
• 8. Managing Rapid Growth - Which type of growth
  strategy? - How will you manage the growth
  (prevent a stall?) - How about going global?
• 9. Managing the Networked Enterprise -  Answers
  How will you use the Internet? -  Discuss
  Enterprise, customers, strategic partner
  specifics -  Low cost marketing and viral
  marketing? - Who will host, manage, work on the
  Web site?

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Meeting

• Presentation
• 10. Financing Strategy - How much? (Answers
  what do you need to get this done?) - When do
  you need the money? Other rounds down the road?
• 11. Exit Strategy and Exit Goals - What are some
  potential exits? - What are some of the examples
  in the space? - What are you doing today for
  these to happen?
• 12. Conclusion Slide - Focus on Why Now -
  Describe the inflection points in your
  industry - Describe recent trends that makes
  your solution viable today - How your company is
  set on capitalizing on the recent trends

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The Process of Acquiring Financing
INVESTMENT
Introduction
Meeting
Due-diligence
Term-Sheet
Shareholders Agreement

• Quick view
• Informal Dialogue
• Informal Due-diligence
• Formal Presentations
• Business Plan

• Fast Pitch
• Executive Summary

• Investment Decision
• Formal Due-Diligence
• Closing Documents
• Valuation

50 Fail 10 gt 5
50 Fail 5 gt 2-3
90 Fail 100 gt 10
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Due Diligence

• Due-Diligence stage (also called Negotiation
  Stage), involves a thorough study of the target
  company by the investor who assesses the company
  on the basis of his own, weighted investment
  criteria.
• At this stage it is critical to assess
• the market and the opportunity
• the entrepreneur and the management team
• the technology
• competition
• the financials

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Due Diligence

• Assessing the Opportunity
• How big is the market?
• How competitive is the space?
• Whats the average product cycle time?
• Will this define a market?
• Where is the competition heading?
• How hard is it to sell?

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Due Diligence

• Assessing the Entrepreneur and the Management
  Team
• Understanding motivations
• Determining commitment level
• Determining willingness to sacrifice
• Judging appetite for risk
• Assessing expertise
• Appraising entrepreneurs leadership abilities
  and vision

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Due Diligence

• Assessing the Technology
• Is it a breakthrough or just evolutionary?
• Is it protectable?
• How easy is it to replicate or substitute?
• Nice to have vs Must have
• Is the success of the enterprise dependent on the
  success or uniqueness of the technology?
• How mature is the technology?
• Whats the time to market?
• Whats the technical risk?

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Due Diligence

• Assessing the Competition
• Understand where the competition is going, not
  just where it is today
• Rate how innovative the competition is
• Predict how they will respond to your offering
• Compare leadership teams
• Consider switching cost

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Due Diligence

• Valuation
• Early-stage valuation is an art, not a science.
• Needs to be high enough to reward entrepreneurs
  for risk (quitting job, etc.)
• Needs to be low enough to allow step-up at Series
  B round.
• Irrational but true Valuation depends on the
  amount of money being raised!
• There are two approaches to making investment
  decisions by means of discounted cash flows. One
  is the net present value method (NPV), and the
  other is the internal rate of return (IRR) method.

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The Process of Acquiring Financing
INVESTMENT
Introduction
Meeting
Due-diligence
Term-Sheet
Shareholders Agreement

• Quick view
• Informal Dialogue
• Informal Due-diligence
• Formal Presentations
• Business Plan

• Fast Pitch
• Executive Summary

• Investment Decision
• Formal Due-Diligence
• Closing Documents
• Valuation

50 Fail 10 gt 5
50 Fail 5 gt 2-3
90 Fail 100 gt 10
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Investment Decision Criteria

• Product-Market Factors
• Market Growth And Attractiveness
• Uniqueness Of Product And Technology
• Degree Market Already Established
• Market Size
• Seasonality Of Product-Market
• Sensitivity To Economic Cycles

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Investment Decision Criteria

• Strategic-Competitive Factors
• Ease Of Market Entry
• Ability To Create Post-Entry Barriers
• Sustained Share Competitive Position
• Nature And Degree Of Competition
• Strength Of Suppliers And Distributors

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Investment Decision Criteria

• Management Team Factors
• Leadership Potential Of Management Team
• Leadership Potential Of Lead Entrepreneur
• Recognized Industry Expertise In Management Team
• Track Record Of Lead Entrepreneur
• Track Record Of Management Team
• Management Competence Factors
• Marketing/Sales Capabilities Of Team
• Process/Production Capabilities Of Team
• Organizational/Administrative Capabilities Of
  Team
• Financial/Accounting Capabilities Of Team

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Investment Decision Criteria

• Financial Factors
• Time To Breakeven
• Time To Payback
• Expected Rate Of Return
• Ability To Cash Out
• Fund Factors
• Business Meets Fund Constraints
• Business And Product Fit With Fund Portfolio
• Ability Of Investors To Influence The Deal
• Location Of Business Relative To The Fund

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Investment Decision Criteria

• Deal Factors
• Stage Of Investment Required
• Number And Nature Of Co-Investors In Deal
• Ability To Syndicate Deal
• Scale And Chance Of Later Rounds Of Financing
• Importance Of Unclear Assumptions

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Turn-offs

• Me too
• Low Barriers to Entry
• Entrepreneurs willing to cash-out with the
  investment
• Missionary
• Large follow - on capital needs
• Keep the lights on capital raise
• Multiple target markets addressed at early stage
  of company

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Post Investment Challenges

• Developing the team
• Bringing products to market
• Use of Funds
• Beating the competition
• Focus on reliability and performance rather than
  features
• Be responsive to customer needs and take the
  customers point of view

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The Process of Acquiring Financing

• In the end, the investment is made in about 2 to
  3 cases of all received investment requests.
• The parties finally make a shareholder agreement
  to establish practical operating rules.
• Investors exit could be anything between
  liquidation and IPO.
• The intention is to liquidate the shareholding in
  early phase companies after 4-8 years and in
  companies with follow-on funding after 1-3 years

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Attributes of Great Investors

• Bets on people not trends
• Driven by the big idea
• Looking for the big winner
• Not afraid of failure
• Knows how to thread the needle to get success
• Understand how to develop and manage a portfolio
  of risk
• Serves as a fantastic coach
• Does his/her best work outside of the board room
• Not waiting for validation from other Investors

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Investors Contribution to Entrepreneur

• Strategic - Serve as a sounding board in
  crafting and flight testing ideas and
  strategies. - Business consultant with unique
  industry experience. - Developing, negotiating
  agreements, and executing strategic
  partnerships. - Developing and executing
  acquisition strategies. - Developing financial
  plans and assisting in follow-on rounds of
  funding. - Developing a global business
  strategy. - Negotiating licensing or royalty
  agreements.

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Investors Contribution to Entrepreneur

• Social and Supportive - Company building
  experience. - Can help manage the transition
  from entrepreneurial to professional management
  structures. - Been around in hard times,
  providing sound advice and encouragement. - Have
  a complete repertoire of mistakes and stories to
  share. - Knowledgeable of industry trends and
  exposed to insider knowledge seeing deals and
  plans. - Vital business coach, mentor and
  personal friend, confidant. - Support for,
  during and after initial public offerings or
  other liquidity events.

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Investors Contribution to Entrepreneur

• Network Effect - Credibility to venture team. -
  Helping recruit key management and board
  members. - Providing access to industry experts
  and knowledgeable advisors. - Providing access
  to the right professional service providers, in
  particular legal and accounting firms. -
  Instrumental in opening doors to key marquee
  customers that otherwise might not take a new
  venture seriously. - Instrumental in opening
  doors to key suppliers. - Introducing the
  venture team to other private equity
  investors. - Providing access to the investment
  bankers for preparing a viable exit. - Providing
  access to executives overseas for strategic
  alliances, investments and resources. - Making
  key contacts with banks and leasing companies. -
  Providing a close-knit relationship with other
  ventures in the portfolio.

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Due-Diligence (The Other Way Around)-Questions
to Ask About Investors-

• When in the entrepreneurial life cycle do they
  prefer to invest?
• What business sectors/niches do they prefer?
• How much do they typically invest per deal? What
  is their average size of investment? Minimums and
  mximums.
• Do they have any industry experts in their firm?
• In which ventures in your space have they already
  invested?
• How are their investments typically structured?
  Do they prefer to lead deals?
• With whom have they completed conjoined deals?
• What is their geographic focus?
• Who are the key partners? What are their
  backgrounds (degrees, companies, etc.)?
• What is their network effect potential?

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Turkeys intellectual property management and
innovation commercialization HUB
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THANK YOU
Serhat Görgün Inovent Inc. General
Manager Address GOSB Teknokent High-Tech
Building 41480 Gebze/Kocaeli/Turkey 0 262 678
89 00 www.inovent.com.tr