Scott droney - financing start-up and growth
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Scott Droney is provide financial services spectrum as well as data processing and managing segments. Since most of its financial services were retail focused, the need to build scale and skill in the transaction processing domain became imperative.
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Scott droney - financing start-up and growth
- 1. Scott Droney Financing Start-up and Growth
- 2. Overview • Starting with a plan • Financing start-ups • Financing growth • Valuing the business
- 3. Risk Points and Associated Funding Preparation for Start-Up Seed Capital Friends and Family Private Investors SBIR/STTR Early Stage Funding Private Investors Some Venture Capital Strategic Partners Late Stage Funding Venture Capital Public Equity Strategic Partners Revenues Manufacturing Risk Development Risk First Customer Marketing Risk Management Risk Initial Public Offering Year 1 Year 2 Year 3
- 4. The Fundamental Truths About Raising Money
- 5. 1: Raising Capital • Takes twice as long as projected • Investors identified may not work out • Second-round may request buyout • Significant costs to raising capital
- 6. Upfront Costs Financials Consultant CPA/Auditor I-Banker Marketing Costs Prospectus Legal Printing Back-end Costs I-Banking Legal Brokerage Easily up to $200,000 2: Cost of Raising Capital
- 7. 3: Can You Impress Investors? • Defensible competitive advantage? – Patented technology – Cycle time – Marketing, advertising, and sales force – Low cost manufacturing • Customers? • Experience? • Growing market? • Who are your friends?
- 8. Understanding the Funding Stages
- 9. Start with a Financing Strategy • Look for smart money (who invests is more important than terms) • Buy top management with first $$$ • Get moving fast, early prototype with customer feedback • Focus on one investor and get an intro • Don’t marry your first date • Go for the best deal, not the biggest
- 10. Financing the Start-up • Entrepreneur resources – Savings, credit cards, mortgages, stock market accounts, friends and family • Bootstrap – Hire as few employees as possible – Lease or share everything – Use other people’s money
- 11. Stage One: Bootstrapping in an Incubator • Average incubee’s sales increased • > 400% from time entered to time exited • > Average annual growth in sales was $239,535 • 87% of grads still in business – Only 20% of new start-ups
- 12. Do Incubators Meet Needs? • Higher order needs need to be met – Human network, access to expertise and capital, partnerships, professional resources, product design, first 100 customers • Some negatives – Perception of being babied – Artificial buffer – Equity stake by incubator
- 13. Stage One: Private Investor “Angel” Profile • Educated white males—40s/50s • Net worth over $750k • Used to be entrepreneurs • First stage financing and young firms • Invest near home—involved • One to two deals a year • Invest between $10,000 and $500,000
- 14. More on Angels • 3 to 10 year time frame for ROI • 5–10 times their investment, function of risk • Find deals through referrals from business associates • Make decisions more quickly • Requirements for due diligence may be lower
- 15. MORE on Angels • Order of investment interest – Manufacturing—industrial/commercial – Manufacturing—consumer – Energy/natural resources – Services – Retail/wholesale
- 16. An Unlikely Angel Investment • A “me too” type of product • No intellectual property • Business location more than 100 miles away • Mature or fading industry • Return on investment less than 15 percent • Not enough market research with customer • Weak competitive analysis
- 17. An Unlikely Angel Investment (cont.) • A poorly defined vision for the company • No management team, a solo entrepreneur • Weak management team with no experience • Exit time more than 7 years away • Unfamiliar business or industry • Minority position with no voting rights • Too many co-investors
- 18. What Winning Angels Do • Consider the source carefully • Focus on the model, not the plan • Emphasize the entrepreneur and the team • Seek a scalable business • Look for the exit • Identify the unfair advantage • Focus on deals where they know something
- 19. Stage One/Two: Private Placement • Raising capital from private investors – Securities: common/preferred stock, notes, bonds, debentures, limited partnership shares, etc. • Reg D – Sophisticated investors – Blue Sky laws
- 20. Private Placement • Advantages – Less costly, less time consuming than IPO – Availability of standardized offering statements – Don’t have to file with SEC
- 21. Alternative Sources • Strategic alliances – R&D limited partnership – Joint venture • Small Business Investment Company (SBIC) • SBIR Grants – Phase I: develop concept and test feasibility – Phase II: pursue the innovation and develop the product – Phase III: commercialize the technology
- 22. Debt Sources • Commercial banks • Commercial finance companies • Small business administration • State-funded venture capital • Incubators • Customers and suppliers
- 23. Venture Capital • Less than 1% of the 300K companies growing 20%+ per year are backed by VCs
- 24. Venture Capital Terms: Basic Principles • VC gets money back first • Participation in upside • Control over fundamental events • Creation of path to liquidity • Preferred stock is the investment security of choice
- 25. Capital Structure • Investment deal has – Amount of money to be invested – Timing and use of investment moneys – Return on investment to investors – Level of risk involved • Preferred stock or debentures
- 26. Rules for Dealing with VCs • Know your enemy • Don’t shop the business plan • Approach through a referral • Write a killer executive summary • Check out the terms sheet carefully • Be patient • Be prepared for a staged investment
- 27. What VCs Relate to • Location can matter • Growth track: bigger is better • 10X investment in 5 years • 25–50% per year • PE = 15:1 or more
- 28. What VCs Relate to (cont.) • Planned exit—make it short • New paradigm, lead products • Number of co-investors • Bridge financing to position for an IPO • Board seats
- 29. Ownership • Stage 1: give up 30% + for every $1M • Stages 2–3: give up 8–15% per $1M • Stages 4,5,6: give up 5–6%
- 30. Your Due Diligence on the VC • Identify your dream teams • Don’t accept a term sheet before due diligence. Stay in control • Request 5 references from each VC
- 31. Your Due Diligence on the VC (cont.) • Interview references – Why did you choose this firm? – How effective have they been in securing deals and partnerships? – How effective have they been in recruiting board members? – How have they helped your company increase its valuation? – On a scale of 1–5, how would you rate the contact partner?
- 32. The Initial Public Offering (IPO)
- 33. The IPO Process
- 34. Advantages of Going Public • Source of interest-free growth capital • More prestige and clout • Easier to form alliances and negotiate deals • Public stock used to attract employees and reward existing employees
- 35. Disadvantages of Going Public • Expensive process: $300,000+ • Time-consuming • Company information is public • CEO responsible to shareholders • Entrepreneur may not control stock • Pressure to perform in the short term • SEC reporting requirements
- 36. Development Seed & Early Stage Growth & Harvest R&D Break-even Profitable, Needs Expansion Capital Buyout, Merger, IPO Direct Offerings Warrants Common Stock Common Stock Common Stock First Customer Multiple Customers Multiple Products May 2002 Nov 2002 June 2003 Sept 2005 Notes Bonds Debentures Common Stock Preferred Stock Direct Offerings Sept 2003 Direct Offerings Warrants Notes Common Stock Preferred Stock Debentures Major Financing Instruments at Different Milestones
- 37. Valuing the Business • Fair market value: willing seller and buyer • Intrinsic value: interpreting balance sheet and income statements • Investment value: worth to an investor • Going concern value: current financial status • Liquidation value: amount recover from sale of assets • Book value: accounting measure that is the difference between total assets and total liability
- 38. Valuation Methods • Multiple of earnings – Market price of common stock/earnings per share • Discounted Cash Flow Analysis – How much an investor would pay today to have a cash flow stream of X dollars for X number of years into the future
- 39. Other Factors in Valuation • The assumptions used to estimate value • The degree of legitimate control the owner has in the business • Intangibles like a loyal customer list and intellectual property • The bottom line: Negotiation determines the value
- 40. Summary • Plan financing stages carefully • Use friendly money first • Stick with private placement as long as possible • Do YOUR due diligence • Get references • Be proactive