Raising Early-Stage Private Equity Capital Bessemer Trust - PowerPoint

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					Raising Early-Stage Private Equity Capital

                     Bessemer Trust




                                                                       George H. Wilcox
                                                                      Managing Director
                                                                 Wilcox@Bessemer.com
                       Bessemer Trust Company
         1050 Connecticut Avenue, N.W., Washington, D.C. 20036
                 Tel. 888-659-3330 Fax 202-659-4059
                          www.Bessemer.com
                                 Contents
                 •Introduction                           3
                 •The Capital Formation Process         4-5
                 •Required Documents                     6
                 •Common Mistakes in Business Plans      7
                 •Common “Spin” by Entrepreneurs         8
                 •Meeting with Investors                 9
                 •Investor Due Diligence                10
                 •Venture Capital Investment Trends   11-18
                 •Financing Lifecycle                   19
                 •Valuation & Pricing                 20-21
                 •Legal Considerations                   22
                 •Due Diligence Checklists            23-25
                 •Biography                             26



Bessemer Trust                                                2
                           Introduction
       •   Bessemer Trust is a private investment firm that was founded by
           Henry Phipps in 1907 to manage his proceeds from the sale of
           Carnegie Steel, the company he co-founded with Andrew
           Carnegie. For nearly 100 years Bessemer has focused exclusively
           on one business - that of managing substantial family fortunes.
           Today we manage more than $32 billion for approximately 1,400
           families, including more than one hundred Fortune 500 CEOs,
           former U.S. Presidents, old-economy industrialists and new-
           economy technology entrepreneurs.

       •   Bessemer has been a longtime and active participant in alternative
           investments, including venture capital, hedge funds, buyout funds
           and real estate. With regard to venture capital, we participate in
           one of three ways: (1) through Bessemer Venture Partners, one of
           the oldest and most successful venture capital firms in the U.S.;
           (2) through our funds-of-funds, whereby we place money with the
           premiere venture capital firms across the globe, gaining
           diversification by stage, style, sector and geography, and; (3)
           through direct investments, whereby we evaluate direct
           investment opportunities on behalf of our clients.


Bessemer Trust                                                                  3
       The Capital Formation Process
           • Preparation
                 –   Discuss Objectives
                 –   Draft/Review/Revise Business Plan
                 –   Draft/Review/Revise Executive Summary
                 –   Draft/Review/Revise PowerPoint Presentation
                 –   Estimate Enterprise Value and Price Offering
                 –   Compile Due Diligence Book
                 –   Conduct Mock Presentations

           • Road Show
                 –   Contact Investors and Distribute Executive Summary
                 –   Distribute Business Plan to Interested Investors
                 –   Arrange Management Meetings
                 –   Evaluate and Negotiate Term Sheets

           • Expedite the Due Diligence Process
                 –   Respond to Information Requests
                 –   Evaluate Investor
                 –   Actively Manage the Process

           • Negotiate the Investment Agreement

Bessemer Trust                                                            4
                      The Capital Formation Process
                                                          Typical Timeline


                                                Wk. 1 Wk. 2 Wk. 3 Wk. 4 Wk. 5 Wk. 6 Wk. 7 Wk. 8 Wk. 9 Wk. 10 Wk. 11 Wk. 12 Wk. 13 Wk. 14 Wk. 15 Wk. 16
Review/Revise Plan, Summary & Presentation
Est. Enterprise Value & Compile Due Dil. Book
Conduct Mock Presentations
Contact Investors & Distribute Summary
Follow-up and Distribute Plan to Investors
Arrange Management Meetings
Secure & Evaluate Term Sheets
Due Diligence
Negotiate Definitive Agreement
Close the Transaction




       Bessemer Trust                                                                                                                         5
                     Required Documents
         • Business Plan
                 – Do not include proprietary information
                 – Include capitalization table
                 – Include audited or reviewed financial statements
         • Executive Summary (critical)
         • PowerPoint Presentation
         • Due Diligence Package
                 –   Articles of Incorporation
                 –   Bylaws
                 –   Board Minutes
                 –   Shareholder Agreements
                 –   Contracts
                 –   Client/Customer References


Bessemer Trust                                                        6
 Common Mistakes in Business Plans
       1. Grammatical and spelling errors
       2. Written in narrative, rather than outline/bullet, format
       3. Poor research and identification of the total addressable
          target market
       4. Lack of internal logic in the financial model
       5. Leaps of faith (unsupported assertions)
       6. Focusing on the technology and not the business
       7. Being an inch deep and a mile wide
       8. Ignoring/dismissing the competition
       9. Projections that are too aggressive or too conservative
       10.Lack of a crisp two-page executive summary that
          clearly articulates the investment case and compels the
          investor to read the full plan

Bessemer Trust                                                    7
   Common “Spin” by Entrepreneurs

        1. “Our projections are conservative”
        2. “Our market will hit $40 billion by 2004”
        3. “We’re about to sign a contract with [insert any
           Fortune 100 company]”
        4. “Key members of the team will join as soon as we get
           funding”
        5. “We don’t have any competitors”
        6. “We’ve got first-mover advantage”
        7. “[Oracle/IBM/EMC/JDSU] is too slow to be a threat”
        8. “Our patents create barriers to entry”
        9. “We only need 1% of the market”
        10.“A number of VCs are interested”

Bessemer Trust                                                    8
                  Meeting With Investors
Do:                                              Don’t:
•   Prepare a concise 15-minute PowerPoint       •   Talk so much that you forget to listen
    presentation                                 •   Give evasive answers to specific questions
•   A dress rehearsal/mock presentation          •   Oversell
•   Have a team leader (CEO/President) who       •   Appear unfocused
    speaks for the company                       •   Go alone. Key team members should
•   Establish an open and honest channel of          attend
    communication                                •   Dismiss the competition. You must clearly
•   Demonstrate passion for the business and         articulate your competitive advantage
    strategy (but not to the extent that you     •   Attach your ego to your idea (i.e., don’t
    can’t see its risks and weaknesses, or are       be defensive when your strategy is
    rigid and incapable of compromise)               challenged; investors want to know that
•   Demonstrate the personal commitment of           you are open-minded and receptive to
    the team to the company (all of your             their suggestions)
    resources – personal, emotional and          •   Forget that you are being evaluated from
    financial – must be committed before             the moment you say hello to the moment
    most investors will risk their capital)          you say goodbye, and that camaraderie
•   Be prepared to defend your key strategic         and rapport play an important role in
    assumptions and financial forecasts              getting the investor to “yes”.
•   Have an exit strategy (IPO,                  •   Go to the meeting without having a firm
    merger/acquisition), but don’t appear            command of the company’s key operating
    anxious to jettison the company                  metrics and how they are/will be tracked
                                                     and utilized.


Bessemer Trust                                                                               9
 What You Need to Know About Your
           Lead Investor
     •   How well does it know your industry
     •   Are any of its portfolio companies competitors? Potential
         partners/customers/suppliers?
     •   What is its reputation in the financial community? How effective will it
         be in helping attract co-investors for this round? For the next round?
     •   Is it seeking any special terms/compensation for acting as the lead and
         how will this effect potential co-investors?
     •   Will it participate in the next round if the company meets its
         milestones?
     •   Beyond capital, what assistance will it offer? Executive recruiting, key
         strategic partnerships, high-profile board members?
     •   How frequently and in what manner does it prefer to communicate
         with management?
     •   If a strategic investor, what is motivating its investment and will it
         seek to block partnerships with or an acquisition by its competitors.



Bessemer Trust                                                                      10
                           Financing Lifecycle
                                             The Chasm                              The Wall
                                                              Venture Capital                     Public Markets
                           Angels                            Strategic Investors
                          Founders
                                                        Early                                   IPO
                         Seed Capital                   Stage            Later Stage                         Secondary
                                                                                                              Offerings
                                                                           Mezzanine
   Revenue
                                                                     C
                                                              B
                                                       A


                                                                                                               Time
                  Valley of Death




             Seed or Start-up: Market research and product development.
             Early Stage: Funding full-scale operations and selling products/services. Not yet profitable.
             Later Stage: Funding expansion and new products. Near break-even.

Bessemer Trust                                                                                                            11
                         Valuation & Pricing
                             Typical Pricing Model
                                                                       Possible Scenarios
                         Pricing Factors                      Expected          Worst           Best
         Base Year Revenue (At or near financing event)       $3,000,000    $2,000,000    $4,000,000
         Expected C AGR Revenue                                     50%           45%           55%
         Exit Year Pre-Tax Profit as % of Rev.                      40%           40%           40%
         Expected IPO or M&A Multiple                                 20            15            30
         Years to Exit                                                 5             6             4
         Probability of Outcome                                     50%           25%          25.0%
         Tax Rate                                                   40%           40%           40%
         Int. Expense In Exit Yr. (M&A Exit Only)            $100,000.00   $100,000.00   $100,000.00
         Required Annual ROR                                      50.00%       50.00%        50.00%
         Equity Investment Required                           $5,000,000    $5,000,000    $5,000,000
         Projected Revenue (Exit Year)                       $22,781,250   $18,588,229   $23,088,025
         Exit Year Net Income (If IPO) or EBIT (if M&A)       $5,567,500    $4,561,175    $5,641,126
         Future Value of Venture at Exit Event              $111,349,992   $68,417,618 $169,233,768
         Valuation (Discounted Present Value)                $14,663,373    $6,006,485   $33,428,892
         Pricing: Equity Percentage Required                      34.10%       83.24%        14.96%


                     Pricing (Equity % Required based on Weighted Average of Scenarios)
                                                    36.8%



Bessemer Trust                                                                                         12
                 Valuation & Pricing
                  Key Negotiating Points

       • Company’s Stage of Development
            – Seed, Early, Late
       • VC’s ROI (discount rate)
            – Seed: 55% - 60%
            – Early: 30% - 50%
            – Late: 20% - 33%
       • Comparable Companies (and exit
         multiples)
       • Staged Discussions to Minimize Dilution

Bessemer Trust                                     13
                       Legal Considerations
•    Don’t issue common stock to investors         •   Anti-dilution Rights
      – Establishes value and impairs issuance          – Straight Percentage (harsh, rare)
          of cheap options/restr. stock to              – Full Ratchet (harsh)
          employees                                            • Purchase price reduced to lowest
•    Option Pool (10% - 25%)                                      subsequent purchase price regardless
      – Establish early but be reasonable –                       of shares issued
          deemed issued for valuation purposes          – Weighted Average (fair)
•    Securities to be issued                                   • Adjusts using a formula based upon
      – Convertible Debt                                          the number of shares issued
      – Warrants                                        – Carve-outs
      – Preferred Stock                                        • Issuances under stock option plan,
      – Convertible Preferred Stock                               conversions, partners, lenders and in
                                                                  acquisitions
      – Participating Preferred Stock
                                                   •   Preferred Stock Voting Rights
             • Resist or cap participation (2x –
                3x)                                     – Vote with common vs. special voting as a
      – Redeemable Preferred Stock                          separate class on issuances, mergers, etc.
      – Super-preferred Stock                      •   Board Seats vs. Observer Rights
             • Converts to red. and conv. pfd. –   •   Stockholder Rights
                adverse tax impact to investors         – Transfer restrictions, pre-emptive and co-
                upon conversion                             sale rts.
•    Registration Rights                           •   Founders
      – Demand, Piggy-back, Lock-up                     – Stock vesting, 83(b) elections, Non-
                                                            competes
                                                   •   No Shop (resist, limit duration and scope)

    Bessemer Trust                                                                               14
             Due Diligence Checklists
                                               Corporate
           1. Management, Officers, Directors & Employees
                   •Key Management: resumes & references
                   •Directors & Officers of the company: contact information
                   •List all Employees: job title, base salary, options/equity
                   •Current Organizational Chart
           2. Capitalization/Securities
                   •Capitalization Structure: include a description of any rights attached to preferred shares
                   •List any Non-Employee holders of any options or rights to purchase securities including warrants
           3. Business Description
                   •Business Plan
                   •Executive Summary
                   •Investor Presentation
           4. Marketing & Sales
                   •Sales Plan
                   •Marketing Plan
                   •Company Marketing Materials and Brochures
                   •Historical Sales Data
                   •Customer Sales Pipeline for next 6 months
                   •Sales Literature describing Product Features & Applications
                   •Describe Sales Process
           5. Customers
                   •Pricing Model and Current Price List
                   •Provide Complete Customer List
                              - Detail on 10 biggest
                              - Detail on 10 medium
                              - Detail on 10 smallest
                   •Provide contact information for top 5 customers for product/service review
           6. Target Market Sizing
                   •Provide any Third Party data supporting # of customers in US eligible to purchase Product/Service

                                                                                                                 Continued…
Bessemer Trust                                                                                                          15
                 Due Diligence Checklists
                                                    Corporate

       7. Competition
               •Competitive Market Analysis
       8. Operations
               •List of Top 10 Suppliers: include contact information
               •Organizational Chart for R&D
               •Development Calendar for next 12-24 months
       9. Information Technology
               •List Proprietary Technology & Patent references
               •Technical Literature describing Product Design and Functionality
               •Key Information Technology (IT) Suppliers
               •List any Third Party Embedded Code
               •Provide Graphic Layout of Technology Platform
       10. Financial Information
               •Latest Financial Statements
               •Latest A/R Aging Schedule
               •Revenue/Sales Projections & Budget
               •Capital Expenditures Budget for next 12 months
               •Create a Win/Loss Report
       11. Intellectual Property (Patent, Trademarks, Copyrights)
               •Schedule of Patent Registrations/Applications identifying each patent by title, registration number, date of registration & status
               •Schedule of Trademark Registrations/Applications identifying each mark by title, registration #, date of registration & statu s
               •List any Licensing/Merchandising Agreements relating to Patents, Technology, Trade Secrets, Trademarks and Copyrights
       12. Contract & Strategic Partnerships
               •List any Joint Venture or Strategic Partnership Agreements
               •List Legal & Accounting Firms: include contact information




Bessemer Trust                                                                                                                              16
             Due Diligence Checklists
                                           Technology
                 1. Company, Product and Service Documents
                         •Product Documents
                                  User Manuals [including Installation Guides, etc.]
                                  Reference Manuals
                                  Architecture/implementation
                                  Product Design Documents
                                  Brochures, Product Fact Sheets
                                  White papers
                                  Industry Analyst Articles
                                  Corporate and technical management biographies
                                  Case studies / User Stories
                 2. Product Maintenance Information
                         •Problem Reports:
                                  details by Customer, severity, resolution - past 6 months
                                  trend report – monthly problems by product version, severity - preceding 1 year
                         •Product Release Documentation
                                  Release documents for previously shipped 2 product versions/releases
                                  Release planning documents [upcoming versions/releases]
                                  Post-mortem documents on latest production release
                 3. Plans and schedules
                         •Project plans & schedules for current development projects
                         •Project plans & schedules for maintenance releases in progress
                 4. Customer reference information
                         •Customer technology testimonials, articles, papers, etc.
                 5. Process (Method) Documentation
                         •Development process
                         •Quality Assurance / Testing process
                         •Configuration Management process
                         •Change Management process
                         •Information Development (Documentation) process
                         •Packaging and/or Distribution process
                         •Client Support process
                         •Maintenance process
                         •Project plans & schedules for maintenance releases in progress
Bessemer Trust                                                                                                       17
                            Biography
                 George H. Wilcox, Managing Director

                 Mr. Wilcox is the Managing Director in Bessemer’s Washington, D.C. office where
                 he is responsible for oversight of more than $1.2 billion in client investments.

                 Mr. Wilcox joined Bessemer in 1997, and took a brief sabbatical to co-found and
                 serve as Chairman and CEO of US Venture Exchange, Inc., a leading mergers and
                 acquisitions exchange. Earlier in his career, he was a member of the capital
                 markets group at Legg Mason in Baltimore. Prior to that, he practiced corporate
                 law with Kirkpatrick & Lockhart in Boston and with Jones Day Reavis & Pogue in
                 Atlanta.

                 Mr. Wilcox holds a Bachelors degree in economics from Boston University, where
                 he was a scholar-athlete. He holds a Juris Doctor degree, cum laude, from New
                 England School of Law, where he was Managing Editor of the New England Law
                 Review.

                 Mr. Wilcox is a member of the Board of Directors of US Venture Exchange, Inc., as
                 well as a member of the Massachusetts and Georgia Bar Associations, the Mid-
                 Atlantic Venture Association's Private Investor's Network, and the Baltimore-
                 Washington Venture Group.




Bessemer Trust                                                                                       18