Essential Guide to Raising Capital

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					                        Essential Guide to
                         Raising Capital
                           Workshop – Work Book




                                   Rev 1.0 October 2008


       For more information refer www.escalator.co.nz or phone 0800-822-748




Escalator - Capital Raising (V1)        Page 1 of 73
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Escalator - Capital Raising (V1)      Page 2 of 73
     Essential Guide to Capital Raising - Notes to participants
     Dear workshop participant,

     Welcome to the Essential Guide to Capital Raising. We strive to deliver condensed and
     pragmatic workshops tailored to entrepreneurs and welcome your honest and frank
     feedback.

     To access post workshop Escalator services such as an Investment Needs Assessment or
     Deal Preparation services, apply online at www.Escalator.co.nz. The online application
     process is as easy as filling in a Angel Soft drop sheet. If you have any difficulties please
     contact our help desk 0800-822-748. Escalator services are also available to help you with
     other growth strategies including Joint Ventures and Strategic Alliances.

     The “Power Pitching” is the follow on workshop from this workshop to this workshop. It is a
     combination of theory, hands on learning and critique.

     The material provided to you in today’s workshop is a collation of information sourced from
     NZTE , Growth Management Consulting Ltd and a number of other industry players for your
     benefit. We are thankful of NZTE’s funding to allow us to work in this exciting space and to
     be able to offer you services at an affordable rate.

     Your presenter today will be either (or both dependant on location):

     Mark Robotham, GM Escalator and founder Growth Management Consulting Ltd

               Growth Management Consulting LTD (GMC) is a consultancy service targeted at
               advisory services for high growth potential businesses , strategy and creation of
               succinct stories - pitches. www.GrowthManagement.co.nz www.succinctstories.com

     John Cunningham Escalator Broker and founder Ignition Partner Ltd
               Ignition Partner Limited advises companies on strategies for growth from innovation,
               with an emphasis on Technology, IP, Structure and Capital Planning.
               www.Ignitionpartner.com

     The Escalator Service also offers other specialist workshops on capital raising and strategic
     Alliances. Please refer to www.escalator.co.nz for an up to date training calendar.

     We rely on your feedback to ensure we are continuing to deliver a quality service to our
     clients, so please take the time to fill out the evaluation form enclosed with the workbooks, at
     the end of the session

     If you would like to discuss the next step for your business following this workshop, or for
     more information, please contact the Escalator Client Services Team on
     0800-822-748.


     Yours sincerely,
     The Escalator Client Services Team




Escalator - Capital Raising (V1)                 Page 3 of 73
                                                 Agenda
     Part One: Capital Investment 101                            (9am – 10:30am)

          1. Growth Options – Why raise capital?
          2. What is Investment ready? - Help available - Escalator
          3. Investment Process

          4. Break

     Part Two: Deal Mechanics                  (10:30am – 12:30)

          5. Valuation Methods
          6. Deal Structures

          7. Session Wrap Up (12:30 – 1pm)

     Part Three: Power Pitching (1pm – 5pm)

          8. Refer Separate Work Book


                                       Workbook Contents
     •    Presentation slides
               o    Part One: Capital Investment 101 – Capital for Growth
               o    Part Two: Valuation & Deal Structures’

     •    Handouts/exercises

               o    Investment Flyer
               o    Non Disclosure Agreement
               o    Information Memorandum – format
               o    Term Sheet
               o    Due Diligence
               o    Shareholders Agreement
               o    Successful Escalator deals: Derceto , Smarter Than Jack (avocado press ltd)
               o    Valuation evaluation worksheet
               o    Exit valuation example for Company XYZ
               o    Case Studies: Gunner Circuit Systems, Axado Pharmaceuticals, Analytic

     •    Escalator

               o    Investment Drop sheet
               o    Power Pitching Workshop Flyer




Escalator - Capital Raising (V1)                  Page 4 of 73
                                   Part One:

              Capital Investment 101




Escalator - Capital Raising (V1)      Page 5 of 73
                        Essential Guide to
                         Capital Raising




                                     Mark Robotham
                                   mark@escalator.co.nz
                                       021 61 8850



 www.Escalator.co.nz        Welcome - Please sign register




 Agenda
Essential Guide                                           Pitching Workshop
                                                             (Separate Workshop)
  to Capital Raising

   Part One: Capital Investment 101                       Part Three :
   – Growth Options – Why raise capital?                     Your Succinct Story
   – Investment ready?                                       Investment Story
        • Help available - Escalator
                                                             On Stage
   – Investment Process

   Part Two: Deal Mechanics
   – Valuation methods
   – Deal structures – negotiation tools




                                                                          www.growthmanagement.co.nz




 Introductions
• 1 Minute - Introduction
   – Your name
   – Company name
   – What does you company do for
     its customers?
   – Have you raised capital before?
   – What do you want out of today?




                                                                          www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                       Page 6 of 73
                                                                                                                      1
  Part one:     Capital Investment 101

    “Capital for Growth ?”




                                                                                            www.growthmanagement.co.nz




  Growth Finance Options
    •   FFFF – Founders, Friends, Family & Fools
    •   Boot Strapping – Creative cash flow funded
    •   Cash Flow Management
         –    CAPEX, Debtor Mgt, Invoice factoring…

    •   Strategic Alliances
         –    Strategic partnerships, Joint venture, Licensing

    •   Bank Debt
    •   Merger & Acquisitions
    •   Capital Investment
    •   Grants
    •   Exit                                                               Growth vs Control Strategy?




                                                                                            www.growthmanagement.co.nz




Why Raise Capital?



                  Net
               Cash Flow
                                                                   ts
                                                                 en
                                                              stm s
                                                            ve turn
                                                        r in re
                                                      pe at
                                                   ee r gre
                                                  D o
                                                     f




                                                                        Time




                                                                                            www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                         Page 7 of 73
                                                                                                                                        2
 Failure to Get Investment
 • Top 3
    – Individual Un-investable
        • Eg No Need for Help or to Late

    – No Succinct Story or Pitch
        • What do you do?
        • No Compelling Need

    – No Attractive Business Model
        • No money in it
        • Doesn’t easily scale




                                                                        www.growthmanagement.co.nz




 Do I need Investment?
                       The emotive change cycle

                        Denial               Commitment

                “We don’t need to change”      “OK so its happening”
                                                “Lets get on with it”




                                             “What happens now?”
                “I am not going to change”
                                             “What are my options”



                    Resistance                Exploration



                                                                        www.growthmanagement.co.nz




 Business or Hobby?




                                                                        www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                     Page 8 of 73
                                                                                                                    3
 Investment Proposition
                     Money in… Increase Value …Money out




                                                                                               www.growthmanagement.co.nz




 Types of Investors

  •   High Net worth's
  •   Angel groups
  •   Organised Groups
  •   Funds
  •   Customers
  •   Suppliers




                                                                                               www.growthmanagement.co.nz




 NZ Funds Map
                                     KOneWOne                                                     Size of Fund
                                     (Tindall)          DCP
                                                                                                  (Estimate)
  New                   BPV
Economy                                                                     Tappenden
                                  West Coast Development Fund               Holdings               $million
              No. 8
                                                           Todd                                             200
                            TMT Ventures                                                                    150
                                                           Capital
                                       West Coast                                                           110
          Endeavour                      Rangatira       Direct
                                    Development Fund      O&
                                                         Capital E                                          100
            I-Cap                         Limited
                                                                                Active                       60
                  I-Globe                                                      Equities                      40
                                  ANZ                                                                        30
      Edinburgh                                    J B Were
                                 Private Pencarrow                                                           25
      Trust                      Equity
  Old                                                  AMP Private Equity
Economy
                                       GS Capital

      0                      5              10               15        20                 25                  30

                                    Average Size of Transactions ($million)




                                                                                               www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                            Page 9 of 73
                                                                                                                                           4
 Know your audience?
  Two Way Due Diligence                                             •       People - www.linkedin.com
  •   Check out the investor carefully:                             •       Directors - www.companies.govt.nz
       –   Check their Web Site and Annual Report

       –   Talk with other companies they have invested in

       –   Find common acquaintances

  •   What can they contribute beyond money?
  •   How have they performed?
  •   Are your ethics and styles compatible
  •   Understand the features of other deals they
      have done (Board representation? Control?)
  •   Understand their decision making process
  •   See if there is a personal fit



                                                                                                   www.growthmanagement.co.nz




 What and for how much?
  Valuation:                                       Idea !

      An estimate
  of the businesses ability
                                                         Risk




  to make money in the future.
                                                                                                   e
                                                                                                 Valu




                                                                Prototype


                                                                    Trial customer

      “A risky business that makes $100                                 Sales – Early adopters

      is usually worth less than a non-
      risky business that makes $100.”                                                 Cash flow positive




                                                                                                        Time



                                                                                                   www.growthmanagement.co.nz




 Inventors vs Entrepreneurs
                         Investible Inventors:
                         •   Make Money – (note: Web Businesses)
                         •   Patent applications filed
                         •   Engaged with a significant strategic partner
                         •   Track record of selling ideas
                         •   Some form of market feasibility study
                             completed and specific to the product –
                             service offering
                         •   Identified investment partners
                         •   Skin in game - significant prior cash
                             investment
                         •   Can communicate
                         •   Acknowledge Gaps




                                                                                                   www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                           Page 10 of 73
                                                                                                                                           5
 Investible Web
                                             • Revenue
                                                  –   Cash flow positive a plus

                                             • Significant community membership
                                                 (10,000+ UB per month)

                                             • True unique offering…
                                                  –   no one else already owns the community

                                             • Not paying external party to
                                               develop code

                                             • Investors interested

                                             • Strategic partner identified and
                                               documented




                                                                                  www.growthmanagement.co.nz




 Valuation Inputs
  Financials –
   Current &
    Forecast
 Balance Sheet
   Cash flow
      P&L                  Variables + Benchmarking + Assumptions +                    Risk
    Assets:
      IP

     Misc
    People
                                                      Model
  Track record

    Market

   Scalability

     Etc...
                                                  Valuation


                                                                                  www.growthmanagement.co.nz




 Validated Sales & P&L Forecast
     •     Growth Companies use forward looking valuation models

     •     Sales Forecast Validation = huge effect on final valuation of business

     •     Inputs have a huge effect on the profitability of the business.

     •     Validation helps to see how valid the inputs are and how a change in inputs
           can have an effect on the profitability and other business metrics.

     •     Major Areas
              –   Level of sales
              –   Average price of sales
              –   Cost of sales
              –   Overheads                                                   Deal Killer-
                                                                      “Fantasy Factored Forecast”
     •     Relatively small changes can lead to
           a significant improvement or decline



                                                                                  www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                          Page 11 of 73
                                                                                                                          6
Required Returns vs Stage
          Company Stage                  ROI                 5-year Increase in
                                                                  Capital
    SEED                             60%+                          10x +

    STARTUP                           50%                           8x

    EARLY STAGE                       40%                           5x

    2nd   STAGE                       30%                           4x

    NEAR EXIT                         25%                           3x


  Eg 60% increase in value for 5 compounded years = 1,000% Increase = 10X



                                                                     www.growthmanagement.co.nz




 Standing out from the crowd
    • Investment ready




                                                                     www.growthmanagement.co.nz




 Selling Product or Company?

                  Business                     Investment
                   Model                       Opportunity




                               Product



                                                                     www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                             Page 12 of 73
                                                                                                             7
                                      Great Companies Are Investible Companies



                                                                          Investment                                                     Negotiable
                                                                            Ready                                                     Realistic Valuation
                                                                                                                                       Based on logic
                                                                          Realistic Deal




                Compatible
                Coachable
              People Magnets                                                                                                         Potential Exits Identified
              Effective Team                            People
                                                      Creditability,                        Exit
                                                    Culture & Attitude




                                       Product                    Business Model                   Scalable Business
                                    Quantified Value                Exit Options
                                                                     Makes money                    Systems & Partners
                                    Barrier to Entry
                                        Market



                               Simple Succinct Story
                            Measured Customer Value                                                  Growth Market Validated
                                                                  Sustainable Value
                                      Unique                                                       Can handle 1000x production
                                                                         ROI
                         IP strategy – freedom to operate                                          Core competencies identified
                                                                  Simple Structure
                                 Validated Market                                                     Effective Partnerships




                                                                                                                                            www.growthmanagement.co.nz




     Investors View




Adapted from – Tom McKaskill




                                                                                                                                            www.growthmanagement.co.nz




    Are you ready? – Bell Mason Diagnostic                                             4. Business Plan
                                               3. Manufacturing


                                                                                                              5. Marketing
                                   2.Product


                                                    PRODUCT                                MARKET

                       1. Technology                                                                                      6. Sales

                                                                         Business

                                                                     Innovation
                        12. Control                                                                                      7. CEO


                                                 SYSTEMS                                   PEOPLE

                                                                                                                 7. Team
                               11. Financeability



                                                            10. Cash                          8. Board


                                                       www.BellMasongroup.com


                                                                                                                                            www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                                                                    Page 13 of 73
                                                                                                                                                                                    8
 Business Model
         INFRASTRUCTURE                   OFFER                                CUSTOMER

                                       Customer Problem
                    Partner Network                                  Customer
                                                                    Relationships

       Core
     Capabilities                                                                     Target Market
                                       Value Proposition
                          Value                                      Distribution
                     Differentiators                                  Channel




    FINANCE         Cost Structure                                Revenue Streams
                                                                                            Return
                                                                                            (Profit)




                        Components of a Business Model




                                                                                                www.growthmanagement.co.nz




 Business Model
    • Classify                                             •   Revenue Streams
                                                           •   Margin vs. Volume
    • Describe                                             •   Cash flow -Break Even
                                                           •   Scalability - Overheads
    • Quantify




                                                                                                www.growthmanagement.co.nz




 Getting Your Story Right!

Its not what you say,
Its what they remember.
And what can they be bothered
to pass on!




                                                                You can not see your self
                                                                Getting your succinct story right needs
                                                                external help
                                                                – Escalator Power Pitching Workshop
                                                                - www.succinctstories.com




                                                                                                www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                        Page 14 of 73
                                                                                                                                        9
 No Compelling Value


                                                                  Value
                                                                                                         Value
       Cost


                                                                                            30%
                                                                                            Value - Gain




                                                                                                           www.growthmanagement.co.nz




                                                              Pre – Post Investment
                                                                     Issues
                                                                                          Post Investment
   Shareholder        Investment Ready
                                                                                             Transition
    Mind Set
                       Growth Options Analysis
                                                                                          New Governance
                           Product Marketing,
  Growth Strategy            Brand & Pitch                            Investment
                                                                                       Leveraging Shareholders
        Vs            Balance Sheet - Financials

  Control Strategy
                             Growth Strategy

                       Contracts & Compliance
                                                                          $                 Implementing
                                                                                         Investment Projects

                     (people, suppliers, IP, companies act)
                                                                                          Sales & Marketing

                                   SHAG
                          (share holders agreement)                                         Management

                            Exit & Partners




                                                                 www.Escalator.co.nz




                                                                                                           www.growthmanagement.co.nz




                                                                                                           www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                                   Page 15 of 73
                                                                                                                                                   10
     Securities Act
•   A proposal for investment that involves offering securities
    to the public is subject to Securities Act disclosure regime.
    Must have registered prospectus.
    Heavy penalties for non compliance.

•   “Eligible Investors”
      –   Relatives or close business associates of the issuer
      –   Habitual investors (principal business is investment)
      –   Selected otherwise than as a member of public
      –   Wealthy and experienced (>$2m net assets & $200k income for 2 years)
      –   Requires minimum subscription of at least $500,000


•   Securities Act (Local Authority and Other Venture Capital Schemes) Exemption
    Notice 2003 e.g. EDANZ scheme, BizAngels
      – Must act under code of practice – register with scheme operator
      – Certain disclosure still required, but not as full or expensive.
      – Maximum funds raised $5m




                                                                                      www.growthmanagement.co.nz




    Selecting Your Advisors
                                   • Use 2+
                                   • Compatible experience
                                   • Forward looking challengers
                                   • Use a Advisory Board
                                          – Enterprise Capability Grant – Small business advisory
                                            board
                                          – http://www.nzte.govt.nz/section/14185.aspx

                                   • Kea
                                   • NZTE – Beachhead
                                   • NZTE - Escalator


                                                                                      www.growthmanagement.co.nz




    Tidying the House
     •     Company File
            – Share register, Board minutes etc
     •     Contracts
            –   Employment
            –   Suppliers
            –   Sales
            –   Channel or Alliance Partners
     •     Accounts
            – Clean Balance sheet
     •     SHAG
            – Share Holders Agreement
     •     Advisory Board




                                                                                      www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                              Page 16 of 73
                                                                                                                              11
        600            Training




                            ?
                         Deal- Investment
                         Readiness Phase
                       Education – Assessment –               Deal Phase
                        Training – Management




                                                                                   25
                                                                                  $20M
                                                       60

                                                  75




                         Needs Assessment
         300




                                                                           www.growthmanagement.co.nz




 Why Escalator?
    •     Software developer by day – expert
          broker by night … yeah right
               – $20K professional services at your calling


    •     100% at Risk fee (no 50-50)
               – No client payment unless deal done


    •     Analysis of options
               – Capital, JV , licensing, boot strap, debt
                 finance




                                                                           www.growthmanagement.co.nz




 Acknowledgements
    • Bell Mason Diagnostic www.bellmasongroup.com
    • Tom McKaskill – www.tommckaskill.com
    • Jim Collins – Good to great www.jimcollins.com

    • Mark Robotham mark@escalator.co.nz
                    www.growthmanagement.co.nz
                    www.succinctstories.com

    • John Cunningham john@ignitionpartner.com




                                                                           www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                   Page 17 of 73
                                                                                                                   12
                                                   www.growthmanagement.co.nz
Escalator - Capital Raising (V1)   Page 18 of 73
                                           Great Companies Are Investible Companies



                                                                              Investment                                                    Negotiable
                                                                                Ready                                                    Realistic Valuation
                                                                                                                                          Based on logic
                                                                              Realistic Deal




                     Compatible
                     Coachable
                   People Magnets                                                                                                       Potential Exits Identified
                   Effective Team                            People
                                                           Creditability,                        Exit
                                                         Culture & Attitude




                                            Product                    Business Model                   Scalable Business
                                         Quantified Value                Exit Options
                                                                          Makes money                    Systems & Partners
                                         Barrier to Entry
                                             Market



                                     Simple Succinct Story
                                  Measured Customer Value                                                  Growth Market Validated
                                                                       Sustainable Value
                                            Unique                                                       Can handle 1000x production
                                                                              ROI
                               IP strategy – freedom to operate                                          Core competencies identified
                                                                       Simple Structure
                                       Validated Market                                                     Effective Partnerships




                                                                                                                                               www.growthmanagement.co.nz
Escalator - Capital Raising (V1)                                                 Page 19 of 73
                        600
                                Essential Guide
                               to Capital Raising
                                   Workshop
Training



                                                                      Misc
                                                                    Workshops
                              Pitching Workshop*                     Contracts                                  Escalator Service
                                                                                                                       July 2008 - 2009
                                                               Strategic Partnerships
  Stage




                         Initial Assessment                         Investor Ready
                             & Education                              Preparation                          Panel Review
                                                                                                                                     Deal Prep
                                                                                                                                                      Milestone
                                                                                                                                                                   Deal Broking
                                                                                                                                                        Review



                                                  Training &
                                               Advisory Services
                                                                                           Peer Review
                                                                                            2nd Opinion


                                                                                                                                                                    Investor
                                                                       Drop Sheet &                                                                                Approaches
                                                                                                                                  Investment Flyer,    Milestone
                                                                                                           Broker Gating                                           Negotiation
                                                                       Gap Analysis:                                                                    Gating
                                                                                                             - Review               Memorandum                        Deal
                                                                       Business Model                                                                   Review
                                                                     Product Proposition                    Deal Potential           or as agreed
  Outcome




                               Base Line
                                                                      Growth Potential                      Deal Mandate                                                             25
                              Assessment
                           Referral -Acceptance                       Expectation Mgt                                                                                               $20M
                                                                      Recommendation                                         60
                                                                                                      75                                                                            Raised
                                         Not Ready -Short NA                                                                                   Escalator Client
                                                                                                                                             Bi Monthly Reviews     Young Company Finance
                                                                                                                                                                            YCF
                                                                         Angel Clubs -                                                                                 NZ Angel Assoc,
                                                                                                                                                                       NZVIF - Escalator
                                                           175            Assistance

                                                       Re-Entry Bypass



                     300
                                   Education & Deal Readiness Phase
                                            & Management                                                                                        Deal Phase



            Escalator - Capital Raising (V1)                                                        Page 20 of 73
                                   Part Two:

                                Valuation
                              Deal Mechanics




Escalator - Capital Raising (V1)      Page 21 of 73
       Part Two:
                        Essential Guide to
                         Capital Raising




                                  Mark Robotham
                                mark@escalator.co.nz
                                    021 61 8850



  www.Escalator.co.nz     Welcome - Please sign register




              VALUATION

                  Deal Killer-
             “Unrealistic Valuation”




                                                                                          www.growthmanagement.co.nz




  Valuation Defined
                                             Idea !
Valuation:

  An estimate of the businesses
                                                 Risk




  ability to make money in the
                                                                                          e
                                                                                         Valu




  future.
                                                        Prototype


                                                            Trial customer

                                                                Sales – Early adopters
  A risky business that makes $100 is
  usually worth less than a non-risky
                                                                               Cash flow positive
  business that makes $100.


                                                                                                Time




                                                                                          www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                  Page 22 of 73
                                                                                                                                  1
How Much is your Business Worth?


You need $1,000,000 dollars to develop a new export market…


  You are prepared to give up 20% of your business for the
                          $1,000,000…


This implies a pre-money (before the investment) valuation of


                        $4,000,000!




                                                                                 www.growthmanagement.co.nz




Returns
• Stages of Companies
    –   Seed
    –   Start up
    –   Early Sales (“First Stage”)
    –   Expanding Sales (“Second Stage”)
    –   Exploding Sales (“Third Stage)



• Required Returns
    – The value of the company depends upon the perceived risk of the business
      venture.


    – As the risk is a lot higher at the seed and start up stage a higher return is required
      and therefore the company value is reduced.




                                                                                 www.growthmanagement.co.nz




Required Returns vs Stage
          Company Stage                         ROI                    5-year Increase in
                                                                            Capital
     SEED                                      60%+                            10x +

     STARTUP                                    50%                              8x

     EARLY STAGE                                40%                              5x

     2nd STAGE                                  30%                              4x

     NEAR EXIT                                  25%                              3x


   Eg 60% increase in value for 5 compounded years = 1,000% Increase = 10X



                                                                                 www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                         Page 23 of 73
                                                                                                                         2
Pre – Post Money Valuation

• Pre –Post Money
    – Pre-money: Value of the company before the investment
    – Post-money: Value after the investment


• Example:

  If an investor invests 1 million for a 20% share
  the implied valuation post-money is 5 million dollars,

                                     1/5 = 20%


                                                                                                                 www.growthmanagement.co.nz




 Founder Dilution with Capital Raising – TRADE ME (estimated)


                                                     Founders           Total                                         Founders
               Source                                 Shares            Shares                    Value               Share
                                 Sam
     1999                        Morgan                   100%                                 Concept only
               Company           Sam
  13-08-99     Formed            Morgan         75,000     50%               150,000           $150,000????           $75,000???

                                 Sam
  30-08-02     Annual return     Morgan         60,000     31%               194,730            Something
                                 Sam
  23-07-03     Annual return     Morgan         60,000     31%               194,730        Something more
                                 Sam                                                        Something more
  27-07-04     Annual return     Morgan         63,171     32%               194,730            still…
                                 Sam
  16-08-05     Annual return     Morgan         63,171     32%               194,730       $      700,000,000             227,082,114



Which would you rather own - 100% of something small or 32% of
  something Worth $700 million!



                                                                                                                 www.growthmanagement.co.nz




Information Requirements
 • Business Plan
      –      Internal and external analysis of the
             business and environment
      –      Strategies in place
                                                                 Financials –
                                                                  Current &
                                                                   Forecast
                                                                Balance Sheet

 • Forecast                                                       Cash flow
                                                                     P&L               Variables + Benchmarking + Assumptions +     Risk
      –      P&L                                                   Assets:
      –      Balance Sheet                                           IP

      –      Cash Flows                                             Misc
                                                                   People
                                                                                                              Model
                                                                Track record

                                                                   Market


 • Information will support your                                  Scalability

                                                                    Etc...
   funding requirements.                                                                                  Valuation




                                                                                                                 www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                                           Page 24 of 73
                                                                                                                                                           3
Valuation Methods
                                            SEP




                          Trailing Based                Forward Based
                               Value                        Value




       • Highly complex to overly simple valuation methods.

       • Ultimately a business is worth
         “only as much as someone is willing to pay for it.” .




                                                                              www.growthmanagement.co.nz




Valuation methods

                                      Common methods in the early stage
                                             capital raising space:
                                           1.     Market Value/Multiple

                                           2.     Discounted Cash Flow (DCF)

                                           3.     Venture Capital Method




                                                                              www.growthmanagement.co.nz




 Market Value/Multiple
   •    Most widely used business valuation method.
   •    Benchmark business with comparable companies sold that operate in the
        same industry.
   •    Gives an indication of what the market is willing to pay.

        Requirements…
         – Normalised EBITDA (Profit)
         – Comparable company multiplier
   Example…
        A firm with EBITDA over the last three years of 4.2m, 4.4m, 4.3m has recently found
        that a comparable company has been sold at an EBITDA multiple of 3.
        What is the valuation?
 Answer…
   Normalised EBITDA                                =4.3m
   Comparable company multiple                      =3
   Enterprise Value                        4.3m x 3 = $12,900,000




                                                                              www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                      Page 25 of 73
                                                                                                                      4
 EBIT Multipliers


                                           3 -7

 Manufacturing – Stable                                      High Growth Potential
                                                             How well does it scale




                                                                                          www.growthmanagement.co.nz




 Market Value/Multiple - Limitations
 • Ability to normalise profit
    –   Early stage companies with large expected growth rates - not simple


 • Comparability of companies
    – Potential differences in business model or structure


 • Multiple
    – Often investors will use a multiple based on gut and personal experience (usually in the 3-5
       range in New Zealand)




                                                                                          www.growthmanagement.co.nz




Discounted Cash Flow Method

 • Best method when
    –   Cash flows more important than profit (early stage expansion/growth)
    –   Investor is concerned with return over specific time period (key when investors plan to exit)
    –   High growth rate


 • Simply discounting future cash flows for risk and
   opportunity cost.


 • Requirements…
    – Forecasted cash flows
          •   Normally 3 - 5 years


    – Understanding of risk/return requirements of investors.



                                                                                          www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                  Page 26 of 73
                                                                                                                                  5
 Discounted Cash Flow Method - Limitations


                                            • Ability to accurately forecast cash flows

                                            • Risk/discount rate assumptions

                                            • Needs common sense to evaluate result
                                                   –   Not a scientific process




                                                                                                     www.growthmanagement.co.nz




    DCF - Mechanics
EBIT                                   229,958            396,572        827,839
                                                                                                  Valuation on 15%
                                                                                                  DCF
Addback Depreciation                    (13,020)           (13,020)       (13,020)
                                       242,978            409,592        840,859                  = sum(yr1,yr2,yr3)
                                                                                                  = $1,073,875
DISCOUNTED CASHFLOWS (ASSUME START YR IS 2007)
                                                                                       NPV
Discount rate               10%          220,889           338,506          631,750   1,191,145
                            15%          211,286           309,710          552,879   1,073,875
                            20%          202,482           284,439          486,608
                            30%          186,906           242,362          382,731
                            50%          161,986           182,041          249,144
                            60%          151,861           159,997          205,288    517,146



                 = NPV(rate,value)                 = Value / (1+discount)^years
             =NPV (10%, 242978)                    = 409,592 / (1+ 0.6)^2               = Value / (1+discount)^years
                                                                                        = 840,859 / (1+ 0.6)^3
                       refer to spreadsheet in handouts




                                                                                                     www.growthmanagement.co.nz




    NPV
         •      Net present value

         •      Net present value (NPV) is a comparison of a dollar today to a projected value for
                the same dollar at some point in the future. Alterations to its value such as returns on
                investment and currency inflation are taken into consideration. If a certain project has
                a negative net present value, then it is likely to be rejected. However, a project with a
                positive net present value is likely to be accepted.
                Certainly, as mortals we do not know what the future will hold, even for such a thing
                as an investment. A positive NPV simply means that the company or organization,
                after accounting for the factors in an investment, deems it to be a positive cash flow
                rather than a negative one.
                In one example, a computer hardware business is looking to buy an existing store,
                and when calculating the estimated cash flows in the future, it considers those to be
                worth $800,000 as a current lump sum. If the store's owner is willing to sell for less
                than $800,000, the acquiring business would consider it a positive NPV investment. If
                the cost is more than the expected $800,000 cash flow, then it would be viewed by
                the business as a negative in net present value.




                                                                                                     www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                             Page 27 of 73
                                                                                                                                             6
 Venture Capital Method
       Company Stage                  ROI                       5-year Increase in
                                                                     Capital
    SEED                             60%+                                  10x +

    STARTUP                           50%                                   8x

    EARLY STAGE                       40%                                   5x

    2nd   STAGE                       30%                                   4x

    NEAR EXIT                         25%                                   3x




                                                                             www.growthmanagement.co.nz




Venture Capital Method
 Example
 Investment                       $1M
 Exit Year                        $5th year after investment
 Revenues (in 5th year)           $20 million
 Net Profit (in 5th year)         $10% of $2 million
 P/E (comparatives)               $15x
 Company value (in 5th year)      $30M
 Required ROI (from table)        60% = 10x
 Required ROI (in dollars)        $10 million
 % Ownership in Coy               33%
 Pre-money Valuation              $2M




                                                                             www.growthmanagement.co.nz




Exit Strategy
                                                           Exit
• Investors in the early                                  Planned or Not
                                                                                 IPO
  stage market do not
                                            Cash Flow Sale
  tend to be long-term.
                                     Trade Sales

• A clear exit strategy
                                             Asset Sale
  needs to be laid out:                                                    Orderly Shutdown


    – Selling their shares back
      to the business
    – Sale of the company
    – Listing on the stock
      exchange                                                 Zero
                                            Bankruptcy




                                                                             www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                     Page 28 of 73
                                                                                                                     7
Reality Check
 • Valuations are merely a starting point for
   negotiations.

 • Your perceived value of the business
   may not be the value a potential investor sees.

 • Expect multiple rounds

 • Focus on shareholder value not percentage
   shareholding

 • Expect terms…




                                                                         www.growthmanagement.co.nz




 Valuations Final Word
                       Not an absolute science, so negotiate…but be realistic!


                                        •   Discounted cash flow (DCF)

                                        •   EBIT multiple/EBIT Data

                                        •   Forecast multiple

                                        •   Price earnings ratio

                                        •   Net tangible assets

                                        •   Other

 “If pressed we would use DCF re forecast for early stage companies, PE or EBITDA
 multiples or published market rates for companies with revenues. To be fair, most
 valuations are based on how much do you need and how much will you give up to
 get it.” (Escalator Broker on typically used valuation methods.)




                                                                         www.growthmanagement.co.nz




      Bridging the Gap
         “the terms”
                 Deal Killer-
           “Inability to negotiate”




                                                                         www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                 Page 29 of 73
                                                                                                                 8
 Deal types


                                   Equity                                Non-Equity
                      Ordinary equity (shares)            Debt
                      Preferential equity                 Licensing
                      Convertible notes                   Strategic Partners
                                                          Joint Ventures




                                                                                     www.growthmanagement.co.nz




 Equity Deals
                    • Issuing shares for capital is a simple investment

                    • Options exist:
                             •   Carrots and sticks can be created
                             •   Structured buy-in
                             •   Structured sell out
                             •   Shareholders (SHAG) Agreement




                                                                                     www.growthmanagement.co.nz




Tools to Consider - Pricing/Valuation




  The investor will nearly always have a different view on valuation either:

    – Agree a fixed price, or                Pricing tools:
                                               –   Future price based on multiples
                                               –   The ‘earn out’
    – Negotiate a solution                     –   Stepped returns to investors




  Anything is possible with a Shareholders Agreement


                                                                                     www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                             Page 30 of 73
                                                                                                                             9
 The Earn Out Solution
                                     •   Used when profit low, and/or can’t agree on
                                         valuation and/or potential growth, or just as
                                         incentive
                                     •   Predict future net profit
                                     •   Value (usually a multiplier of EBIT)
                                     •   Set agreed milestones
                                     •   Value again in 2 - 3 years
                                     •   If goals achieved, receive a top up - shares
                                         and/or cash

                                         This can help if there is a wide gap between your
                                         valuation and the incoming investor




                                                                                          www.growthmanagement.co.nz




 Terms – Carrots& Sticks
    •   Equity – Non Equity

    •   Bridging Valuation Gaps
         –    Ratchets, Earn outs

    •   Control Exits
         –    Tag Along, Drag Along
         –    Reluctant Shareholders - Forced Sales        •   Clean Balance Sheet (removed debt)
         –    Unplanned Exits
         –    Russian roulette                             •   Bridge Risk
                                                                –   Convertible notes
    •   More carrots                                       •   Maintain control
         –    Bonuses – Profit share                            –   Financial Authority
         –    Put /Call
                                                           •   Poison Pills
    •   Funding Milestones

    •   Protecting Minority Interests                      •   Milestone Funding




                                                                                          www.growthmanagement.co.nz




 Shareholders Agreement (SHAG)
   Simple Shareholding                                     •   SHAG
        –    Is a mechanism for distributing returns to         –   Opex / capex decisions
             investors                                          –   Right of veto on major decisions
        –    Is a simple instrument for exercising              –   Anything operational / strategic
             control                                            –   Subscription for New Shares
                51% gives a simple majority                     –   Appointment of Directors
                Directors decide dividend distribution          –   Settlement
                   policy                                       –   Further Issues of Shares and Rights of
                75% for ‘major transactions’                        Sale
                                                                –   Ongoing Arrangements
                                                                –   General Provisions – dividends, major
                                                                    transactions, etc
                                                                –   Schedules




                                                          See Example SHAG in workbook




                                                                                          www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                  Page 31 of 73
                                                                                                                                  10
  Equity Deals

        Equity
 Ordinary equity            These are shares that are entitled to all income and capital after
 (shares)                   the rights of other classes of capital and creditors have been
                            satisfied


 Preferential equity        A security that has preference over ordinary equity with respect
                            to dividends or payments when liquidating the company. They
                            may also have rights to block certain transactions


 Convertible notes          A security that can be converted to ordinary equity under certain
                            conditions. These notes often have special rights that the
                            ordinary equity does not.




                                                                                                        www.growthmanagement.co.nz




  Non-equity Deals
     Non-Equity
 Debt                  The borrowings of a company that ordinarily is repaid prior to equity being paid. It is
                       normally interest bearing and has a defined repayment terms. Debt has priority
                       upon winding up.

 Licensing             A legal agreement entitling the owner to undertake a specific activity (e.g. sales
                       license, manufacturing license). For a useful guide, refer to Robert Auerbach’s
                       ‘Granting a Licence to Manufacture Products’, available at:
                       http://www.marketnewzealand.com/MNZ/services/14433.aspx?Exporter=true
 Strategic             A partnership where two parties agree to work together for mutual benefit. It can
 Partnership           involve several licenses and an agreement to develop a product / market together.


 Joint Ventures        Similar to a strategic partnership, although a JV has a separate legal standing as
                       an entity (enabling it to be sued). For a useful guide, refer to Robert Auerbach’s
                       ‘Joint Venture Agreement’, available at:
                       http://www.marketnewzealand.com/MNZ/services/14433.aspx?Exporter=true




                                                                                                        www.growthmanagement.co.nz




  Controlled exits…
                       Do you want to control who can buy out the investor?
                       Do you want the investor to control who can buy you out?

                       http://vcexperts.com/vce/library/encyclopedia/glossary.asp

        Pre emptive    A shareholder's right to acquire an amount of shares in a future offering at
                       current prices per share paid by new investors, whereby his/her percentage
                                                                                                  •
        Right
                       ownership remains the same as before the offering

        Put/ Call      The right to sell / buy at given price (or Range) within a given time period

        Ratchet:       Ratchets reduce the price at which investor can convert their debt into preferred
                       stock, which effectively increases their percentage of equity. Often referred to as
                       an “antidilution adjustment.”

        Drag Along:    A majority shareholders' right, obligating shareholders whose shares are bound
                       into the shareholders' agreement to sell their shares into an offer the majority
                       wishes to execute.

        Tag Along:     A minority shareholder protection affording the right to include their shares in any
                       sale of control and at the offered price.




                                                                                                        www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                                Page 32 of 73
                                                                                                                                                11
 Preference Terms – VC Investors
                                    •    Different share type – ‘preferred shares’ now
                                         common
                                    •    Preference plus advantages of ordinaries
                                    •    Preferences include:
                                                •    Liquidation preference (1-3 times)

                                                •    Preferential dividends

                                                •    Anti-dilution (full ratchet or weighted average)

                                                •    Protective mechanisms (e.g. board, consent
                                                     requirements)

                                                •    Exit provisions


                                    (Source: ‘Recent Developments in VC and PE terms and Structures’ –
                                         Presentation by Andrew Lewis, Simpson Grierson .)




                                                                                            www.growthmanagement.co.nz




 Example: Mixed funding

                                  Tranche 1         Tranche 2          Tranche 3               Total
 Preference Shares (VC)                   $2m                                                          $2m



 Convertible Note (VC)                    $3m                 $2m                                      $5m



 Debt (bank)                                                                       $3m                 $3m



 Total                                    $5m                 $2m                  $3m               $10m




                                                                                            www.growthmanagement.co.nz




 Non-Equity Deals - Types & Tools

  • Debt
  • Licensing agreements
         - Sales & distribution
         - Manufacturing

  • Technology development agreement
  • Joint venture
  • Strategic partnership




                                                                                            www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                    Page 33 of 73
                                                                                                                                    12
 Private Debt
   • Security documentation
            ⎯    Mortgage of business and personal property                                        U
                                                                                              IO
            ⎯    Discharge/priority of existing debt
            ⎯    Personal guarantees

   • Key issues:
            ⎯    Funding ‘tagged’ to specific purposes
            ⎯    Restriction on asset disposal
            ⎯    Dividends/distributions or repurchase shares
            ⎯    Compliance with financial ratios




                                                                                          www.growthmanagement.co.nz




 Licensing – Issues and Consideration

Sales / distribution / marketing license:                 Manufacturing license:
• Royalties / license fees                                • Ownership of IP, designs etc
• Ownership of IP                                         • Capital equipment required
• Term                                                    • Royalties / license fees / other fees
• Minimum / maximum volumes
• Training
• Market research
• Market development commitment
• Post sales support



  Some times these licenses can be with the same counter parties - but, can they do it all?




                                                                                          www.growthmanagement.co.nz




 Technology Development Agreement

   • IP Ownership (pre agreement)
   • Funding commitment
   • Resource commitment
   • Term
   • IP ownership (post development)

   • Management structure




                                                                                          www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                                                  Page 34 of 73
                                                                                                                                  13
 Joint Venture
   A joint venture can take many different legal forms:
   •   Formal ‘joint venture’
   •   Unincorporated joint venture
   •   Partnership


   The joint venture’s scope can be as broad as:
   •   Sales / distribution
   •   In-market representation
   •   Manufacturing
   •   Technology development
   •   In-market support
   •   Administration




                                                            www.growthmanagement.co.nz




                 Wrap Up


                Deal Killer
        “failure to explore options”




                                                            www.growthmanagement.co.nz




 Collaboration in the Industry
                                  • Developing Industry
                                       – Angel Groups
                                       – Industry players

                                  • Training Investors
                                  • Sharing Knowledge



                                                            www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                    Page 35 of 73
                                                                                                    14
 Drop Sheets



  • AngelSoft
     – Automating deal
       management
     – Syndication




                                             www.growthmanagement.co.nz




 More Training
• Power Pitching
   – What do you do again?
       www.succinctstories.com



• Specialist
   – Contracts
   – Strategic Deals




                                             www.growthmanagement.co.nz




 What Are Your Takeaways?

    • Raising Capital is a finance tool

    • Is your business an investible
      proposition?
        – succinct story
        – business model
        – Advisory group

    • Register for a free Needs Assessment
      www.escalator.co.nz




                                             www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                     Page 36 of 73
                                                                                     15
 Contact Details:   www.Escalator.co.nz

                            Apply for Help: www.escalator.co.nz



                            Mark Robotham
                                 Mark@escalator.co.nz
                                 www.escalator.co.nz
                                 www.GrowthManagement.co.nz
                                 021 61 8850

                            Brendan Mahar – Help Desk
                                Brendan@escalator.co.nz
                                0800 822 748

                            Ben Grant – Help Desk
                                 Ben@escalator.co.nz
                                 0800 822 748




                                                                  www.growthmanagement.co.nz




 Acknowledgements
    • Bell Mason Diagnostic www.bellmasongroup.com
    • Tom McKaskill – www.tommckaskill.com
    • Jim Collins – Good to great www.jimcollins.com

    • Mark Robotham mark@escalator.co.nz
                    www.growthmanagement.co.nz
                    www.succinctstories.com

    • John Cunningham john@ignitionpartner.com




                                                                  www.growthmanagement.co.nz




Escalator - Capital Raising (V1)                                                          Page 37 of 73
                                                                                                          16
       DCF - Mechanics
EBIT                                         229,958            396,572         827,839
                                                                                                        Valuation on 15%
                                                                                                        DCF
Addback Depreciation                          (13,020)           (13,020)        (13,020)
                                             242,978            409,592         840,859                 = sum(yr1,yr2,yr3)
                                                                                                        = $1,073,875
DISCOUNTED CASHFLOWS (ASSUME START YR IS 2007)
                                                                                             NPV
Discount rate                         10%      220,889           338,506          631,750   1,191,145
                                      15%      211,286           309,710          552,879   1,073,875
                                      20%      202,482           284,439          486,608
                                      30%      186,906           242,362          382,731
                                      50%      161,986           182,041          249,144
                                      60%      151,861           159,997          205,288    517,146



                      = NPV(rate,value)                  = Value / (1+discount)^years
                =NPV (10%, 242978)                       = 409,592 / (1+ 0.6)^2               = Value / (1+discount)^years
                                                                                              = 840,859 / (1+ 0.6)^3
                             refer to spreadsheet in handouts




                                                                                                           www.growthmanagement.co.nz
   Escalator - Capital Raising (V1)                             Page 38 of 73
                         Company Limited
                         P & L Forecast
                         for the year ending 31 March 2008


                                                                    2008                 2009                2010

                         SALES
                                                                            -                    -                   -
                         Total Sales                                  3,238,241            4,147,318           5,311,601
                                                                      3,238,241            4,147,318           5,311,601

                         Discounts given                               (226,677)            (290,312)           (371,812)

                         Total Sales                                  3,011,564            3,857,006           4,939,789


                         COST OF SALES
                         Opening stock                                  116,329              116,329             116,329

                         Cost of production                           1,652,852            2,116,860           2,711,130

                         Closing stock                                 (116,329)            (116,329)           (116,329)

                         Total Cost of Sales                          1,652,852            2,116,860           2,711,130

                         Gross Margin                                 1,358,712            1,740,145           2,228,659
                         %                                                 45.12%               45.12%              45.12%

                         OTHER VARIABLE COSTS
                         Sales Administration                           120,463              154,280             197,592
                         Logistics                                       60,231               77,140              98,796
                         Total Variable Costs                           180,694              231,420             296,387

                         Gross Profit                                 1,178,018            1,508,725           1,932,272
                         %                                                 39.12%               39.12%              39.12%



                         Gross Profit C/Fwd                           1,178,018            1,508,725           1,932,272

                         EXPENSES
                         ADMINISTRATION EXPENSES
                         General Administrative Expense                  67,004               67,004              67,004
                         Couriers & Postage                               3,020                3,020               3,020
                         Computer Expenses                                1,000                1,000               1,000
                         Office Expenditure                               5,940                5,940               5,940
                         Telecommunications                              20,400               20,400              20,400
                         HR Costs                                       439,530              552,373             587,486
                         Vehicles                                        15,007               15,007              15,007
                         Occupancy Costs                                 57,659               57,659              57,659
                         Travel                                          15,000               15,000              15,000
                         Total Administration Expenses                  624,560              737,403             772,516

                         PRODUCT DEVELOPMENT
                         Product Development                             20,000               22,500              20,000
                         Quality Control                                 99,000              107,750             101,500
                                                                        119,000              130,250             121,500

                         MARKETING EXPENSES
                         Design                                          12,000               52,000              50,000
                         Promotion                                       55,000               55,000              45,833
                         General Marketing                              137,500              137,500             114,583
                         Total Marketing Expenses                       204,500              244,500             210,417

                         TOTAL EXPENSES                                 948,060            1,112,153           1,104,432

                         EBIT                                         229,958              396,572             827,839


                         Addback Depreciation                          (13,020)             (13,020)            (13,020)
                                                                      242,978              409,592             840,859

                         DISCOUNTED CASHFLOWS (ASSUME START YR IS 2007)

                         Discount rate                   10%            220,889              338,506             631,750
                                                         15%            211,286              309,710             552,879
                                                         20%            202,482              284,439             486,608
                                                         30%            186,906              242,362             382,731
                                                         50%            161,986              182,041             249,144
                                                         60%            151,861              159,997             205,288

                         (has not taken into terminal value) Example is purely to demonstrate the effect the discount rate has on valuation




Escalator - Capital Raising (V1)                                                    Page 39 of 73
                                   Company Limited (ANSWERS)
                                   P & L Forecast
                                   for the year ending 31 March 2008


                                                                         Apr-07      May-07      Jun-07      Jul-07      Aug-07       Sep-07        Oct-07      Nov-07      Dec-07      Jan-08      Feb-08      Mar-08

                                   SALES
                                                                              -           -           -           -            -           -             -           -           -           -           -           -
                                   Total Sales                            240,313     245,319     250,430     255,647      260,973     266,410       271,960     277,626     283,410     289,315     295,342     301,495
                                                                          240,313     245,319     250,430     255,647      260,973     266,410       271,960     277,626     283,410     289,315     295,342     301,495

                                   Discounts given                        (16,822)    (17,172)    (17,530)    (17,895)     (18,268)      (18,649)    (19,037)    (19,434)    (19,839)    (20,252)    (20,674)    (21,105)

                                   Total Sales                            223,491     228,147     232,900     237,752      242,705     247,762       252,923     258,192     263,571     269,063     274,668     280,390


                                   COST OF SALES
                                   Opening stock                          116,329     116,329     116,329     116,329      116,329     116,329       116,329     116,329     116,329     116,329     116,329     116,329

                                   Cost of production                     122,660     125,215     127,824     130,487      133,205     135,980       138,813     141,705     144,657     147,671     150,747     153,888

                                   Closing stock                         (116,329)   (116,329)   (116,329)   (116,329)    (116,329)   (116,329)     (116,329)   (116,329)   (116,329)   (116,329)   (116,329)   (116,329)

                                   Total Cost of Sales                    122,660     125,215     127,824     130,487      133,205     135,980       138,813     141,705     144,657     147,671     150,747     153,888

                                   Gross Margin                           100,831     102,932     105,076     107,265      109,500     111,781       114,110     116,487     118,914     121,392     123,921     126,502
                                   %                                        45.12%      45.12%      45.12%      45.12%       45.12%        45.12%      45.12%      45.12%      45.12%      45.12%      45.12%      45.12%


                                   OTHER VARIABLE COSTS
                                   Sales Administration                     8,940       9,126       9,316       9,510        9,708        9,910       10,117      10,328      10,543      10,763      10,987      11,216
                                   Logistics                                4,470       4,563       4,658       4,755        4,854        4,955        5,058       5,164       5,271       5,381       5,493       5,608
                                   Total Variable Costs                    13,409      13,689      13,974      14,265       14,562       14,866       15,175      15,492      15,814      16,144      16,480      16,823

                                   Gross Profit                            87,422      89,243      91,102      93,000       94,938       96,916       98,935     100,996     103,100     105,248     107,440     109,679
                                   %                                        39.12%      39.12%      39.12%      39.12%       39.12%        39.12%      39.12%      39.12%      39.12%      39.12%      39.12%      39.12%



                                   Gross Profit C/Fwd                      87,422      89,243      91,102      93,000       94,938       96,916       98,935     100,996     103,100     105,248     107,440     109,679

                                   EXPENSES
                                   ADMINISTRATION EXPENSES
                                   General Administrative Expense           5,584       5,584       5,584       5,584        5,584        5,584        5,584       5,584       5,584       5,584       5,584       5,584
                                   Couriers & Postage                         252         252         252         252          252          252          252         252         252         252         252         252
                                   Computer Expenses                           83          83          83          83           83           83           83          83          83          83          83          83
                                   Office Expenditure                         495         495         495         495          495          495          495         495         495         495         495         495
                                   Telecommunications                       1,700       1,700       1,700       1,700        1,700        1,700        1,700       1,700       1,700       1,700       1,700       1,700
                                   HR Costs                                31,404      31,404      31,404      31,404       31,404       31,404       31,404      43,941      43,941      43,941      43,941      43,941
                                   Vehicles                                 1,251       1,251       1,251       1,251        1,251        1,251        1,251       1,251       1,251       1,251       1,251       1,251
                                   Occupancy Costs                          4,805       4,805       4,805       4,805        4,805        4,805        4,805       4,805       4,805       4,805       4,805       4,805
                                   Travel                                   1,250       1,250       1,250       1,250        1,250        1,250        1,250       1,250       1,250       1,250       1,250       1,250
                                   Total Administration Expenses           46,823      46,823      46,823      46,823       46,823       46,823       46,823      59,360      59,360      59,360      59,360      59,360

                                   PRODUCT DEVELOPMENT
                                   Product Development                      1,667       1,667       1,667       1,667        1,667        1,667        1,667       1,667       1,667       1,667       1,667       1,667
                                   Quality Control                          8,250       8,250       8,250       8,250        8,250        8,250        8,250       8,250       8,250       8,250       8,250       8,250
                                                                            9,917       9,917       9,917       9,917        9,917        9,917        9,917       9,917       9,917       9,917       9,917       9,917

                                   MARKETING EXPENSES
                                   Design                                   1,000       1,000       1,000       1,000        1,000        1,000        1,000       1,000       1,000       1,000       1,000       1,000
                                   Promotion                                4,583       4,583       4,583       4,583        4,583        4,583        4,583       4,583       4,583       4,583       4,583       4,583
                                   General Marketing                       11,458      11,458      11,458      11,458       11,458       11,458       11,458      11,458      11,458      11,458      11,458      11,458
                                   Total Marketing Expenses                17,042      17,042      17,042      17,042       17,042       17,042       17,042      17,042      17,042      17,042      17,042      17,042

                                   TOTAL EXPENSES                          73,781      73,781      73,781      73,781       73,781       73,781       73,781      86,319      86,319      86,319      86,319      86,319

                                   EBIT                                   13,641      15,462      17,321      19,219       21,157      23,135        25,154      14,677      16,781      18,929      21,122      23,360


                                   Addback Depreciation                    (1,085)     (1,085)     (1,085)     (1,085)      (1,085)       (1,085)     (1,085)     (1,085)     (1,085)     (1,085)     (1,085)     (1,085)

                                   CASHFLOWS                               14,726      16,547      18,407      20,305       22,242       24,220       26,239      15,763      17,867      20,015      22,207      24,446

                                   DISCOUNT RATE                    6%
                                                                   15%
                                                                   20%
                                                                   30%
                                                                   40%
                                                                   50%




Escalator - Capital Raising (V1)                                                                                         Page 40 of 73
                          Handouts
                              &
                      Additional Reading




Escalator - Capital Raising (V1)   Page 41 of 73
                                SAMPLE FLYER                                                                                                 SAMPLE FLYER



                                                                                                                COMPANY OVERVIEW
  INTRODUCTION
                                                                                                                [The review should cover the following aspects:]
  The Shareholders of [   ] (the “Company") have decided to seek additional investment in
  the Company. IP Limited has been appointed by the Shareholders to act as their adviser                        History
  and to manage the process. No approaches in relation to the process should be made to
  the Company.                                                                                                  Management and Employees

  This Information Flyer provides a description of the key investment highlights, an overview                   Operations
  of the Company, a description of the investment process and an indicative timetable.
                                                                                                                Summary Financial Information

  INVESTMENT HIGHLIGHTS                                                                                         A summary of the Company’s recent financial performance and position is set out below.


  [Outline key selling features which could include:                                                            [You may include commentary to explain historic performance and growth expectations].
  Strategic Asset/Player –

  Track Record -

  Growth Prospects –

  Key Contracts and Customer Relationships -

  Processing Facilities –

  Low Cost, High Quality Production

  Competitive Strategy -

  Financing Options –

  Skilled Management –

  Strong Barriers to Entry -

  Other




Escalator - Capital Raising (V1)                                                                Page 42 of 73
                                SAMPLE FLYER



  THE INVESTMENT PROCESS AND INDICATIVE TIMETABLE

  Investment Process

  Potential investors will be provided with, at the option of IP Limited and the Shareholders of
  the Company, an Information Memorandum that will describe the business of the
  Company. Prior to the release of the Information Memorandum potential purchasers will be
  requested to sign a Confidentiality Agreement.

  Selected potential investors will be given access to further confidential information to
  enable them to conduct their own due diligence investigations. The Shareholders of the
  Company and IP Limited reserve the right at their sole discretion to include potential
  investors in or to exclude potential investors from, the shortlist. A shareholders agreement
  will be issued to shortlisted potential investors during the due diligence process.

  The Shareholders of the Company and IP Limited reserve the right at their sole discretion
  to change or discontinue the investment process at any time without notice.

  Indicative Timetable

  Information Memorandums Issued

  Proposals received

  Due Diligence

  Settlement




Escalator - Capital Raising (V1)                                                                   Page 43 of 73
                                                                                    CONFIDENTIALITY AGREEMENT


                                                                THIS AGREEMENT is made this (date)
                         (name of Company 1.)
                                                                            BETWEEN Company 1.
                                   and

                                                                            AND            Company 2.
                         (name of company 2.)
                                                                BACKGROUND

                                                                A.    Company 2. will be provided with information owned by Company 1. and
                                                                      Company 1. will be provided with information owned by Company 2. which is
                                                                      commercially sensitive and highly confidential.

                                                                B.    The purpose of the provision of the information to the respective parties is to
                                                                      enable Company 1. and Company 2. to consider entering into a business
                                                                      relationship / strategic alliance / joint venture.

                                                                C.    Company 1. and Company 2. have agreed to be bound by duties of
           CONFIDENTIALITY AGREEMENT                                  confidentiality and secrecy.


                                                                IT IS AGREED as follows:

                                                                1.    Definitions

                                                                      “Company 1. Confidential Information” shall mean all information and data
                                                                      which is disclosed to Company 2., and which relates to the business activities
                                                                      of Company 1. and which is not in the public domain.

                                                                      “Company 2. Confidential Information” shall mean all information and data
                                                                      which is disclosed to Company 1. and which relates to the business activities
                                                                      of Company 2. and which is not in the public domain.

                                                                2.    Non-Disclosure

                                                                      In consideration of Company 1. furnishing Company 2. with the Company 1.
                                                                      Confidential Information, Company 2. agrees not to disclose or otherwise
                                                                      publish the Company 1. Confidential Information without the prior written
                                                                      consent of Company 1.

                                                                      In consideration of Company 2. furnishing Company 1. with the Company 2.
                                                                      Confidential Information, Company 1. agrees not to disclose or otherwise
                                                                      publish the Company 2. Confidential Information without the prior written
                                                                      consent of Company 2..


Escalator - Capital Raising (V1)                Page 44 of 73
                                                Page 2 of 3
3.            Use

              Company 2. agrees not to use the Company 1. Confidential Information for
              any purpose other than that for which the information was provided.

              Company 1. agrees not to use the Company 2. Confidential Information for
              any purpose other than that for which the information was provided.

4.            Material

              Company 2. shall take all reasonable care to ensure that all materials in the
              possession of Company 2. which contain or incorporate Company 1.
              Confidential Information be securely kept; and shall return, destroy or
              otherwise deal with as directed all material containing or incorporating
              Company 1. Confidential Information on the direction of Company 1..

              Company 1. shall take all reasonable care to ensure that all materials in the
              possession of Company 1. which contain or incorporate Company 2.
              Confidential Information be securely kept; and shall return, destroy or
              otherwise deal with as directed all material containing or incorporating
              Company 2. Confidential Information on the direction of Company 2..

5.            Other Agreements

              Company 2.’s obligations in respect of the Company 1. Confidential
              Information shall be in addition to any other obligation under any other
              agreement which involves the Company 1. Confidential Information, unless
              expressly excluded by reference.

              Company 1.’s obligations in respect of the Company 2. Confidential
              Information shall be in addition to any other obligation under any other
              agreement which involves the Company 2. Confidential Information, unless
              expressly excluded by reference.

6.            Term of Agreement

              This agreement shall continue until an agreement in respect of a business
              relationship / strategic alliance / joint venture between Company 1. and
              Company 2. is entered into, or Company 1. and Company 2. agree that
              Company 1.’s and Company 2.’s obligations under this agreement shall cease.


SIGNED for and on behalf of                       )
Company 1.                                        )



SIGNED for and on behalf of                       )
Company 2.                                        )
confagree1




             Escalator - Capital Raising (V1)                                                 Page 45 of 73
          SAMPLE INFORMATION MEMORANDUM                                                SAMPLE INFORMATION MEMORANDUM

                                                                                CONTENTS

                                                                                EXECUTIVE SUMMARY

                                                                                THE OPPORTUNITY

                                                                                BUSINESS DEVELOPMENT

[Company Name]                                                                  COMPETITIVE ADVANTAGE

                                                                                THE TECHNOLOGY

                                                                                COMPETITOR ANALYSIS
Information Memorandum
                                                                                CORPORATE STRUCTURE

[Date]                                                                          FINANCIALS

                                                                                THE OFFERING

                                                                                COMPANY DIRECTORY
[Company Logo]                                                                  APPENDICES




                         STRICTLY CONFIDENTIAL
                                COPY NO: [ ]




                                                 Copy No. ( )                                                    Copy No. ( )
 Escalator - Capital Raising (V1)                               Page 46 of 73
          SAMPLE INFORMATION MEMORANDUM                                                                     SAMPLE INFORMATION MEMORANDUM

IMPORTANT NOTICE & DISCLAIMER                                                                      EXECUTIVE SUMMARY
                                                                                                       The Opportunity
In consideration of X Co. Ltd providing this Information Memorandum to the                             The Company
recipient, the recipient acknowledges that the contents of this Memorandum                             Products and Marketing Strategy
are confidential to X Co. Ltd and the recipient agrees not to disclose,                                Funding and Finance
distribute or permit to be communicated verbally, directly or indirectly, or                           The Offering
otherwise, or to otherwise publish the contents of this Memorandum except
with the prior written consent of X Co. Ltd.                                                       THE OPPORTUNITY
                                                                                                        Product and Market Opportunity
For the purposes of this acknowledgement “recipient” includes, without                                  Business Model to exploit Opportunity
limitation, any principal, director, officer, shareholder, employee or agent of
the recipient.                                                                                     BUSINESS DEVELOPMENT
                                                                                                        Products and Market Strategy
This Memorandum has been compiled solely for information purposes to                                    M&A Strategy
assist interested parties in making their own evaluation of the X Co. Ltd and                           Licensing Strategy
does not purport to contain all the information that a prospective purchaser                            Future Projects
may require. In all cases, interested parties should conduct their own                                  Milestones
investigation and analysis of the Company and the data contained in this
Memorandum.                                                                                        COMPETITIVE ADVANTAGE
                                                                                                       Strengths
X Co. Ltd does not make any representation or warranty as to the accuracy or                           Alliances and Strategic Relationships
completeness of the information contained in this Memorandum.                                          Operations and Distribution
Furthermore, X Co. Ltd shall not have any liability to the recipient or any
person resulting from the use of this Memorandum.                                                  THE TECHNOLOGY
                                                                                                        Description
X Co. Ltd considers that the financial information contained in the                                     Protection
Memorandum has been prepared to the best of its knowledge and ability but                               Future Technologies
recipients must rely on their own investigation of all financial information and
no representations or warranties are or will be made by X Co. Ltd as to the                        COMPETITOR ANALYSIS
accuracy or completeness of such information.                                                          Competing products
                                                                                                       Competition in the sector
The Confidential Information is disclosed on the basis that the Recipient is                           Emerging products
        1. a close business associate of the Owner                                                     Competition in other sectors
        2. a person whose principal business is the investment of money or
           who in the course of and for the purposes of the recipient’s                            CORPORATE STRUCTURE
           business habitually invests money                                                           Directors
        3. a person who cannot be regarded as having been selected as a                                Senior Management
           member of the public.                                                                       Company Structure
Accordingly neither the provision of the Confidential information nor anything                         Company Constitution
contained in the Confidential Information constitutes an offer of securities an
offer of securities to the public that would otherwise be required to comply                       FINANCIALS
with the Securities Act .                                                                               Summary of Financial Position
                                                                                                        Summary of Financial Performance
For the purposes of this disclaimer, X Co. Ltd includes, without limitation the                         Summary of Financial Projections
officers, employees, directors, advisers and agents of X Co. Ltd.                                       Gross Margin Analysis
                                                                                                        Capital Planning




                                                                  Copy No. ( )                                                                  Copy No. ( )
 Escalator - Capital Raising (V1)                                                  Page 47 of 73
          SAMPLE INFORMATION MEMORANDUM

THE OFFERING
     Form of Capital
     Capital Raising Process
     Timetable
     Value of Company
     Risk Factors
     Exit Strategy

COMPANY CONTACT DETAILS

APPENDICES




                                    Copy No. ( )
 Escalator - Capital Raising (V1)                  Page 48 of 73
                            SAMPLE TERM SHEET                                                                                             SAMPLE TERM SHEET
                            Terms for Investment into X co Ltd
                                                                                                               Costs
              Agreement between Y Ltd and the shareholders of X co Ltd                                         Costs associated with the investment and changes to shareholders agreement and
                                                                                                               constitution will be paid by the investor.
Dated 1 May 2003

Background                                                                                                     Exit
X co has developed technology. It requires money to complete a business plan,                                  Y is a venture capital investor and expects to exit profitably in about 4 years. The parties
progress its intellectual property rights, complete proof of concept and to build a facility                   agree to include exit strategies in the business plan.
to produce the product and extract the active components.
                                                                                                               Note
Investment terms                                                                                               All amounts are exclusive of GST. Where GST is a factor this needs to be added to the
The investment term required reflects the development stated above.                                            amounts shown. Under current law these investment are financial transactions and do
1. $A by 31st May 2003 to complete a business plan. The plan will be completed by 30th                         not attract GST.
   June 2003
2. $B by 31st July 2003 to progress the protection of the intellectual property and proof
   of concept.

The monies in 1 and 2 will be by way of unsecured loan to the company and will convert
to ordinary shares with the subscription under 3 below.
3. $C to build the facility outlined in the business plan. This is expected to be in three                     As agreed by all X co Ltd shareholders and Y Ltd
    tranches for land, building and equipment the first tranche in February 2004. The
    second in June 2004 and the third in Sept 2004.
4. The investment in 3 will be for ordinary shares and the loans in 1 and 2 will convert
    to ordinary shares at the same value. Y will own 30% of the company post
    investment.
                                                                                                               X co Ltd
Shareholding
The current shareholding and post investment shareholding will be

Shareholder             Current                 Post investment

                                                                                                               Y Ltd




The conditions for this subscription are:

x    Satisfactory due diligence by Y by 30th May 2004
x    Production of a business plan acceptable to the parties by 30th June 2003
x    Appointment of a Y appointed Director to the Board of X co
x    Changes to the Share Holders Agreement and Company Constitution before the
     subscription in item 3 above.
x    Any disputes are resolved within 7 days of written notice, or referred to arbitration
x    The agreement will be interpreted under NZ law




    Escalator - Capital Raising (V1)                                                           Page 49 of 73
                   SAMPLE DUE DILIGENCE FILE HEADINGS

    Technology

    Product

    Operations and Implementation

    Business Plan

    Marketing

    Sales

    CEO

    Team

    Corporate and Board

    Cash

    Financeability

    Controls




Escalator - Capital Raising (V1)   Page 50 of 73
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Escalator - Capital Raising (V1)                                                                   Page 55 of 73
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Escalator - Capital Raising (V1)                                                               Page 56 of 73
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Escalator - Capital Raising (V1)                       Page 57 of 73
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Escalator - Capital Raising (V1)                                  Page 58 of 73
MEDIA RELEASE - EMBARGOED UNTIL 11AM, THURS 21 APRIL 05                                                 Endeavour Capital's Neville Jordan, said he had known Beca founder Sir Ron Carter
                                                                                                        as well as Gavin Cormack for 20 years. "I admire the outstanding work started by Sir
     Endeavour Capital invests NZ$3 million in                                                          Ron in building the Beca Group into a world class engineering consultancy business
                                                                                                        with extensive success in many countries," he said. "The innovative New Zealand
Beca start-up Derceto following sales in USA of world                                                   technology that Beca has spun off into Derceto signals a bold new step for the group.
         leading energy efficiency technology                                                           We look forward to committing our resources, both financial and commercial, to help
                                                                                                        grow Derceto into the dominant international player within its niche industry."

    Derceto to leverage Endeavour Capital's North American                                              Derceto director Bryce Whitcher said the company had been faced with a raft of
          expertise and target US$250 million market                                                    financing options including interest from overseas venture capital firms. "We wanted
                                                                                                        external funding to take the business to the next level and, given our New Zealand
AUCKLAND, 21 April, 2005 - Endeavour Capital, one of New Zealand's leading                              heritage, we are proud that a locally based investor such as Endeavour Capital has
venture capital firms, today announced a NZ$3 million investment in software                            come on board as our partner," he said. "In addition, three of the principal executives
innovator Derceto, a spin-out from Beca, the largest New Zealand owned professional                     in Endeavour Capital are professional engineers which means they understand both
services group. Initially stimulated by New Zealand's deregulated electricity market,                   the Derceto technology and the target market, making Endeavour Capital an ideal
Derceto now develops energy efficiency software for large water distribution                            mentor and partner."
companies in the United States and Australia, optimising water pumping schedules
and creating significant savings in power.                                                              Endeavour Capital partner Dennis Row said he saw huge opportunities in developing
                                                                                                        the company into a global innovation leader in its field. "Derceto is a truly unique
The US$104 billion water utility market in the United States accounts for 75 billion                    product developed in New Zealand for a very specific yet commercially significant
kilowatt hours per annum or 3% of the total electricity consumption in that country.                    world market, the water distribution industry. In the United States alone, where
In 2004 Derceto began targeting the 210 largest utilities, each serving more than                       Derceto already has traction, the market opportunities are immense. This makes
200,000 customers, where sales opportunities alone total more than US$250 million.                      Derceto a compelling investment for Endeavour Capital," said Dr Row.
In the last eight months Derceto's American client base has grown to more than
fifteen utilities across the United States.                                                             Derceto's success in the US market to date includes the implementation of its software
                                                                                                        by California based East Bay Municipal Utility District, a recognised innovator
The NZ$3 million investment from the Endeavour i-Cap fund, managed by                                   among North American utilities. East Bay MUD, who service 1.2 million customers
Endeavour Capital under the Government licenced Venture Investment Fund scheme                          in and around Oakland, estimate that their annual energy savings will reach
(NZ VIF), will be made in two tranches over 12 months culminating in a shareholding                     US$500,000, based on the first eight months of Derceto operation.
of approximately 40% in Derceto.
                                                                                                        For further information please contact:
                                                                                                        Nicholas O'Flaherty, Bullet PR
Beca Executive Chairman, Gavin Cormack, said the Endeavour Capital investment                           Tel: 021 303-181, email: nicholaso@bulletpr.co.nz
will enable Derceto to reach its full potential as a stand-alone commercial entity.
"Derceto has successfully transformed innovative technology from within the Beca
Group into a unique product with a huge international market, especially among the
                                                                                                                                            Notes to editors:
more than 200 major water utility companies in North America" he said.
                                                                                                        About Derceto
Mr Cormack said that Endeavour Capital's proven success and extensive business
                                                                                                        Auckland-based Derceto is a software company focussed on delivering award
network in the United States made the firm a natural fit for Derceto. "In Neville
                                                                                                        winning energy efficiency software for water and wastewater utilities. The company
Jordan and Dr Dennis Row, Endeavour Capital has two outstanding New Zealand
                                                                                                        grew out of Beca's development of software designed to take advantage of New
entrepreneurs with proven commercial success in the North American market."
                                                                                                        Zealand's deregulated electricity market by optimizing territorial local authorities'
                                                                                                        water pumping schedules, allowing significant power cost savings. Derceto emerged
Neville Jordan, the founder and Chairman of Endeavour Capital, became the first
                                                                                                        out of the Beca Group as an optimisation software company in 2003. US subsidiary,
New Zealander to successfully list a local company, MAS Technology, on NASDAQ.
                                                                                                        Derceto Inc. headquartered in San Francisco, provides sales and support services to
Endeavour Capital partner Dr Dennis Row, who becomes a Derceto director, has also
                                                                                                        clients in the USA and Canada. For more information on Derceto visit:
achieved significant business success in the United States. He spent more than two
                                                                                                        www.derceto.com
decades in California where he was founding partner and CEO of Rebis Inc, and
Senior Vice President of Cyra Technologies.




 Escalator - Capital Raising (V1)                                                       Page 59 of 73
About Beca Group
Established in 1918, Beca Group is the largest New Zealand-owned professional
services company, employing over 1500 staff in 13 countries and with projects in over
63 countries.
Beca works in five key sectors: industry, building, infrastructure, environmental and
resource management, and delivers engineering, planning, project management,
applied technologies and valuation services.
Headquartered in Auckland, Beca operates from three market hubs: New Zealand,
Australia and Singapore. The employee-owned practice designs and supervises
projects with a total value of over $N2.4 billion annually.
Recent projects include terminal expansion at the Wellington and Auckland
international airports, Britomart Transport Centre in Auckland, Westpac Stadium in
Wellington, Sky Tower and Casino in Auckland, Manukau Wastewater Treatment
Plant in Mangere, Auckland City Hospital and the 338m Macau Tower in China.
For more information on Beca Group visit: www.beca.com

About Endeavour Capital
Endeavour Capital was founded by successful businessman Neville Jordan as a result
of his desire to put something back into the New Zealand economy and to help ensure
that small companies based on science and technology had access to vital venture
capital funding.
As a licensed manager under the New Zealand government's Venture Investment
Fund scheme, Endeavour has raised more than $40 million of investment funding.
This is presently being invested in exciting New Zealand-based companies working
on world-class developments in biotechnology, ICT, the creative industries, and
advanced manufacturing.
More information on Endeavour Capital and its investments is at: www.ecap.co.nz




 Escalator - Capital Raising (V1)                                                       Page 60 of 73
                        Escalator Client Fact Sheet                                                    What strategies did the broker use to overcome the challenges?

                                                                                                       Time up front clarifying the investment and business story to ensure consistency
Name of Broking firm:                                                                                  when either the broker or the company was in discussions with investors. The
                                                                                                       broker also took significant time understanding the needs of the investor and
Deloitte                                                                                               coaching Derceto Executives and Board about the needs of investors.

Name of Client (if Broker OK to use):                                                                  What benefits did the client receive from the completion of this deal?

Derceto Ltd                                                                                               x   Capital - giving the company the ability to grow in the U.S. market.
                                                                                                          x   Assistance with strategic development and management of the business.
What did the client need?
                                                                                                       Any comments from the client’s perspective?
The client approached Escalator requiring capital. After initial meetings with the
broker it was evident the client required a clear business plan and an overall                         Escalator/Deloitte provided useful services.
strategy needed developing. There was a great product however the client was                           1. Experience and contacts in capital raising.
not in the position to raise money, as the ‘story’ was not captured in a clear                         2. Resource to search for potential partners and “woo” them.
business plan. The broker worked with the client to develop the ‘story’, i.e. what’s                   3. Low cost – except for Business Plan which was paid for – coaching and
the market, what was driving the need for the product in the future - which was                           assistance to prepare for talking to investors.
changes in U.S. power market (deregulation and consolidation of water plants).
                                                                                                       NB: Success only basis for balance of fees is helpful to a start-up company.
How did the broker assist?

The broker advised the client around strategy and their investment story and took
the investment opportunity to twelve investors, four of whom were interested to
learn more (three venture capitalists and one strategic partnership). Two came
back with serious offers. Eventually the broker helped close the deal with one of
the VCs.

How long did it take to complete the deal?

The assessment, strategy and business plan work took 6-7 months, followed by
the deal work which took a further six months.

What challenges needed to be overcome to complete the deal?

The investment story had to be developed plus credible sales numbers needed
developing and proving, i.e. who is going to buy and when (sales numbers
attributed to exact sales target with potential date of purchase). A key activity at
this time was the first successful product sale to a US client.




Escalator Client Fact Sheet                                                                            Escalator Client Fact Sheet


 Escalator - Capital Raising (V1)                                                      Page 61 of 73
                        Escalator Client Fact Sheet                                                    What benefits did the client receive from the completion of this deal?
                                                                                                       Primarily the money, which usefully leveraged approximately $80,000 NZ Trade
                                                                                                       & Enterprise grants funding for market development (Enterprise Development
Name of Broking firm:                                                                                  Grant – Market Development Component) and intellectual property protection
I Grow NZ Ltd – David Caselli                                                                          (Enterprise Development Grants). The capital injection and grants will speed up
                                                                                                       international market access.
Name of Client (if Broker OK to use):
Smarter than Jack Ltd (subsidiary of Avocado Press Ltd)                                                A second benefit to the client was the skills and capabilities the investors have
                                                                                                       brought to the company, four of whom have taken seats on the board.
What did the client need?
The client required capital (less than $500,000). However during the Current                           It became important to the client to have an independent group to be accountable
Position Analysis (CPA) and Business Needs Assessment (BNA) process it was                             to, in addition to managing herself. The board has assisted the client to achieve
apparent that the client also required skills and capability which in turn dictated                    more than she might have done being accountable only to herself.
the type of investor that the broker would approach.
                                                                                                       Any other comments on this transaction from a broker’s perspective?
How did the broker assist?                                                                             The client was great to work with as she thought about advice provided and
The client had an existing business plan. The brokers asked that this be rewritten                     acted quickly on that advice – usually within a matter of days. It proved she was
to re-define the business strategy, implicitly accelerating the global offering. The                   committed. Additionally she rolled up her sleeves to assist in getting the deal
threat was if the business does not grow into foreign markets quickly enough it                        away.
could face competition.
                                                                                                       Any comments from the client’s perspective?
How long did it take to complete the deal?                                                             I would highly recommend Escalator to other would-be clients, and found it really
About 7 months from application to deal completion. This comprised 6 weeks                             useful. I had a business plan but no idea what investors might want or how to
assessment of the opportunity by the broker in the form of an Escalator Current                        value the business. Escalator helped me to move from being accountable only to
Position Analysis and Business Needs Assessment, followed by 6 months deal                             myself to having a board and being accountable to them. (Jenny Campbell,
preparation and closing.                                                                               Smarter than Jack Ltd)

The client put the process on a hold for a time during this period, while focusing
on running her business (as the only staff member). Exploration of overseas
markets gave the client the impetus to initiate expansion sooner rather than later.

What challenges needed to be overcome to complete the deal?
The major challenge was getting a number of individuals investing on the same
terms and conditions. This took two months. Two of the investors were seeking
radically different terms and eventually all came together. It took time getting the
client in front of all the potential investors.


What strategies did the broker use to overcome the challenges?
Talking a lot! This was necessary due to the number of individual investors
involved and the need to get commitment from them to buy into the same vision
and the same deal structure.




 Escalator - Capital Raising (V1)                                                      Page 62 of 73
         Valuation Worksheet                                                                                                                       0                   Modest
                                   Factors & Issues:                                                                                              +                    High
         Weighted Ranking          Impacting the Valuation of Pre-revenue, Start-up Companies                                                     ++                   Very high

 0-30%   Strength of the Management Team                                                                              0-10%        Product or Service
                   Impact         Founder's experience                                                                                      Impact                     How well is the product/service defined?
                       +          Many years business experience                                                                               --                      Poorly defined
                      ++          Experience in this space                                                                                     -                       Some definition
                     +++          Experience as a CEO                                                                                          0                       Definition needs focus
                      ++          Experience as a COO, CFO, CTO                                                                                +                       Clear, focused and succinct
                       +          Experience as a Product Manager
                       --         Sales person or Technologist only                                                                                                    Is the product/service compelling?
                      ---         Straight out of School                                                                                           -                   This product/service is a vitamin
                                                                                                                                                   0                   This product is a pain killer
                                   Willingness to step aside                                                                                       +                   This product is a pain killer with no side effects
                     --            Unwilling
                      -            Somewhat unwilling                                                                                                                  Can the product/service be easily copied?
                      0            Neutral                                                                                                        ---                  Easily copied
                     +             Somewhat willing                                                                                                -                   Duplicated or replaced with difficulty
                     ++            Willing                                                                                                         0                   Product is unique and protected by trade secrets
                                                                                                                                                 +++                   Solid patent protection
                                   Is the founder coachable?
                      0            Yes                                                                                0-10%        Channels to market
                     ---           No                                                                                                          --                      Haven't been considered
                                                                                                                                               -                       Many possibilities identified
                                   How complete is the management team?                                                                        0                       Narrowed to one or two channels
                     --            Very incomplete                                                                                             +                       Initial channels verified
                      -            Somewhat incomplete                                                                                        +++                      Channels established
                      0            Good start
                     +             Rather complete team                                                               0-10%        Stage of Business
                     ++            A complete and experienced management team                                                                  --                      Idea only
                                                                                                                                                -                      In product development
0-25%    Size of the Opportunity                                                                                                                0                      Product ready for customer evaluation
                    Impact         Size of the specific market for the company's product or service                                            ++                      Positive, verifiable customer acceptance
                      --           <$50,000,000                                                                                               +++                      Sales
                       0           $100,000,000
                      ++           >$500,000,000                                                                      0-5%         Size of investment
                                                                                                                                                +                      $250,000 - $750,000
                                   Potential for revenues in 5 years                                                                            0                      $750,000 - $1,500,000
                      -            <$50,000,000                                                                                                 --                     >$1,500,000
                     +             $100,000,000
                     ++            >$100,000,000
                                                                                                                      0-5%         Need for subsequent funding
                                                                                                                                               +             none
                                   Strength of competitors in the marketplace
                                                                                                                                               0             <1,000,000
                     ---           Very strong                                                                                                 --            >1,000,000
                      -            Strong
                      0            Modest
                                                                                                                      0-5%         Quality of presentation
                      +            Weak
                                                                                                                                                ---                    Poor
                     ++            Very weak
                                                                                                                                                 0                     OK
                                                                                                                                                 +                     Excellent
                                   How large are the barriers to entry?
                     --            Very low
                                                                                                                      Adapted from Power of Angel Investing Workshop
                     -             Low
                                                                                                                      Ewing Marion Kauffman Foundation




         Escalator - Capital Raising (V1)                                                             Page 63 of 73
      HANDOUT 2


      An investor invests $503,968, for a post money share of 30% in the company of XYZ Limited.

      The P & L below forecasts the operating profit for the next three years.

      Comparable firms in the same industry give rise to an EBITDA multiple of 3.



      XYZ LIMITED
                                                     2007               2008               2009
                                               Total Y1           Total Y2           Total Y3
      Sales
      Total Sales ($)                               1,575,728           3,405,440         5,036,740



      Cost of Sales
      Product                                         789,673           1,720,441         2,561,838
      Distribution                                    116,235            257,600            378,700


      Gross Profit                                    669,820           1,427,399         2,096,202
      GP Percentage                                         43%                42%                42%


      Overheads
                                                      478,389            507,800            534,300


      Operating Profit                                191,431            919,599          1,561,902


      Multiple on EBITDA                                     3                  3                  3
      Implied Enterprise Value                        574,294          2,758,796          4,685,705
      Investor Share                     30%          172,288            827,639          1,405,712


      IRR calculation                     Exit in 2007                      Exit in 2008                      Exit in 2009
                                    Dates           Values             Dates           Values           Dates            Values
      Entry                         1/04/2006        -$503,968          1/04/2006        -$503,968       1/04/2006         -$503,968
      Exit                         31/03/2007          172,288         31/03/2008         827,639       31/03/2009        1,405,712
      IRR                                                 -66%                                28%                               41%




Escalator - Capital Raising (V1)                                  Page 64 of 73
Escalator - Capital Raising (V1)   Page 65 of 73
Escalator - Capital Raising (V1)   Page 66 of 73
Escalator - Capital Raising (V1)   Page 67 of 73
Escalator - Capital Raising (V1)   Page 68 of 73
Escalator - Capital Raising (V1)   Page 69 of 73
SAMPLE DEAL
sampledeal@samplegroup.angelsoft.net
Business Summary: We buy, sell and produce goods and services that are
bought, sold or produced. We sell all the goods and services that are bought or
produced. We buy all the goods and services that are sold or produced, and we
produce all the goods and services that can be bought or sold. We buy when
prices are low, sell when prices are high and skim fees off the top of every
transaction. This question allows up to 450 characters. I have used a total of 449.        Company Profile:
                                                                                           URL: www.SampleDeal.com
Customer Problem: Consumers want or need to purchase goods and services                    Industry: Electronic Instruments &
that are produced. This requires a marketplace for vendors to provide these. This          Controls
question has a limit of 210 characters. I have used a total of 203.                        Employees: 12
                                                                                           Founded: 01/2006
Product/Services: When someone wants to buy something, we provide them
with the product and the vendor. When someone wants to sell something, we                  Contact:
provide them with the consumer and the product. When a product is to exchange              Horace B. Gillywater
hands, we provide the consumer and the vendor. We buy when the prices are                  sampledeal@fakeemail.com
                                                                                           w 111-222-3333
low, sell when our prices are high, and charge fees on each and every
                                                                                           c 222-333-4444
transaction that is made. This question allows up to 450 characters. I have used           f 333-444-5555
a total of 450.
                                                                                           Financial Information:
Target Market: There are 6.1 billion consumers in the world. We create a                   Funding Stage: Product In
potential marketplace for each and everyone one of them. Today we are                      Development
reaching one hundred million people in the US, over one hundred fifty million              Capital Raised: $250,000
people in Western Europe, and another 50 million people in Australia and New               Monthly Burn Rate: $45,000
Zealand. We are confident that with your money we will be able to reach one                Pre-Money Valuation: $5,000,000
billion people. This question allows up to 450 characters. I have used a total of          Capital Seeking: $1,000,000
450.                                                                                       Management:
Customers: Current customers are two hundred fifty million men, women, and                 Horace B. Gillywater, CEO
children in the United States, Canada, and the European Union. This question               Jimmy J. Walterwash, CFO
has a limit of 210 characters. I have used a total of only 206.                            Advisors:
Sales/Marketing Strategy: We advertise using extensive markieting campaigns                Lawyer: Dewey and Howe
on television, radio, billboards, magazines, the Internet, and by word of mouth.           Investors:
Our advertising campaign includes a catchy tune and an easy to remember                    Friends
slogan, accompanied by a well recognized logo. We are looking to expand our                Family
market into Asia, Africa, South America, Antarctica, and Greenland by the end of
this year. This question allows up to 450 characters. I have used a total of 445.          Referred By:

Business Model: We charge a fee of ten percent on every transaction made, at
each level of production, distribution, wholesale, and retail sale. This question
has a limit of 210 characters. I have used a total of only 208.
Competitors: Current competitors include but are not limited to shopping malls;
retail, wholesale, and second hand stores; manufacturers, buyers, sellers,
resellers, and advertisers; law firms, doctors offices, banks, and consulting firms;
black markets, importers, exporters, and mom and pop shops; restaurants,
hotels, salons and resorts; high tech, low tech, and no tech companies. This
question allows up to 450 characters. I have used a total of only 449.

Competitive Advantage: The current way of partnering consumers with vendors for the purposes of buying, selling, and
producing goods and service is the age old marketplace. We provide the only alternative to that marketplace with our
completely innovative model. We have intellectual property of patents, copyrights, and trademarks. We have recently
cornered 80% of the potential market. This question allows up to 450 characters. I have used a total of only 445.



 SAMPLE DEAL                               Financials*    2005      2006        2007      2008        2009       2010       2011
 111 Elm Street
 Metropolis, AL 77777                      Revenues          $0            $0      $0         $0     $15,000    $65,000 $100,000
 USA
                                           Expenditures    $200         $400     $800     $1,000      $2,500     $4,000     $9,000

                                           Net            ($200)     ($400)     ($800)   ($1,000)    $12,500    $61,000   $91,000

Powered by     Angelsoft. Submitted to Angelsoft Angels on 06/21/2006                                          * In Thousands (000)
        Escalator - Capital Raising (V1)                   Page 70 of 73
                                           Want to catch the ear of Investors?
                                                    Unleash the potential of your company with …

                                                    Power Pitching Workshop
                                           Getting your “story” or pitch right, is not only the secret to
                                           gaining access to investors but it will also open the gateway
                                           to attracting talented staff and profitable customers.

                                        It’s amazing that the majority of companies fail in the basic
                                        task of explaining what they do. It takes practice and time to
     master this talent in an effective way. Most companies will fail to secure investment and limit
     their growth potential if they do not master the talent of pitching.

     The Escalator Service helps aspiring companies raise capital. If you are looking at raising
     finance within the next 2 years then you should attend.

     This workshop is an interactive working session where you will learn what investors are
     looking for in an investor pitch. Most importantly we will help you craft your company “pitch”.
     This is a high impact intensive session with rave reviews.


     Workshop Agenda: (4 hours)

          •    Create your succinct-story
          •    Pitch structure and content
          •    Pitch Delivery
          •    Working on your own pitch
          •    Plenty of practice pitching



                                   Mark Robotham – General Manager Escalator Service – facilitates leveraged
                                   capital investment and strategic alliances for business growth.

                                   Mark has been described as a passionate and pragmatic orchestrator of
                                   Entrepreneurs.

                                  Having “gone global” with some of NZ’s pioneering technology export
                                  companies, working in places such as Silicon Valley and Marton, Mark now
     helps the rising stars of the navigate the issues of high growth. His background is in Electronic
     Engineering, Marketing, Business Growth and governance.. He is also founder of a consultancy
     practice that works with high growth potential companies www.growthmanagement.co.nz

     To register email info@escalator.co.nz Attendance is fully funded by NZTE

     Numbers are limited to 10 companies per workshop to maximise participants learning and
     output. If you fail to attend once registered – remember you have stopped another
     Entrepreneur experiencing the power of an Escalator workshop.




      Escalator Workshops are supported
     by the Unlimited Magazine


Escalator - Capital Raising (V1)                     Page 71 of 73
Escalator - Capital Raising (V1)   Page 72 of 73
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Escalator - Capital Raising (V1)                     Page 73 of 73