Georgia Owner Financing Closing Statement

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Georgia Owner Financing Closing Statement Powered By Docstoc
					 — Financing Your Venture —


            by Jim Butterworth
U.S. Civilian Research & Development Foundation
              Idea to Market Workshop
               Kazakhstan, June 2007
Part I
  Introduction
  The Transition from Idea to Execution
  Business Planning

Part II
  A Primer on Venture Capital
  Financing Your Venture
  Other Startup Considerations
Part I
  Introduction
  The Transition from Idea to Execution
  Business Planning

Part II
  A Primer on Venture Capital
  Financing Your Venture
  Other Startup Considerations
28 years in technology-related ventures in
all capacities
  Founder/CEO, venture capital firm
  Founder/CEO, early Internet company
  Corporate finance/M&A, global investment bank
  Technology marketing
  Programmer/engineer

Owner/inventor of 14 issued and pending
patents worldwide
Education
  Bachelor of Industrial and Systems Engineering,
  Georgia Institute of Technology
  Master of Business Administration,
  Amos Tuck School at Dartmouth College
           25.8 million U.S. businesses
           “Small” businesses represent:
                99.9% of total businesses
                50% of the private work force
                41% of high tech jobs
                75% of net new jobs
                41% of private sales
                52% of private sector output
                97% of all U.S. exporters with 29% of export
                value

           Produce 13-14x patents/employee
           (and 2x likely to be among the 1%
Source: U.S. Small Business Administration (2002 survey)
In the U.S.:
  $1.8 trillion in revenue in 2003 (9.6% of all
  sales)
  10.1 million jobs in 2003 (9.4% of
  employment)
  600,000 new net jobs from 2000-2003

In Europe:
  1.0 million jobs in 2004
  630,000 new net jobs created from 2000-2004
  Highest growth rates in biotech, health care
  and medical devices
  Largest absolute growth in university spin-
  offs
Established > 4,100 new companies since
1980, 2/3 of which were still operating
Executed > 30,000 active technology
transfer licenses (including > 4,500 in
2003), generating > $1.3 billion in license
income
Launched > 2,200 new commercial
products between 1998-2003
Performed > $30 billion of R&D in 2001
Filed 8,000 U.S. patent applications in
2003
Conception /              Launch
Invention                 Growth Stage
Seed Stage                Expansion Phase
  Formation /
  incorporation           Exit
  Market research
  Product research        Post-Exit
Early Stage
  Product development
  Team formation
  Infrastructure build-
  out
Conception /              Launch
Invention                 Growth Stage
Seed Stage                Expansion Phase
  Formation /
  incorporation           Exit
  Market research
  Product research        Post-Exit
Early Stage
  Product development
  Team formation
  Infrastructure build-
  out
Solid foundation =
best chance of
funding your venture
Market-driven concept
  Talk to prospective customers
  Assess market and competition
Resolve legal issues upfront
  Satisfy prior employment obligations
  Incorporate properly
  Check intellectual property rights (patents, trademarks,
  copyrights and NDAs)
  Spin-out cleanly

Form a solid team
  Management, board, advisors, professionals
  Teamwork begets success

If possible, kick-start the business
  Spin-out / acquisition
  Key customer
Purchase decisions are based on
relationships – understand your
customers
Understand and model your customers’
economic benefit:
  How are they currently solving the problem?
  How will their work processes change by using your
  product?
  What is their economic benefit / ROI?

Your product/service must be better,
faster and cheaper
CFIMITYM
Cash flow comes ultimately and
most importantly from customers,
NOT from investors
Profit is not cash flow
Capitalize properly
“The plan is useless; it’s the
planning that’s important.”
  General Dwight D. Eisenhower, on the
  success of his D-Day invasion plan

The process of uncovering and
identifying what creates and drives
value in your business, and the risks
involved
A business plan is an output of the
business planning process
Business plan (narrative)
Pro forma financial statements
PowerPoint pitch (12-13 pages)
Elevator pitch (1-2 minutes)
Describes all the critical internal and
external elements and strategies for
guiding the direction of your
company
Communicates how you will create
sustainable value
Identifies risks and uncertainties
and communicates how you will
manage them
Describes the company’s structure,
objectives and future plans
Refining your       Motivating and
product / service   focusing
strategy            employees
Identifying key     Analyzing capital
customers           budgeting
Identifying         decisions
milestones and      Facilitating new
timelines           product
Helping set         development
objectives &        Integrating new
performance         acquisitions
metrics             Facilitating restarts,
Managing risk and   restructuring and
Attracting key employees
Educating potential investors
Arranging strategic alliances
Obtaining large contracts with
strategic customers
Facilitating mergers and
acquisitions
Summary (1)
  Mission statement
  What is the idea?
  How will it create
  value?
  Timeline / milestones
  Expected results
  Specific request (e.g.,
  $)
         To create [value/EVA]
by [product/service] for/to [customer(s)]
                  by…



   Strategic     Strategic     Strategic
  Objective 1   Objective 2   Objective 3
To be Kazakhstan’s leading
producer of “A-class” widgets to the
natural gas sector by:
  Securing exclusive purchase contracts with 3
  of the top 10 customers of A-class widgets in
  Kazakhstan;
  Creating proprietary manufacturing methods
  for the highest yield of A-class widgets; and
  Building a world-class team of research &
  development scientists and engineers.
Summary (1)
  Mission statement
  What is the idea?
  How will it create
  value?
  Timeline / milestones
  Expected results
  Specific request (e.g.,
  $)

Market Overview
(2)
  Substantiation of
  need
  The opportunity (size,
  trends, etc.)
  Market validation
  Identification of
  prospective
What is the major pain your
customers face currently and/or in
the future?
  Cost
  Convenience
  Growth
  Focus
  Time-to-market
  Regulatory compliance

Why are alternative
products/services not addressing
the pain (fully)?
The market is large for our
product/service:
  Size stat 1
  Size stat 2
  Size stat 3

The market is growing for our product /
service:
  Growth stat 1
  Growth stat 2
  Growth stat 3

Market trends favor us:
  Trend 1
  Trend 2
  Trend 3
Summary (1)                 Description of
  Mission statement         Product/Service
  What is the idea?
  How will it create        (2)
  value?                      Overview of product /
  Timeline / milestones       service, including
  Expected results            high-level technology
  Specific request (e.g.,     description
  $)                          Specific value
                              proposition (including
Market Overview               qualitative &
(2)                           quantitative customer
  Substantiation of           benefits)
  need                        Correlate product /
  The opportunity (size,      service features &
  trends, etc.)               benefits with market
  Markey validation           needs
  Identification of           Value chain dynamics
  prospective
Operating Plan (2)
  Production /
  manufacturing
  Marketing /
  distribution
  Sales & marketing
  plan

Competitive
Environment (2)
  Sustainable
  competitive
  advantages
  Alternatives
  Competition (existing
  and potential
Competitive Advantages
  Proprietary IPR
  Exclusive distribution
  Exclusive content / sources
  Proprietary manufacturing
  Proprietary integration
  Installed base / customer contracts
  Unparalleled capital structure
  Unparalleled scale, scope and/or focus
  Team with unique expertise and/or access
  First mover advantage
Distinguish between momentary and
sustainable
Must correlate to strategic objectives
Operating Plan (2)        The Team (1)
  Production /              Management
  manufacturing             expertise & relevance
                            Board, advisors,
  Marketing /
                            professionals &
  distribution              others
  Sales & marketing         Identify key hiring
  plan                      needs
Competitive               Financials (1-2)
Environment (2)             Pro forma snapshot
  Sustainable               Key metrics / drivers
  competitive               Funding requirements
                            (optional)
  advantages
  Alternatives
  Competition (existing
  and potential
      (in thousands)   2007   2008   2009   2010
Revenue driver 1 (1)                               Key is to
                                                   understand
Revenue driver 2 (2)                               drivers and
Cost driver 1 (3)                                  assumptions
                                                   since…
Net Revenue
– Cost of Sales (4)
                                                   Numbers will
= Gross Profit
                                                   prove wrong!
– SG&A (5)
= Pre-tax Income
(Loss)
Notes
(1) Assumption 1
(2) Assumption 2
(3) Assumption 3
(4) Assumption 4
(5) Assumption 5
Does your venture need external
financing?
  How much & when?
  Venture capital, debt, etc.

Capital structure considerations
  Options plans, etc.
  Position vis-à-vis in-kind contributions
Use of proceeds; e.g.:
  Staff                                      $200,000
  Technology & IPR development                150,000
  Equipment & facilities                      200,000
  Other legal, operations, SG&A and
                                              100,000
  misc.
  Reserve (net of cash on hand)               100,000
  Total                                      $750,000
Operating Plan (2)        The Team (1)
  Production /              Management
  manufacturing             expertise & relevance
                            Board, advisors,
  Marketing /
                            professionals &
  distribution              others
  Sales & marketing         Identify key hiring
  plan                      needs
Competitive               Financials (1-2)
Environment (2)             Pro forma snapshot
  Sustainable               Key metrics / drivers
  competitive               Funding requirements
                            (optional)
  advantages
  Alternatives            Road Map (1)
  Competition (existing     Major
  and potential             accomplishments
                            90-day plan
Appendix (as long as you want)
  Market details (e.g., surveys)
  Product details
  Operating & financial details
  Résumés (CVs)
  Articles / research reports
  Patents & IPRs
  Key contracts
  Brochures
One of the most important “outputs” of
business planning
Convinces the “target person” to
schedule a longer meeting with you
Empowers and enables the “target
person” to convince other appropriate
people to become interested in your idea
Resonates, demonstrates sincerity
Communicates a sense of value, empathy
and urgency
No more than 1-2 minutes!
Pour a solid foundation
Protect your strategic assets (like
IPRs)
Value is in the business planning,
not the business plan
Be concise and to the point with
pitch materials
Be top-down customer-driven, not
bottom-up product-driven
 — Financing Your Venture —


            by Jim Butterworth
U.S. Civilian Research & Development Foundation
              Idea to Market Workshop
               Kazakhstan, June 2007
Part I
  Introduction
  The Transition from Idea to Execution
  Business Planning

Part II
  A Primer on Venture Capital
  Financing Your Venture
  Other Startup Considerations
Pour a solid foundation
Protect your strategic assets (like
IPRs)
Value is in the business planning,
not the business plan
Be concise and to the point with
pitch materials
Be top-down customer-driven, not
bottom-up product-driven
Part I
  Introduction
  The Transition from Idea to Execution
  Business Planning

Part II
  A Primer on Venture Capital
  Financing Your Venture
  Other Startup Considerations
What is venture capital?
  A cash investment made by professional,
  institutionally backed investors to emerging
  growth businesses
  Generally made as cash in exchange for
  equity (ownership) in the investee company
  Usually high risk, but with the potential for
  above-average returns
PLACEHOLDER
PLACEHOLDER
Private                   Academic
  Professionally            Intellectual property
  managed                   Spin-outs
  Return on investment    Government
  focused
                            Create new jobs and
  May bring network,        grow economy
  business advice,          Offer cash, tax
  credibility, etc.         incentives, in-kind
                            Stem brain-drain
Corporate
  Manage risk             Angels
  Distribution networks     May bring network,
  Product R&D               business advice,
                            credibility, etc.
  Operational skills
                            Live vicariously
  Spin-outs
                          The 3Fs
Management Team
  Track record
  Relevancy
  Bet on the jockey, not the horse!
Concept
  Solves real problem
  Favorable market dynamics
  Disruptive
Unfair advantages & sustainable
competitive advantages
Proper capitalization
Receive 1000s of business plans
each year
Read 100s of plans
Meet with dozens of companies
Fund a handful
Portfolio expectations:
  60% die or go nowhere (living dead)
  30% yield 2-4x in 4-7 years
  10% (hopefully 20%) are tremendous
  successes (e.g., 10x, 100x, 1000x!)
General partners (GPs) manage the
fund
Capital comes from institutional
“limited partners” (LPs)
Singularly focused: ROI
GPs get an annual fee
Once LPs get investment back, GPs
get a portion of the profits
LPs get the remaining profits
              LP 3                       2%            GP
         LP 1
                 LP 4
            LP 2
                                         Management
                              $100

                             VC Fund IX, L.P.
 Portfolio            $10                               $10          Portfolio
Company 1                                                           Company 10

     Portfolio
                      $10                              $10       Portfolio
    Company 2                                                   Company 9

          Portfolio
                       $10                        $10        Portfolio
         Company 3        $10                  $10          Company 8

              Portfolio           $10    $10            Portfolio
             Company 4                                 Company 7
                             Portfolio     Portfolio
                            Company 5     Company 6
              LP 3                                  GP
         LP 1
                 LP 4
            LP 2
                                       $20
                            $180

                           VC Fund IX, L.P.
 Portfolio                                                        Portfolio
Company 1                                                        Company 10

     Portfolio
                  $100                              $35       Portfolio
    Company 2                                                Company 9

          Portfolio                                       Portfolio
         Company 3                           $40         Company 8

              Portfolio          $25                 Portfolio
             Company 4                              Company 7
                           Portfolio    Portfolio
                          Company 5    Company 6
Not all startups require external funding
Cash flow comes ultimately and most
importantly from customers, NOT from
investors
Benefits of external funding
  Cash
   –   Faster growth
   –   Staying power
   –   Competitive positioning
   –   Credibility
  Value-add investors
   – Credibility
   – Customer/partner introductions (―Keiretsu‖ effect)
   – Management expertise
Non-Equity             Equity
  Personal funds          Venture capital
  Personal debt           Angels
  Grants and              The “3Fs” –
  awards
                          Friends, Family
  Customer pre-
  sales                   and Fools
  Venture leasing         Corporate direct
  Receivables             investment
  financing
  Business loans
  In-kind
  contributions
Equity is the most expensive form of capital!
  Joint ventures
How much?
When?
From where / whom?
What terms?
  Security
  Valuation
  Control
  Timing
Have cash in the bank
Prepare to build your company
without any outside investment
(bootstrap)
Seek to secure multiple competing
offers
Raise money when you can, not
when you have to (Sun Tzu – “In
times of war, prepare for peace”)
Have a call to action
Understand your business
Operating experience
Domain and/or geographic
experience
Rolodex / network
Relevant portfolio
Relevant limited partners (in your
space)
Deep pockets / courage to stay the
                            Investor                             Final
                          Presentation                        Documentatio
                               s                                   n

0   1   2     3   4   5   6   7   8   9   10   11   12   13    14   15   16    17   18


             Business                     Term Sheet
                                                                              Funding
               Plan                       Negotiation
            Submissions                       s



                  Budget 4-5 months, or more
Network to gains access to VCs
Don’t get hung-up on confidentiality
Be persistent
Be humble yet confident, and always
courteous and professional
Embrace and learn from rejection
Be greedy in the long-run (any % of
something > 100% of nothing!)
“We don't like their sound, and guitar music is on the way
                                        out.”
  – Decca Recording Co., rejecting the Beatles in
    1962
“The wireless music box has no imaginable commercial
                                      value.”
  – David Sarnoff Associates, in rejecting a proposal for investment in the radio in the
     1920s
“Who the hell wants to copy a document on plain paper?”
     – National Inventors Council, as told in 1940 to Chester Carlson, founder of
       XEROX

  “Many of our stockholders have asked me about this
   new invention by Alexander Graham Bell called the
 telephone. While we think it’s an interesting curiosity,
 there’s never going to be a market for that technology,
    and therefore we have declined the offer to take a
                               license.”
       – Chairman of Western Union, in its annual report from the late
             1800s
Problem solver   High integrity
Decisive         Critical path doer
Leader &         Impatient / bias
motivator        toward action
Humble           (with analysis)

Passionate       Rejoices in others’
                 victories
Persistent
                 Focused on the
Optimistic       long-term goal
Professional
Focus on the long-run
  What goes around comes around
  Friendships last longer than jobs
  Don’t let greed blind the objective

Make the most of the experience
  Listen & learn
  Failure or rejection is what you make of it

Entrepreneurship is a lifestyle
choice
  Balance your risk & return
  Seize opportunities
  Life’s short, have fun!
 — Financing Your Venture —


            by Jim Butterworth
U.S. Civilian Research & Development Foundation
              Idea to Market Workshop
               Kazakhstan, June 2007

				
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