It Startup Plan Vc Funding

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					Funding startups
CF                                            funding growth
                                                      Venture Capitalst
             Business Angel
      Entrepreneur, 3 F’s

 Sweat equity        Seed money           Start-up           Expansion                            time

                                                                                                Sales

     Concept                                                                             Expansion
                                                                                               regional
      know how
                     Prototype                                                Product
      time                                                                    support          market
                                        Product             Marketing                          segment
      research       proof of
     engineering     concept
                                      introduction
                                                                              helpdesk
     prototype       product dev.     1st personnel               working
     1st marketing                                                capital    maintenance
      plan           business plan     start marketing                        product
                     production        management team                        enhancements
                     prototype         market studies
                     marketing plan

                                                                                            2
                                                                  Source: Rudy Aernoudt (adapted BAN-V)
enfocus 1993-1997




              3
enfocus 1998-2003




              4
artwork systems 1993-1996




                      5
             biotech and finance




                             y
                         pan
                       com
                       ech
                                                          ny
                                                     pa




                   biot
                                                   om
                                               r’ c
                                     g   ula
                                 ‘re
       CCF




valley of             Time
 death




                   biotech valley of
                   death: best case
                       scenario
                                                               6
                                          conclusion
   many companies require capital to fund their
    startup
   de size of the needs depends on many factors
   there are several potential sources for this funding
    –   own resources
    –   friends, family and fools
    –   banks
    –   partners
    –   customers and suppliers
    –   venture capital and business angels


                                                   7
sources of funds
                        Informal risk capital
   own resources and time
    – each entrepreneur invests his own time and often
      money
    – see belgium: 90% of startups use own capital of
      entrepreneur; often pays himself small or no wage in
      startup period
   Friends, family and fools
    – can be source of funds
    – be aware of disadavantages:
          risking personal relationships
          inexperience of investors



                                                       9
                             Partners, alliances
   in some case strategic alliances are major source
    of funds
    – Ablynx (drug companies)
    – in the case of Sportopolis: breweries
   many alliances are based on simple logic
    – capital rich established partner invests in startup, in
      exchange of substantial long-time revenue streams
          sales of beer, drugs




                                                           10
         government support, PPS
   governments may support certain activities by
    providing funding
   see sportopolis: public/private collaboration




                                                11
                                              Banks
   banks are limited by law in the risks they take
   they therefore always look for collateral, which
    they can sell in case of failure of project
   this limits their use for high tech startups, where
    assets are intangible, or don’t have resell value
    – software
   this is why sportopolis could access banks and
    enfocus not




                                                   12
venture capital
source and uses of venture capital 2005




     – source: evca, pricewaterhousecooper en thomson venture economics
   compared to 5.700 million euro in silicon valley
                                                                          14
    funding: belgium and europe

   Belgium 2002
    – banken (55,1%)
    – particulieren (27,5%)
    – publieke sector (7,2%)
    – privé ondernemingen
      (6,7%)
    – universiteiten (3,5%)




                               15
vc’s and ba’s in flanders




                     16
                                        vc’s in flanders




   source: ‘eendagsvlieg of pionier’               17
impact of venture capital




                     18
      Life cycles and investment stages
   Pre-seed
    – Mostly just an idea about the business concept
    – No product yet
    – Technological uncertainty
   Seed
    – Business concept is fine-tuned
    – Proof of concept delivered
    – Prototype might be delivered as well
   Early stage/ start-up
    – Proof of product
    – Company starts up, makes first real marketing expenses
   Growth/ expansion
    – Proof of market
    – Company expans and turns break-even

                                                               19
                        Working with VC’s
   Investment rounds
    – Vc’s do not invest all the money required to get to
      profitability in one go
    – Often the ‘necessary’ funds are provided to achieve
      certain milestones
    – Round A, Round B...
   Lead investors and others
    – Often one investor does the work: due dilligence,...
    – Often (a) new investor(s) join in the following rounds,
      and they become lead investor



                                                         20
E-ink investment rounds




                      21
how vc’s select companies
            the financial logic of a VC
   quality of investment   bad    alive   ok     good   super   total

amount invested            200    400     200    100     100    1000

Multiple after 5 years      0      x1      x5    x10     x20

Cash from trade sale        0     400     1000   1000   2000    4400


Revenue                    -200    0      800    900    1900    3400




                                                                23
what you need to understand about VC’s
   VC’s look for companies that have the potential to
    score really big, to compensate for the total
    failures
    – sometimes it feels like VC’s want to be lied to.
    – I’ve never over-promised, I’ve always presented what I
      believed was realistic – or even conservative.
    – but it’s important to show the long-term upside
      potential,
    – so you end up with a two-pronged business plan



                                                 Peter Camps
                                                       24
what you need to understand about VC’s
   VC’s are also looking for ROI on their own time
    – in general, a vc spends a relatively fixed amount of time
      on each company they actually invest in
    – this means that, depending on the VC’s internal
      structure, the VC needs each investment to be for a
      certain minimal amount
    – that’s one reason why sometimes it seems easier to get
      $2m than $1m, provided you can come up with a
      meaningful way to spend 2m.




                                                   Peter Camps
                                                         25
what do VC’s look at when analysing a
                             project?
most VC’s focus on a certain domain

   such as
    – industry sector (biotech, IT...)
    – investment size
    – stage of investment (early stage capital, ..)
    – geographical focus
    – ...

   this functions as a filter for VC’s
    – It enables them to provide ‘smart money’: allows them to leverage
      their expertise and networks within a certain domain




                                                                27
     General VC investment criteria
   Two schools of thought:
    – ‘ I invest in people first and foremost. Smart people will
      find great opportunities and I will never know the
      sectors or technologies as well as smart people.’
    – ‘I don’t care about people, I care about markets. I look
      for big painful problems that customers have. If
      management doesn’t work out, I can always fix
      management.’

    The truth is somewhere in between.
                                                (Robert Simon)


                                                         28
belgian vc selection criteria




                         29
                               lessons from enfocus
   1995
    – just Peter, Ignace and 2 board members
    – in 3 years sales of 1.000 copies of Tailor into an installed base of
      75.000 seats of neXt Computer
    – revenue stream barely sufficient for personal survival, and
      decreasing; Enfocus is running out of money fast
    – neXt does not gain traction in a world dominated by Apple, moves
      away from publishing
           Enfocus looses its target market
            (publishing users who own neXt computers)
           Tailor heavily uses the Display Postscript facilities only offered by neXt
    – plans to port Tailor to Mac
    – funding: business angel, private funds, IWT

-> reponse of VC’s: we do not fund turnarounds!


                                                                              30
                    lessons from Enfocus
   1998
    –   team of 9 (plus board members)
    –   senior management team
    –   run-rate of € 200.000+ per quarter
    –   flirting with break-even
    –   some brand recognition
    –   riding the wave of PDF
    –   innovating and well-received products
    –   promising opportunities
    –   contacts with potential oem customers

-> project was validated!

                                                31
financial expectations of vc’s
duration




     33
                                    expected return
   return:
    – 10$ invested today must be worth 10$ *(1+x) in 1 year, 10$*(1+x)
      ² in 2 years,...
    – x= return (internal rate of return, IRR)
   VC’s expect (very) high returns on their investments
    – because the risks that some companies in their portfolio fail is very
      real...
    – ... so the other investments must make up for it
    – if at the outset the potential for a high return is not present it is not
      worth taking the risk
   the earlier stage the investment the higher the risk of
    failure, thus the higher the potential return must be
    – seed stage: +/- 50%
    – later stage: +/- 35%
                                                                      34
working with vc’s
            after you get the funding
   be prepared for a different mode of operation
    – the control rules and a formal board of directors require
      quite some time preparing for and running meetings
          updating business plans, preparing investment requests,
           building argumentation pro/con potential business strategies,
           etc
    – this is not all bad, since it forces you into a professional,
      structured mode of operation.
          but it does take time and effort
          it can be very frustrating to explain your business to someone
           who doesn’t understand your business…



                                                            Peter Camps
                                                                   36
          after you get the funding
   watch for “political” reasons behind certain
    standpoints
    – vc’s invested in your company for their own reasons
    – their risk assessment may differ from yours
    – attempt to get these issues out on the table, rather than
      lurking in the corner as a hidden agenda.




                                                  Peter Camps
                                                        37
contributions by vcs




                38
business angels
                          business angels
   business angels are (ex-) entrepreneurs who
    invest in high potential startup companies
   average investment between 25.000 and 250.000
    euro
   besides financial support they provide guidance of
    entrepreneur, using their own expertise
   business angels often have an extensive network
    of contacts and can give the companies a
    substantial credibility boosts towards customers,
    suppliers, banks...


                                                 40
                                           BAN Vlaanderen
   www.ban.be
   business angels netwerk vlaanderen
     – in 2004, fusie van de vier bestaande vlaamse ban's.
     – krijgt financiële steun van de vlaamse regering.
     – platform waarbinnen startende of groeiende ondernemers op zoek naar
       risicokapitaal in contact worden gebracht met business angels.
     – ban vlaanderen is géén investeringsfonds
   doel
     – het bewust maken van ondernemers en kandidaat investeerders van business
       angel financiering
     – het informeren, trainen, opleiden en voorbereiden van ondernemers
     – het informeren en voorbereiden van business angels
     – het in contact brengen van ondernemers met business angels (matching events)
     – het samenbrengen van business angels met het oog op syndicaatvorming
   And thus:
     – Be Angels, le réseau des investisseurs actifs en Région Wallonne et en Région
       Bruxelloise


                                                                                       41
investments by business angels




                          42
exit
                                               exits
   VC’s invest in a company for a limited time
   they want their money back after that period
   the do so by selling their shares to someone else...




                                                  44
                            initial public offering
   description: sell the shares of the company to the public to be traded
    on a stock exchange
     – advantages:
            conversion to cash for investors
            major shareholders usually maintain control
            high potential return
     – disadvantages:
            company must have tremendous growth potential to receive ipo
            costly process
            uncertain outcome
            major shareholders may be limited as to how much, when, and how they can
             sell stock
   story of Ablynx
     – 85 million fresh cash in company
     –




                                                                              45
46
                                               trade sale
   description: business bought outright by another
    existing company
    – advantages:
          receive cash or stock
          often purchased by strategic partner
          management contract can be negotiated
    – disadvantages:
          fit must be appropriate
          potential management changes
          corporate identity may disappear
   example Enfocus
    – peter camps left company after 3 years...

                                                     47
                                                                 other exits
   ‘50/50 acquisition’ = merger
     – description: join with an existing company
     – advantages:
             may receive stock and some cash
             resources are combined
             current management may stay
     – disadvantages:
             new partners or bosses
             less control
             may receive little or no cash
   buy-out
     – description: one or more stockholders buy out the others
     – advantages:
             seller receives cash
             other owners remain in control of the company
     – disadvantages
             seller must be willing
             buyers must have sufficient cash to buy others
             often paid via cash flow of company: drain on resources of company
   bankruptcy
     – 10 to 20% of cases...
                                                                                   48
                frequency of exit routes




– http://www.rotman.utoronto.ca/cmi/news/schwienbacher.pdf
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