1 Ideas to Deals Building an Investment Ready Business.

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Ideas to DealsBuilding an Investment Ready

Business

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We would like to be your We would like to be your business partner…business partner…

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• Provide your business professional Provide your business professional consulting and advising with certified consulting and advising with certified

business advisorsbusiness advisors

As your business partner we can…As your business partner we can…

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• Provide you with access to over 70 topic specific seminars and workshops covering pertinent topics for businesses at all stages from start-up to growth and existing.


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In 2008, we: Advised 961 Small BusinessesFacilitated $12,844,875 in loans / investment capitalWon the Ohio SBDC Performance AwardAwarded the SBDC Service Excellence and Innovation Center Award by the SBAWere named one of the top 10 SBDC’s out of over 900 SBDC’s in the country


• Provide your business an Provide your business an experienced and award winning teamexperienced and award winning team

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• Access to numerous resources and Access to numerous resources and networks to support your growthnetworks to support your growth

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• Provide access to numerous resources and Provide access to numerous resources and Networking opportunities to support your growthNetworking opportunities to support your growth

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Chris BroganJim CanterucciMike Figliuolo


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Specific services include: Developing export strategies Preparing your product or service for export International legal considerations Shipping your product; pricing, quotation and terms Methods of payment and Financing Export transactions Business travel abroad Selling overseas.


• Provide International Trade AssistanceProvide International Trade Assistance

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Continuous Improvement & Modernization ~ Process improvements, workforce assessments & training, lean operations…

Inventions & Prototyping ~ Product design, modeling, prototyping, market assessment, Intellectual property, R&D grants…

Partnering & Commercialization ~ Licensing technologies, capital access, mfg partners, marketing channels, fulfillment strategies…


Provide Manufacturing & CommercializationProvide Manufacturing & Commercialization

AssistanceAssistance

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Build A Business

Make Meaning Make a difference Make Value

If you succeed in building a business, either funding sources will be fighting to give you money or you won’t need their money.

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Why Develop a Business Plan?

Provide a Roadmap of How to Drive Your Business!

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How To…

1. Develop an Operating Plan.

2. Modify the Operating Plan to Fit Your Audience.

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“In preparing for battle I have always found that plans are

useless, but planning is indispensable.”

- Dwight D. Eisenhower

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Key Issues In an Operating Plan

Why are we necessary? What do we do? Who are we? Who do we serve? How and where do we find those we serve? How we’re unique? Where are we going? How do we get there? What are the roadblocks? Why do we do what we do?

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Key to Writing an Operating Plan

Do it for you. Keep it simple. Keep it real. Internalize it. Work it.

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The key to funding is knowing your business and being honest about

what you have.

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Can you answer this:

What do you do?

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OK…

Can you put it in a box and sell it?

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What kind of Business Do You Have?

Scaleable, Exponential Growth, Defined Exit?

Heavy Service Component, Slow/high Growth, No Exit?

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Who is out there to buy our Product?

How do we get them to buy our product?

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Friends, Family, Founder

Bootstrapping is building the business from internally generated funds.

• You need to establish a foundation for your business.

• Build credibility and show that your business has customers and a product that people want to buy.

• Focus on customers and cash flow. • Work hard and be creative in seeking ways to drive

revenue while holding expenses down.

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Why are banks in business?

To make money not to make loans.

Lending is a tool to making money.

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Banks typically lend for “stuff”.

Banks are a great option if you have history and are looking to expand. However, for an early stage company with limited history and minimal collateral, getting a loan could prove difficult.

Commercial Banks

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When the company is new the entrepreneur should establish a banking relationship and utilize this as far as it will go. The relationship with a bank will be very helpful in the future as the business becomes established.

There is no 100% financing from a typical commercial bank.

Commercial Banks

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Small Business Administration

SBA is not in the business of making bad loans.

Once the bank has agreed that the loan is good but in some way outside their guidelines they will seek an SBA guarantee.

The SBA is there to help you with your cash flow.

Longer term Lower down payment

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What do banks look for?

Credit Credit Score should strive to be over

740 + (A year ago I would have said 700)

Guard Your Credit Score

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Business Plan

The business plan tells the bank how you are planning to repay the loan.

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What to put in a business plan

Executive Summary Narrative

Product Description Market Analysis Market/Marketing Strategies Management Plan

Financial Data Profit and Loss Statement (Income

Statement) Balance Sheet Source and Use of Funds Cash Flow Statement Personal Financial Statement

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Collateral

There is no 100% financing

To a bank collateral is real estate or equipment.

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Working Capital

Short-term money to operate thebusiness.

Typically financed by a Line ofCredit.

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Getting the bank to say YES!

Know your credit score going in. Establish a banking relationship Keep you plan tight, clear and easy to

understand. Use common format, don’t be creative. Help the banker say yes. Put yourself in

the banker’s shoes. Structure your ask. Separate working

capital, equipment and real estate.

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Angel Investors

Angel investors are high net worthindividuals who are interested in investing inemerging businesses.

Two Types of Angel Investors

Professional Strategic

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Professional Investors

The underlying reason that they will invest is return on their investment.

They invest in spaces they know. They invest with people they know They invest based on referrals from

people they know. Invest based on due diligence. Will require professional terms. Looking for a big payout based on a

liquidity event.

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Strategic Investors

More interested in the product than the business.

Invest based on gut reaction. May take common stock May not look for a liquidity event. May be the friends in FFF (or referred

by FFF)

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Key points About Investors

If you take someone else’s money you have a partner. They will want to have some influence on the company to protect their investment.

You will probably have to relinquish some level of control over the company.

If you are unwilling to share leadership of the company, investors are not the option for you.

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Institutional Venture Capital

The only reason that they will invest is return on their investment.

They only invest in spaces they know. They only invest with people they know They only invest based on referrals from

people they know. Invest only based on due diligence. Will only require professional terms. They are only looking for a big payout based

on a liquidity event.

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Seeking Investors

Investors invest in people and teams that can execute.

“A” teams with “B” markets will generally beat “B” teams with “A” markets.

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Investor Business Plan Summary Format

Summary should be “concise” Summary should provide a clear description of

the problem you solve. How you solve it. Your business model. The underlying magic of your product. Defensibility of your product. Summary should be no more than “four-pages”.

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What is it all Worth?

Valuation

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Valuation of early-stage companies is a little short of random.

Valuation is negotiated, there are no hard numbers especially for early-stage companies.

Provide a good projection of future value at a potential, future liquidity date and discount back.

Know comparables…What other companies, similar to yours, have generated what multiples of sales at liquidity.

Build value as you build the company ~ Focus on “Value Inflection Points”.

Focus on dollars not percentage 10% of a $20 million company is worth more than

100% of a $1 million company.

Key Valuation Issues

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Suggestions for CEO’s

Know what investors look for and expect. Make sure you and the investors are on the

same page. Good investors will want you to have a fair percentage of the company.

Know why these things are important to investors.

Understand the factors that influence value Anticipate investor questions. Look at competitive deals. Learn from the process ~ Listen well

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Cap Table Example

Pre InvestmentUnit Holders Issued Valuation Pre-investment Post-investment

John Doe 500k $500k 25% 19%Bill Smith 400k $400k 20% 15%Jane Brown 800k $800k 40% 31%

ESO Pool 300k $300k 15% 15% Note…ESO does not dilute Total Issued $2 mil $2 mil 100% 80%

Post Investment

Investors 500k $500k 0% 20%

Total Issued $2.5 mil $2.5 mil 25% 100%

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“Cram Down” Example

Pre InvestmentUnit Holders Issued Valuation Pre-investment Post-investmentJohn Doe 481,250 $240,625 19% 11.5%Bill Smith 381,250 $190,625 15% 9.5%Jane Brown 781,520 $390,625 31% 19%ESO Pool 375,000 $187,500 15% 15%Investors 481,250 $240,625 20% 11.5%

Total Issued $2.5 mil $1,250,000 100% 62.5%

Post Investment

Investors Rd 2 1,500,000 $1,250,000 0% 37.5%

Total Issued $4 mil $2.5 mil 100%$750,000 raised at $.50 per share; decrease in valuation of 50%

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Pitching

Question: How can you tell if an entrepreneur is pitching their business?

Answer: Their lips are moving.

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Tips for Pitching

Explain what you do in the first minute. “Clearly” explain what you do in the first

minute. Articulate the problem in the market and

what you do to solve it. Purpose of a pitch is to “stimulate interest”

not to close the deal. Keep it tight. 10 slides, 20 minutes, 30

point font. Speak to the audience’s interest.

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Investors’ Interest

How are you going to make money?

How are you going to generate my return?

Are you capable of “executing”?

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Don’t When Speaking to Investors.

Don’t try to BS the investor because they see through it.

Get your value proposition across early in case you don’t get to the end of the presentation.

Don’t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will.

Don’t ask for an NDA!!!

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Don’t When Speaking to Investors.

Don’t ask for an NDA at initial meetings!!! Real investors are not in the business of

stealing business ideas and trying to develop them.

You control what is in the summary and initial pitch. You don’t need to disclose the “secret sauce” at this point.

Investors will sign an NDA prior to due diligence.

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Recommended Readings

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Resources for Assistance

Ohio Small Business Development Centerhttp://sbdcfreeadvice.ning.com, 614-287-5294

TechColumbus www.techcolumbus.org, 614-487-3700 OSU Center for Entrepreneurship,

www.centerforentrepreneurship.com, 614-292-4085

www.ideas2deals.typepad.com

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Everything is always impossiblebefore it works.

That is what entrepreneurs are allabout – doing what people have toldthem is impossible.

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The Ohio SBDC at Columbus State

p. 614-287-5294

http://sbdcfreeadvice.ning.com

For Information on SBDC ActivitiesFor Information on SBDC Activities

“Pitching the Dream”

Mark ButterworthInnovation4ward

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Agenda

What investors looking for The pitch Deal structure

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Angels – Looking For

A company where they believe can add value and make money (and have fun)

An industry they understand and good management team

Invest based on: Chemistry

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Venture Capital – Looking For

A company where they can make lots of money (fun is not a factor)

Big markets, sustainable differentiation and good management

Invest based on: Management team

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Good Management – Ideal

Experience in a start-up or launching a product within a large company

Domain knowledge Relationships with key customers

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Good Management – Other

Broad vision Ambitious Tremendous energy Good listener Adaptable Know that they don’t know everything Hire people better than themselves

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Investment Criteria: Other

Sales and marketing strategy Competition Technology Financials Exit strategy

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The Investor’s Mindset

Their time is more important than their money

You must manage the process!

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First Meeting – Angel Investors Goal: Get a second meeting not a check

Format: Short, non-technical PowerPoint

Message: Within the first three minutes: The problem you are solving, How you solve the problem, and That you have the management team to

execute

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First Meeting - Other Do not assume:

they have read the plan that you will get through presentation

The product or technology is only 5% of the pitch in the first meeting

One page summary financials Assumptions more important than

numbers How the investor will make money!

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After The First Meeting

You must manage the process Anticipate the investors needs Submit your own Due Diligence

Review Manual Don not tell them “it is in the business

plan” Opportunity to customize to their “hot

buttons”

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Deal Structure Individual Angels:

Security: Common stock Exit: Share buy-back, Sale or IPO Return: 15% to 20% Valuation: reasonable

Organized Angel Funds and Venture Funds: Security: Preferred stock Exit: Sale or IPO Return: 30%+ compound annual Valuation: Tough but fair

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Preferred vs. Common Stock Common Investors and management have same

rights Preferred has additional rights: Liquidation preference – get their money back first

Anti-dilution provisions – protection against reduction in valuation

Redemption – investment plus dividends back at predetermined time

Dividends – 5% to 8% annually Veto over strategic decisions (sale, liquidation, IPO)

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Resources: Gerald A. Benjamin and Joel Margulis. Finding Your

Wings (How to Locate Private Investors to Fund Your Venture). New York: John Wiley & Sons, Inc. , 1996.

David Gladstone. Venture Capital Handbook (An Entrepreneur’s Guide to Obtaining Capital to Start a Business, or Expand an Existing Business). Englewood Cliffs: Prentice Hall, 1998.

Pratt’s Guide to Venture Capital Sources. New York: Securities Data Publishing, 2000.

www.pwcMoneyTree.com

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The Ohio SBDC at Columbus State

p. 614-287-5294

http://sbdcfreeadvice.ning.com

For Information on SBDC ActivitiesFor Information on SBDC Activities

1 Ideas to Deals Building an Investment Ready Business.

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