Breakout is an Epi-V initiative, delivered by Transitions. Module 7 – Where Angels Dare and VCs...
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Transcript of Breakout is an Epi-V initiative, delivered by Transitions. Module 7 – Where Angels Dare and VCs...
Breakout is an Epi-V initiative, delivered by Transitions.
Module 7 – Where Angels Dare and VCs Fear to TreadShai Vyakarnam and Simon Pratten
VC Investment CriteriaVC Investment Criteria
• Global sustainable under-served market need
• Strong management team
• Defensible technological advantage
• Believable Plans
• 60% IRR
Defensible advantageDefensible advantage
• Intellectual Property Rights for example
• Patent
• Copyright
• Trademark
• Defensible market leadership
• against well-funded competition
• Niche Market share
• Brand
• Your personal values, culture, networks etc.,
Believable Plans – Exit ReadinessBelievable Plans – Exit Readiness
• Balanced Scorecard
• Business Plan
• Development Plan
• Marketing plan
• Adverts, mail shots, web-sites
• Sales Plans
• Distribution, Direct Sales
• Quality Plans
• Financial Projections
• Budget
• 60% IRR• Pay back financing in third year
• Cash flow
Rule of thumb – VC 101
• $1 = say 25%
• Post money = $4
• Need 10x = $40m value of company
• If PE ratio is say 8
• Need sales $320 to pay back VC
Why stages?Why stages?
• Risk/Reward profile differ
• Successive dilution
• Typically 30% dilution each stage
• Investment = pre-money valuation/2
• “Squeeze the Angels”
Round Investment Pre-money Post-money Founders FFF Angel VCA VCBand staff options
FFF 50 100 150 67% 33%Angels 500 1000 1500 44% 22% 33%VCA 5000 10000 15000 30% 15% 22% 33%VCB 10000 20000 30000 20% 10% 15% 22% 33%Total 15650Exit 100000 20000 10000 15000 22000 33000
All 15550 100 0.64%
Case Study
• Chance meeting in Liverpool and shared interest
• Set up informal joint venture leading to NewCo
• Where the final exit value was not considered – but the next tranche of money was…
Stages so far
1996 982004 05 06 07
LiverpoolHotel Coffee shop
100k 60k
New team
Early formation of teamBrainstormTechnical stuff
300
2m
AllOf zero
1/3rd
Of zero
8%
7.09%
Setting a desired exit valuation
Round 1 Round 2 Round 3 Round 4
001 01 10 100
Sh1 Issues shares
%
Sh2
Sh3
Sh4
Options
10,000,000
Seed round Angel/early VC Development C Round
Entrepreneurial/creativity = hard work, poor pay, informal communication
Direction = sustained growth; functional org structure,, capital mgmt, incentives, budgets and standard processes
Delegation = decentralised; operational and market level responsibility,; profit centres; decisions based on periodic reviews, top management acts by exception; formal communication styles
Co-ordination = Product groups; formal planning centralisation of support functions; corporate staff oversees coordination; corporate capital expenditure; accountability for ROI; lower level profit sharing
Collaboration = evolutionary path; team actions for solving problems; cross functional task teams; decentralized support staff, matrix Organisation; simplified control mechanisms; team behaviour education programms; advanced information systems and team incentives
Leadership
Autonomy
Control
Red Tape
Internal Growth?
Larry Greiner – Growth model
Recognise the realities of growth and be prepared for them
Crises of…
Growth through
Personal transitions…
Optimism
Pessimism
Time (n years+/-)
Sceptical
Raised money
Prototype slow
Bugger – no sales yet!
Business is suffering – spending too long on internal perspectives
Awayday we can do it
Dark nights
Major client signs
Hey maybe worth it
It works!
Aargh; Maybe; Denial of need for change; See small changes; success; reluctant acceptance; try new behaviours; makes a difference; not so bad; new behaviours are the norm…
To achieve desired valuations
• Management Team = A team/C product
• Customers, revenues – evidence
• IP
• Systems and procedures in places
• Governance
• Captured in the Balance Scorecard
Entrepreneurial business
Established business
Questions
• How will you look when you grow up?!
• Draw an Organisation chart as you are now
• And as you need to be at the time of exit
• What systems will you have put in place
• What KPIs will you have established and delivered?
• These are the crunch issues as you grow