PRACTICAL TIPS OF FUND RAISING - Chinese University of ...€¦ · Common mistakes entrepreneurs...

PRACTICAL TIPS OF

FUND RAISINGA P R I L 2 9 , 2 0 11 ( F R I ) , 2 1 : 3 0 - 2 2 : 3 0

CUHK CfE Webinar Series

Instructor

Mr. Mingles TsoiProject Director

CUHK Center for Entrepreneurship

Guest

Mr. Laurence ChanManaging Director

Hong Kong EV Power Limited

Agenda of this Session

Time Particulars Host

21:30 Steps of Fund Raising Process Mingles Tsoi

21:45 Case Sharing by Guest Laurence Chan

22:00 Q&A Mingles TsoiLaurence ChanAll Participants

22:15 Essential Skills and Tips Mingles Tsoi

22:25 Wrap-up and Conclusion Mingles Tsoi


Different Stepsin the

Process of Finding Finance

Checklist for Whether to Seek Angel or Not

Management Team Is your team experienced, driven, coachable, and

willing to cede some control and decision-making authority to outside investors?

Target Customer Do you have an identifiable market segment? Is there

a demonstrable and significant demand for your proposed solution?

Market Size Are the projected revenues in your product category

large and growing? Can this be a several hundred million dollar market?

Competition Have you identified potential competitors? Do you

understand your company’s differentiation points? Will true barriers to entry help your company to maintain a competitive advantage?

Technology Have you proven the concept behind your product or

technology? Can this be confirmed with data or by objective experts? Have you built a comprehensive business plan to commercialize the technology?

Protected Intellectual Property Have you protected your intellectual property? Have

you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by others?

Sales Strategy Do you have a plan to achieve widespread market

penetration for your products and services? How will you do this as efficiently as possible? Will you create an internal, direct sales team, or will you rely on external channel partners?

Profit Potential Can you demonstrate how high margins (+15%) and

consistent cash flow growth will be achieved?

Capital Needs Do you require between 200,000 RMB to 5,000,000

RMB to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?

Financial Projections Have you developed reasonable financial projections

- including an income statement, cash flow and balance sheet and supporting spreadsheets - based on logical, realistic assumptions?

Exit Strategy Do you have a clear exit strategy that will enable

angel investors to generate a return of at least ten times their initial investment within five to seven years?

Business Plan Have you developed a comprehensive business plan

that articulates your key business strategies for how you will grow your venture?


Not all companies are suited to receive venture capital, and some will do better with loans or other forms of financing.

According to Katarina Bonde, Managing Director of KUBI, the following companies can benefit from seed capital:

Companies with business ideas & significant commercial potential;

Companies with enough growth or profit potential to generate a good return on investments;

Companies in dynamic and changing industries;

Companies built on technical innovations;

Founders who can share control of the company.

What kind of enterprises need venture funding?


Matching with finance correctly

With great idea,

you need

finance for

additional

research or

produce a

prototypes

Expansion Early stageStart-upPre-start

• No sales yet, you

need finance for

working capital

such as,

• salary, initial

marketing, product

development &

testing

• Having a few sales,

finance is required

for marketing and

operations, in order

to make the

business fly

With profits and well

established business

operation, funding is

required for new

product development

and exploring new

markets

up to US$0.1M up to US$1.0M US$0.1 - 1.5M US$0.2M up


Capital formation strategic pyramid

IPO

VC

seed funds

informal VC

large-scale loans

private placement

angels

small business funding support

from family, friends, key employees

your own money


Capital formation strategies

debt equity

credit termsinterest rate

amortization

penalties

pledged

equity termsvaluation

dilution

control

dividend

redemption

rights


Capital Financing Triangle

© 2005 All rights reserved by Mingles Tsoi


Personal Golden Circle

© 2005 All rights reserved by Mingles Tsoi


Where did seed capital came from?

Personal Savings

Bank Loans

Family

Employees/Partners

Friends

Venture Capital

Mortgaged Property

Government Guaranteed Loans

Other

78% personal savings

13% family

14% bank

12% employees

9% friends

6% VC

2003 Inc. 500 survey


PE / VC

Youarehere

or

DEPARTED

APART

Expansion Early stageStart-upPre-start


Common mistakes entrepreneurs make in the search of capital

Preparing inadequately Searching capital too dispersive Misjudging the time to close a

deal Falling in love with your

business plan Spending too much time raising

money Failing to understand the

investor’s real needs Taking your projections too

seriously Confusing product

development with the need Failing to recognize the

strength of mgt. team

Providing business plans too excessive details

Wasting the time of investors

Lacking of analysis

Acting at the wrong timing

Afraid of sharing idea without telling the whole story

Underestimate strategic benefits from investors

Wrongly recognizing valuation is a science than an art

Mistakenly believe ownership equal controls


What are the venture investor really looking for?

Marketing &

Branding Strategies

Durable Revenue

Streams

Management Team’s

Ability to Lead/Execute

Path to Profitability

is Clear

Large and Clearly Defined

Target Markets

Strong Base of Loyal and

Diversified Customers

Strategic Alliances,

Channels, & Networks

Defendable Competitive

Advantage (IP)

The business plan should always address the areas

shown above to ensure there will be a first meetingCUHK CfE Webinar Series

Factors drive value in venture-investing

Clearly

defined

sales &

marketing

strategy

Intellectual

asset

harvesting

&

manageme

nt systems

Recognizab

le brands &

industry/pe

er respect

Transparen

cy

in

accounting

and

financial

systems

Culture of

innovation

and

adaptability

Commitme

nt to

strong/prop

er

governance

GROWIN

G

COMPAN

Y VALUE

DRIVERS


Entrepreneur wants/needs

•maximum capital/valuation

•avoid dilution/control

•affordable cost of capital

Investor wants/needs

•maximum return

•mitigate risk/downside protection

•input on future &

•growth of the business/control

Balancing competing interests

mutually

beneficial

exit strategy

Growth in

the value of

business

additional

rounds of $ at

more

favorable

valuations

common objectives


Equity Gap between Sources of Finance

Cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.

Business Angels in relation to Risk

The Pros and Cons of Business Angel Investors

Five basic requirements from investors

Market

large and rapidly expanding

People

that can get the job done

Idea / technology

be commercialized

Strategy

with strong unfair advantage

Price per share

be reasonable


Top 10 Questions all Angel Investors Concern

1. How much can I make?

2. How much can I lose?

3. What is my exit strategy from this deal?

4. Who else says this deal is viable?

5. Does the founder already have resources at risk?

6. What other value can I bring to the table?

7. Can I trust the management team?

8. Is this company’s target market large, growing and reachable?

9. Does the company have a sustainable advantage, either operational effectiveness or strategic positioning?

10. Is the company’s business, revenue, and profit model credible, verifiable, efficient and sustainable?


Real story before year 2000

Result August 12, 1998, Amazon acquired Sunnyvale-based Junglee, an

XML-based data-mining startup

priced for 1.6 million shares of Amazon stock

Sold at US$ 210 million

Background June 1996, Tsuyoshi Taira attended the symposium of TiE (The

Indian Entrepreneurs)

met four Indian undergraduates from Stanford U.

core product, a sophisticated search engine

Taira acted as angels with: 4 friends from Taiwan, US$ 400,000

1 friend from Japan, US$ 100,000

a few ABC, US$ 250,000

Seed Fund US$ 0.75 millionAnnualized ROI = 128 X

Return on Investment = 279 X

Real story in year 2005

Result

October 16, 2005, Framedia was acquired byFocus Media for US$ 183 million (cash & stock)

Hina Capital Partners, the angel behind, tookUS$ 143 million (stock) of the acquiring company

Stock appreciated 250% after selling

Gross Earning US$ 357 Million

Background

July 2004

Framedia, a provider of in-elevator advertising in residential buildings in China

Hina Capital, appreciated her nation wide presence

Seed Fund US$ 5 millionReturn on Investment = 70 X


Another real story in year 2006

Result

October 12, 2006

sold at US$ 1.65 billion

Sequoia Capital, the VC backer owned 30%

Gross Earning US$ 495 Million

Background

November 7, 2005

Sequoia Capital, private equity fund US$ 3.5 million

subsequently invested US$ 7.5 million

Seed Fund US$ 11 millionReturn on Investment = 45 X


How things have changed?

Past NowResource management Doing less with more Doing more with less

Exit strategies In through the out door,

built to flip

No exit,

built to last

Capital expenditure Spend if it can be spent Defer if it can be deferred

Infrastructure/system & staffing If built, people will come,

look marvelous on paper

Get the customers, maintain

demand exceeds

Intellectual property Defensive strategy Offensive strategy

Deal with bad news 3 monkeys & euphoria Nowhere to run, nowhere to

hide

Motivating/compensating your

team

Excessive salaries, overnight

millionaires

Hard to keep folks happy, they

want to be informed

Capital formation Term sheets negotiated, less

tendency to borrow

Low rates, more attractive, but

much tougher terms

Customer acquisition/retention Lot of shadow alliances More demanding less loyal

M&A Great time to be a seller Great time to be a buyer


Books for Reference

Mastering the VC GameJeffrey BussgangISBN: 978-1591843252


Angel InvestingMark Van Osnabrugge, Robert J. Robinson

ISBN: 978-0787952020

PRACTICAL TIPS OF FUND RAISING - Chinese University of ...€¦ · Common mistakes entrepreneurs...

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