Published on January 2, 2019
1. 0300 01234 35 velocitygrowthhub.com High Growth Start-Up Funding NatWest Entrepreneur Accelerator Hub, Milton Keynes 30 October 2018, 9.30am - 12.30pm
2. This segment covers: • A quick overview of the sorts of finance (debt and equity) • What we mean by Angels and Funds (and who they are) • What an investor is looking for in a funding proposition • How an investor assesses opportunities
3. • What is the Founder objective? • What is the company mission? • What do other stakeholders want? • Can you reach those objectives without external funding? • How much more value will you create with external funding? External funding is always a trade off between resources, costs, and control External funding - for what purpose ?
4. Source: Enterprise Europe Network Funding varies with scale
5. Need £m Stage of Growth Likely Source 0 - 0.1 Start up Angel / Crowdfund 0.1 – 0.5 Trading Angel Net / Referral net 0.5 – 2.0 Recently profitable Seed Funds 2.0 – 10.0 Sustained profits Traditional VC 10.0 – 100.0 Corporate action VC and PE 100.0+ Global expansion VC and PE Equity choices?
6. Debt and Equity choices?
7. Balance of equity and debt Equity helps to support debt, and debt can help improve the return on equity. Knowing how to balance them and use them both is a key to business success.
8. How people (normally) think
9. How many Found where Benefits Angel 525 BBAA + Angel List Are like you Crowdfund 30 + Web Hands-off Angel Network 8 + Web Syndicates Referral network 12 + - Quick Seed Fund 22 BVCA Focused VC and PE 220 BVCA Connected Private Family Office 80 + - Varies How many investors are there? SMEs in the UK numbered c. 1,300,000 in 2015. That year, 1,270 equity deals were made with a total investment value of £3.5bn. These SMEs – representing 0.1% of the total business count - raised an average of £2.7m each. Data: Office for National Statistics and Beauhurst
10. Europe is a small place
11. Mindset of equity finance providers Angels Venture Capital Individuals (but may syndicate) Organisation Scale – limited to personal appetite for risk (smaller) Scale – published investment range (larger) Experience – entrepreneurial or domain Experience – corporate finance > managerial Involvement – hands-on but limited bandwidth Involvement – points of challenge (next round, exit, insolvency) No set time limit Limited investment period (5-7 years typically) Whimsy & personal chemistry Investment policy and due diligence Relationship-centric Financial return-centric
12. Making a return on investment
13. • If trading company takes 6 years to create a return at 20% IIR investors will expect to sell their shares for 3x what they paid • If they invest £1m for 25% of the company (meaning that your company was worth £3m before they invested) • They want £3m or more for their 25% in 6 years or sooner • So, company must sell for £12m, giving you £9m … You earned £1.5m per year Novice guide to investor expectations
14. Investment doesn’t always work
15. Where are the deals?
16. Who becomes an angel?
17. • What problem do you solve, for whom? • Why you? • Why hasn’t it already been done? • What benefit for investors? • How much will it cost them? • When do they benefit? Questioning the need for finance Raising money is almost as much a sales and marketing problem as it is a financial project.
18. Other factors affecting investment
19. Factor Effect Evidence Things the investors understand High Strong Things the investors have experience of High Strong 10 years of the investors experience can be used High Strong The investors can assist with a more valuable exit Moderate Weak The investors can add marketing / sales skills Moderate Weak Their ‘investment brand’ has positive value Moderate Weak Lead founder has succeeded in sector High Strong Founder earned over £1m per year of effort Moderate Moderate The founder is part of a diverse team Small Moderate .. of 5 to 7 people Small Weak .. with relevant experience High Strong .. including national class technical or sales talent High Strong The venture is already revenue generating Moderate Moderate The venture has positive social impact Small Moderate The venture has positive environmental impact Small Moderate The venture is in a ‘rising tide’ segment or industry High Strong The venture is in a ‘rising tide’ geography High Strong Improving the odds
20. Your investor can change your outcome
21. • Entrepreneur lacks experience or track record • Level of entrepreneur’s commitment is not sufficient • Lack of focus • No clear user case • Upside of the business is not clear or sufficient • Absence of comprehensive and credible market information • Market is highly competitive • No unique selling proposition • Product/service doesn’t appear distinctive or superior to competition • Not clear how any competitive advantage will be sustained • Use of finance is not clear These things will put off investors every time
22. Tea Break
23. Financial projections 12 slides to explain what really matters
24. • Avoiding problems • Paying bills on time (including tax) • Working out what investment you need to succeed • (forecast with and without investment) • Working out what this investment is worth to you • Working out what you can afford to pay for that investment • Dividends • Interest What is this all for ?
25. • Cash (that’s pretty much all that matters in a growth business) (Slightly important) • Creation of assets • Growth • Risk What matters ….
26. • Operating activities and working capital • Debtors • Creditors • Stock and WIP • VAT, NI and PAYE • Returns on investments, servicing of finance and equity dividends paid • Taxation • Capital expenditure and financial investment • Fixed assets, and other acquisitions and disposals • Management of liquid resources & Financing Why profit isn’t the same as cash
27. Customers Suppliers and Staff
28. Make your model work from EXTERNAL DRIVERS • Know your sales funnel and sales drivers • Link them to internal processes and activity • Know your internal assumptions, cost and drivers • Build up from real activities P.S. • You can also forecast individual products, investment in equipment … How to forecast
29. • Revenue, margins, reinvestment, cashflow • Trends • Growth rates • Some key ratios • Margins • Liquidity ratios • Returns on investment • Ability to pay dividends • Ability to pay interest on loans • Resilience ratios What investors are looking for
30. Please, don’t • Use prebuilt forecasting tools • Xero • Sage • Quickbooks • Figurewizard • Or pay someone else to do it for you So, do you need a big spreadsheet ?
31. Element Year 1 Year 2 Year 3 Year 4 Year 5 Revenue £1,000 £2,000 £3,000 £4,000 £5,000 Cost of sales £500 £1,000 £1,500 £2,000 £2,500 Gross profit £500 £1,000 £1,500 £2,000 £2,500 Costs £450 £650 £750 £850 £950 EBITDA £50 £350 £750 £1,150 £1,550 Free cash (£150) £0 £550 £1,500 £2,850 A simple forecast Nice steady growth, opening one new branch a year, reinvesting cash to grow, clearly sustainable
32. A complex forecast
33. 1. Forecast 1. Profit and Loss 2. Balance Sheet 3. Cash Flow Statement 4. Equity capital table 5. Forecast enterprise (or project) value 2. Deviations from forecast 1. Historic management accounts 2. External financial and economic information for context 3. Narrative to tell the story In the forecast pack
34. As you get better at this, look at proper ‘grown up’ models: • Sensitivity analysis • Scenario analysis • @RISK • Monte Carlo Simulations • Production and stock modelling • Timing and variances in timing Walk before you run
35. What a proper model starts with
36. Tea Break
37. An art not a science • Discounted cashflows (“DCF”) • Dividend yield • Dividend valuation model (“DVM”) • Listed company method • Net assets • Real world SME Valuing Your Business
38. What is this on a standalone basis? Calculate the value of a business by discounting at an appropriate discount rate the value of all future positive and negative cashflows to their present value Also calculate a terminal value, which is a bit complicated Discounted cashflow valuation
39. • Predicting future cashflows • Deciding on the discount rate(s) • Non-cashflow items (depreciation, amortisation) Considerations
40. Valuation per share = Gross dividend per share Dividend yield • Find the yield of a similar quoted company • Increase the yield required to factor in higher risk of smaller private company • Apply the increased yield figure and the gross dividend per share actually paid out to calculate the price per share Dividend Yield Valuation
41. • Predicting future dividend growth (“g”) • Historic dividend levels • What if no dividends are paid out? • What if dividends have replaced salaries? • What if dividend growth only starts in Year 3? • Calculating the cost of equity (Ks) • Relevance of similar quoted companies? • Price per share = – D0 (1+g) x 1 Yuk! – Ks – g (1 + Ks) n-1 Considerations
42. Most popular method by listed company analysts. This method considers not just the value of the assets but also their intrinsic earning and cash potential Value of the business = PE Multiple x Shares in Issue PE Multiple = Price per Share / Earnings per Share Listed Company Valuation Method
43. • Book value • Does this reflect true current asset values? • Net realisable value • Normally the minimum a seller will accept • Redundancy, liquidation, other closedown costs too • Replacement cost • Normally the maximum a buyer / investor will offer • Synergies Assets valuation
44. • Valuing intangible assets (brands, patents, trademarks) • Valuation of other assets • Plant & machinery • Land & buildings • Vehicles • Trade debtors • Stock • Valuation of liabilities • Provisions • Contingent liabilities Considerations
45. Equity value is • Adjusted sustainable profit [EBITDA, EBITA or EBIT] x Appropriate Multiple plus • Property owned by the business plus • Net Cash plus • Actual Trading Working Capital less • Target Trading Working Capital ‘Real world’ SME valuation method
46. • What multiple? • Similar private company deals • Similar listed companies (?) • Sector outlook • Management capabilities • Business outlook - growth potential • Customers • Suppliers • Buyer synergies – yes indeed! Profit multiple
47. Two main methods Short term – quick action plans • Financial / Management / Legal / Tax Longer term – vision and strategic planning • Now / Where / How Increasing business value
48. • Accounting policies – compare to competitors • Working capital levels – be efficient • Non recurring revenue or costs – adjust for them • Capital expenditure – too much / too little • Forecasts – be realistic Short-term action plan - financial
49. • Easier to unlock value with a strong employee management team • Put key employee incentives in place (EMI, EBT etc) • Reduce owners’ ongoing involvement and the business’s reliance on the owners Short-term action plan - management
50. • Material customer and supplier contracts • Ownership of business assets • Environmental consents and procedures adherence • Companies House filings • Trademarks and patents registration • Key employee service contracts Short-term action plan: legal
51. • Up-to-date, clean records: • Corporation tax • VAT • PAYE • NICs • Inspection visits Short-term action plan: taxation
52. • Plan well in advance • Plan from a position of strength • Get appropriate external advice • Involve key personnel Conclusion
53. Next week Monday, 5 November9.30am – 12.30pm
54. Try-out your elevator pitch