Post on 29-Jun-2020
Parenting for Technology Businesses
Entrepreneurship and Mentoring
for Technical Start-Ups
Followed by a networking session with light refreshments
Prof Russell Smith MD PhD
Holder of the Queen’s Award for Enterprise Promotion
Operational Programme II – Cohesion Policy 2007-2013
Empowering People for more Jobs and a Better Quality of Life
Event part-financed by the European Union
European Social Fund (ESF)
Co-financing rate: 85% EU Funds; 15% National Funds
Investing in your future
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Part 1: Assessing the idea
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Commercial due diligence (1/2)
Science
IP outputs and strategy
Management and facilities
Markets and competition
Commercialisation strategy
Financial considerations
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Commercial due diligence (2/2)
Due diligence is not just about ticking boxes
It is more than an administrative function
It is about knowing what questions to ask
It is about building up an overall picture – Evaluating the credibility of a project
– Assessing whether it can deliver on its promises
– Estimating the benefits and return on investment
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How to approach the science
Science should be reviewed by peers
– Appropriate expertise as required
– Review commercial issues separately
A few pointers:
– Methodology and processes; are they sensible?
– Data outputs; are they realistic, use of statistics?
– Research tools and ethical approvals
– Is this an area that has had difficulty in the past?
– Is the science going to generate products or services?
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IP outputs and strategy (1/2)
Is there IP coverage now or will there be in the future?
– Type of IP (patents, copyright, know-how…)
– Strength of coverage
– Geographical scope
Does it cover a platform technology or specific product
or service?
Evidence of search reports and examination
Quality of IP agents and advice
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IP outputs and strategy (2/2)
Any need for third-party commercial licences?
Who owns existing IP and who will own future IP?
– Single vs Joint ownership
Is there a sensible IP strategy going forward?
– Evidence of portfolio build-up?
Is there evidence of any disputes?
– Funders, collaborators, institutions
– Third party actions
Future IP costs
Publication strategy
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Management and Facilities
Is the team involved realistic?
– Does it have the right expertise?
– Has the team / individual members done this before?
Are there gaps in the team?
– Can they bring the right people on board?
Will they have enough time to devote to this project?
Are there facilities / space to house the people?
How will the team support new employees?
– Approvals from university etc
– What about things like insurance, training etc
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Project Benefits and Outputs
Benefits relating to:
– Customers
– Income generation
– Cost savings
– Publication and
dissemination of results
Before considering the
commercial opportunity,
need to be clear on what
the project outputs are:
– New technology platforms
– Software
– Research tools
– Practice guidelines
– Questionnaires
– Protocols
– Toolkits
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Markets and competition (1/4)
What are the outputs of the project?
– Is it a product or a service?
– Will there be a clearly-defined product or service
profile?
What sector will the product fall into?
– For example:
A clear technology product (Patent?)
Computer software (Copyright and/or patent?)
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Markets and competition (2/4)
Who is the customer and the payer?
– The user? Corporate or individual?
– Another organisation
– Impact of environmental considerations?
Scale of opportunity
– Within the country
– Within a group of countries (eg EU)
– Broader appeal with full international potential
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Markets and competition (3/4)
What is the market potential?
– Current market size and segmentation
– Market dynamics
Established vs emerging
– Future growth potential
– Key product / service differentiators
Is there a market for the product / service?
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Markets and Competition (4/4)
What is the competition?
– Types of competition?
Market entry barriers
– Low vs high barriers
– Regulatory hurdles to entry
– Manufacturing and distribution costs
– Marketing and sales costs
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Commercialisation strategy
The management company
– Typically SME
– Often with researchers as founders
Need to beware:
– Weak management (eg too much research focus)
– IP position
– Financial vulnerability/viability
– Understanding of the commercial strategy
– Loss of rights and dilution of returns
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Financial considerations
Are they asking for too much or too little cash?
Do the costs look reasonable?
Will the investment (grant) take the work to a
meaningful milestone point?
What additional investment will be required after any
initial project has finished?
– Many proposals under-estimate late development and
commercialisation costs
Linking funding to performance milestones or time
– Be prepared to remove funding on poor performance
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Conclusions
Face-to-face meetings can be much better
than desk research and analysis
Need to have a clear understanding of the risk
elements and focus resources appropriately
Cannot predict every eventuality
Don’t be afraid to ask obvious questions!
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Part 2: Assessing the team
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Lead researcher
Main review of science “contracted” to the independent peers - assumes careful selection of peer reviewers (critical)
CV for lead researcher?
Other interests and activities?
References for lead researcher?
Summary of grants received and outcomes?
Publication list for lead researcher – Any evidence of commercial applicability?
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Assessing existing or potential CEO
CV and experience of leading other teams
Awareness of relevant science (not critical)
Communication ability (written and oral)
Understanding of IP and strategy
“Feel” for potential products and sector
Ability to build team rapidly (good network)
including professional advisers and interims
Experience of raising finance (debt and equity)
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CEO – CV and experience
Mixture of science and business
Most likely science first (ideally PhD) and
business second (MBA not essential)
Business is global! Evidence of global
business and market experience beneficial
Any “easy” due diligence (eg websites)
Take up references!
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CEO – Communication ability
This is, perhaps, one of the key skills
Should be able to communicate clearly with
both the written word (not just research
papers!) and also with oral presentations
Is it possible to see the Executive Summary
from a previous business plan and a funding
presentation (under CDA perhaps?)
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CEO – Understanding of IP and strategy
Does the individual ask the right questions? – Who owns the IP?
– What searches have been done and what is the current opportunity? Any third parties involved?
– Who developed and what is the protection strategy?
– Who funds protection? Will they want reimbursement?
– Who are the professional advisers?
– What is the attitude of the inventor?
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CEO – “Feel” for products & sector
Does the person have an understanding of the
sector and current trends? If not, how would
they gain that information (eg commission a
report from a university business school)?
What products and/or services look attractive
to the candidate and why?
Could those products or services be prioritised
at the present time?
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CEO - Networks and teams
Does the individual have a ready-made
network of people to help straight away?
– Professional advisers (accounts and lawyers)
– Finance person (used to raising money)
– Commercial person (used to selling things)
– Operations person (used to running projects)
– Manufacturing person (used to making products)
– Regulatory person (used to gaining approvals)
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CEO - Experience of raising finance
What forms of finance (and how much) has the
person raised (debt and equity)?
What experience with private investors, VCTs
and venture capital companies?
Understanding of any investor tax issues
Recommended share allocation split between
parties and who wrote their last Shareholder
Agreement? (sorts the real-life people from the
textbook people!)
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CEO - Professional advisers
Ideally, CEO sources all that you need… – Need accountants (interview three)
– Need lawyers (interview three)
– Both of the above must be corporate and not general
– Willing to work on contingency?
– Recent clients? Take up references
Make a phone call (people say more when not in writing)
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Finance Director
May or may not be an accountant
Must have raised both debt and equity finance
Must have their own panel of, or access to groups of, investors
Must have good relationships with corporate banking
Must understand investor tax issues
Must be able to create management accounts
Good if could take on HR responsibilities
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Commercial Director
Apprenticeship often important – may have no formal qualifications whatsoever!
Must have good CV and history of moving rapidly through the ranks from field sales, regional manager, national manager etc
Must come across as determined (but not aggressive), driven to succeed
Evidence of good management skills
Can they bring anyone with them?
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Operations Director
Needs to have good attention to detail without
losing sight of the “big picture”
Evidence of ability to work within teams
Good understanding of capital expenditure and
operational expenditure for planning purposes
Lateral thinker
Good communicator – ability to say “no”!
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Manufacturing Director
Experience in relevant sector
Good relationships with suppliers
Understanding of supply, manufacturing and
distribution chain
Expertise in managing inventories
Relevant knowledge of regulations
Clarity of thinking regarding what work to do
“in-house” and what to “contract out”
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Regulatory Director
Must have experience in relevant field
Good written and oral skills essential
Team player but willing to lead and take
decisions when needed
May need to be a Board appointment in order
to drive strategic decision-making
Must work closely with all department heads
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Scientific Advisory Board
Leading scientists from research
establishments and from industry
SAB usually meets once every 4-6 months
Helps review recent science/results and define
both research and development strategies
Key is to focus on the potential products and
services based on commercial intelligence
Must have the respect of the Lead Researcher
since SAB advice may sometimes disappoint!
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Part 3: Building the business
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Raising Equity Finance: The documentation “Holy Trinity”
The Business Plan
The Cash Flow Forecast
The Funding Presentation
And we also need:
– Shareholder Agreement
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The funding presentation
An illustrated version of the Executive Summary from the Business Plan
Usual to have around 15 minutes
Probably no more than 10 slides
Need to convey the key messages but with more chance to illustrate than is possible in the Executive Summary
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Important to get key corporate information across
Be clear about your corporate plan
The funding presentation isn‟t the place to open negotiations
Be clear about share price, % of equity released, share options, finance round closing date, shareholder agreement etc
All decided ahead of speaking to financiers
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Let‟s look at what a high-growth business might look like
A company with the following share structure:
– 60% equity to the founders
Inventor 25%
employer of the inventor 25%
management team 10% (CEO 5%)
– 30% equity for start-up funding (>25%) – these are
the shares bought by the investor(s)
– 10% equity to a share option scheme – additional
shares for current & new employees
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What is the share option pool for?
To give incentives to current staff
To attract high-quality senior staff including the
CEO and others
To bind staff to the business (three years?)
To reduce cash burn since smaller salaries
may be acceptable
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How do share options work?
The right to buy shares in the company at
today‟s valuation at some later time
Potential capital gain if shares can then be sold
later for a higher price
May attract tax benefits (EMI in UK)
Options may „vest‟ over 3 to 5 years and may
have performance target conditions
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How do we get these parties to work to a common goal?
Full account must be taken of the needs of the
inventor, the management team and the
investors right from the outset – views may
not be in harmony
Need to capture everything in a plan that all
parties can agree to… the business plan
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Equity finance: how is the company valued?
More of an art than a science…
Early-stage (eg university spin-out with no
sales) start-ups may struggle to get a high
valuation (eg 1m Euros in current climate)
Hence 30% equity for cash would generate
300,000 Euros start-up funding
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Valuation on basis of trading
Obviously doesn‟t apply to start-ups
Upward trend in turnover/profit over years
Need clear reason why debt finance not
possible – perhaps need large capital amount
to fund growth or purchase of another business
Simple multiples of profit often used (5x profit a
common multiple used in UK)
Sector-specific multiples (eg 3.5x Architects)
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Valuation of start-ups
Need to define “investment” to date
Pragmatic list of resources expended
coupled with…
Robust analysis of market potential and hence
future revenue and profit
Net Present Valuations (NPVs)
Consider University Business School help
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Sources of early-stage finance – Private Investors
High net-worth individuals
Ability to invest 25k to 250k Euros typically
Many private investors act in groups
Any tax incentives will be extremely important
Very important group for early-stage
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Tax breaks in the UK
Investors can get tax breaks via EIS relief on
investment and CGT – in other words they can
get a double benefit
But… both schemes require that no entity
owns more than 50% of the business (ie it is
not a subsidiary)… hence need to plan!
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What do investors want? The rules of equity finance
Must have strong commercial application but
no need for immediate or short-term revenue
Protected IP (eg a good patent family)
Management team capable of delivering
Exit strategy for investor
Of which the most important is
management
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Early stage strategies – „interims‟ and multiple finance rounds
Interim CEO part of „founding team‟
Interim CEO leads start-up funding of ca 300k -
500k Euros
Interim CEO shapes the company and leads
second round of finance of ca 1-2m Euros
Replace with full-time CEO
Full-time CEO leads later VC finance rounds
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Multiple finance rounds – „Dilution‟ of ownership
Each finance round issues more shares so
shareholders can be diluted
Example – Company X raises 300k Euros by
issuing 1000 shares and selling 300 for 1k
Euros each (valuation of 1m Euros)
Inventor gets 25% and so has 250 shares
worth 250k Euros in total (paper value only)
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Second round
Company issues another 1000 shares but this
time values them at 2k Euros each since new
patents and other progress argue for increased
value of the company – raises 2m Euros cash
So – now have 2000 at 2k Euros each making
the company worth 4m Euros post-cash
Inventor‟s stake diluted to 12.5% but worth
500k Euros – smaller stake but bigger value
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Venture Capital round
Having spent the 2m Euros the company
progresses and is arguably of greater value
Issues 2000 new shares at 3k Euros each –
now have 4000 shares at 3k Euros each giving
a valuation of 12m but with 6m Euros cash
Inventor now has only 6.25% but shares have
a cash value of 750k Euros… only on paper!
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VC „pref‟ shares
„Pref‟ shares have preferential rights
Rights controlled by shareholder and
investment agreements
Usually gives venture capital company better
rights over disposal of assets in case of failure
Not fair on early investors… but that‟s life!
Never negotiate without experience
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Dilution - summary of what happened to the inventor:
Round Share price Shares % Euros
1 1k Euros 250/1000 25 250k
2 2k Euros 250/2000 12.5 500k
3 3k Euros 250/4000 6.25 750k
Lower % holding but higher cash value
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Exit strategy
How do investors get their money back? After
all, they have bought shares not made a loan
Need an exit strategy:
– Trade sale (M&A)
– Management buy out (MBO) unlikely to
form part of initial strategy
– Sale of shares on public market
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Investor relations
Very important – especially if you want
investors to “follow on” in later finance rounds
Organise any tax forms straight away
Quarterly updates – progress against plan
AGM
Make sure all investors get press releases
before they are released to the media
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Shareholder Agreement
Defines a set of “rules” that apply to all shareholders
A “private” document between shareholders
Includes provisions to protect the rights of minority shareholders (eg more than 75% approval, or more, for certain decisions)
Defines when shares can be sold
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Common inclusions:
Mortgages over company assets
Committing to long-term financing
Buying or selling large capital assets
Issuing more shares (dilution)
Joint ventures
Transactions outside normal business
Winding up the company
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Common inclusions:
Selling and transferring shares
– Prevents “inappropriate” sales (eg to a competitor)
“Drag-along” and “Tag-along” clauses
Key people provisions
Death in service and long-term illness
provisions (especially relating to sale or
transfer of shares)
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Common inclusions:
May include rules for payments to Directors
May define any loans or special remuneration terms for Directors
May define “good-leaver” and “bad-leaver” terms
Does not remove need for good “Service Agreement” for Directors and “Key Persons”
Thank You!
Any questions?
For more information on events in this series visit
www.um.edu.mt/knowledgetransfer
or email knowledgtransfer@um.edu.mt
Operational Programme II – Cohesion Policy 2007-2013
Empowering People for more Jobs and a Better Quality of Life
Event part-financed by the European Union
European Social Fund (ESF)
Co-financing rate: 85% EU Funds; 15% National Funds
Investing in your future
59