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Ideas to DealsBuilding an Investment Ready

Business

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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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Build A Business

Make MeaningMake a differenceMake 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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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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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 valueAnticipate 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-investmentJohn 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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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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Angel Investors

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

Two Types of Angel Investors

ProfessionalStrategic

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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 knowThey 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 stockMay 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 returnon their investment.They only invest in spaces they know.They only invest with people they knowThey 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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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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Title Slide: This is where you tell what you do and give a simple to understand example.

Problem: Describe the pain you are alleviating for your customers.

Solution: Show how you solve the pain. Business model: Explain how you make money. The advantage you have: Why are you different than

everyone else?Marketing and Sales: "Clearly" tell what your sales strategy

is. Do not forget to discuss your pricing.

Pitching Plan

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Competition: Show there is enough of a market available to buy your product even with the competition.

Management Team: You need to convince the investor that you have the team that can execute and will succeed.

Financial Projections: You need a simplified, clear slide here. You need to justify your numbers.

Current Status/Future Status: Show your use of funds and how that will drive the growth of the company. You do need to discuss exit options. Who are buyers and when. Don't hem-haw around. show the investor that they can not only expect the company to succeed (which is about you) but also that they can expect a return in a certain time frame (which is about them).

Pitching Plan

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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.

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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 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.Get over it…You’re not that special

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Recommended Readings

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Resources for Assistance

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

TechColumbuswww.techcolumbus.org, 614-487-3700

Ideas to Deals Blogwww.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 forThe pitchDeal 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 teamInvest 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 managementInvest based on: Management team

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Good Management – Ideal

Experience in a start-up or launching a product within a large companyDomain knowledgeRelationships with key customers

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Good Management – Other

Broad visionAmbitiousTremendous energyGood listenerAdaptableKnow that they don’t know everythingHire people better than themselves

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Investment Criteria: Other

Sales and marketing strategyCompetitionTechnologyFinancialsExit strategy

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The Investor’s Mindset

Their time is more important than their moneyYou must manage the process!

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First Meeting – Angel InvestorsGoal: 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, andThat you have the management team to execute

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First Meeting - Other

Do not assume:they have read the planthat you will get through presentation

The product or technology is only 5% of the pitch in the first meetingOne 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 processAnticipate the investors needsSubmit your own Due Diligence Review ManualDon not tell them “it is in the business plan”

Opportunity to customize to their “hot buttons”

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Deal StructureIndividual Angels:

Security: Common stockExit: Share buy-back, Sale or IPOReturn: 15% to 20%Valuation: reasonable

Organized Angel Funds and Venture Funds:

Security: Preferred stockExit: Sale or IPOReturn: 30%+ compound annualValuation: Tough but fair

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Preferred vs. Common StockCommon Investors and management have same rightsPreferred 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