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Topics

• The “City”

• Sources of money to finance new/early stage companies

• How much money do you need?

• Company valuation

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The “City”

What is the “City”

Do we need it?

What does it do?

Whose money is it?

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The “City”

What is the “City” International Centre for financial services

Do we need it? Yes! Industry would stop without it

What does it do? Facilitates business and investment

Whose money is it? Ours!

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Companies need

finance to fund

business activities

and growth

The “City” - Example

Banks, fund managers,

Pension funds etc

Collectively we have

lots of money

Lots of small amounts

of money deposited

for short periods

Need large sums of

money for years

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• Exporting company wins $50M contract in USA.

• Get paid on completion June 2006 in $

• Pay costs (salaries etc) now in £

• profit margin is 10% (vulnerable to currency movements)

How can they be sure that they will make a profit?

Buy the right to sell $50M in June 2006 at today’s rate (future contract)

The “City” - Example

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Companies Need Finance to Set-Up and Grow

• A new family run shop selling furniture

• A biologist with a drug proven to cure lung cancer in mice

• A software startup with a solution that facilitates international information and knowledge sharing for global companies

• An engineer with a new type of battery that will give electrical cars far greater range

• A group of car mechanic setting up a mobile servicing business

How much money do you think they need?Where should they get it?

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Sources of Money• Your own money + friends and family

• Shows commitment• No restrictions • Friends probably want equity

• Grants • Cheap money (don’t need to repay & no interest)• Small amounts• Often matching funding for specific project

• Debt finance (e.g.; bank loan)• Interest over a specific period• Secured against asset (might lose your house)

• Equity finance• Investor buys a share of the company• Investor “gambles” on return through dividends or selling shares• Nothing to repay• No asset security• No interest

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Sources of Funding

You, your friends &

family

Grants & awards

Business Angels

Venture Capitalists

Maturity of Business

or………… organic growth

StartupMature company

IPOStock Exchange

Banks

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The Funding Ladder

£10m+

£5m+

£5m - £20m

£25k - £500k

<£25k

IPO

Trade sale

Venture capital

Business angels, Seed funds, Grants

TTOs, Friends and family, Grants

Capital required Possible sources for finance

Note: Requirements & sources vary, e.g. trade investors at any stage

FUNDING GAP

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Loans (Banks)

• Could be from persons or institutions

Suitability• Any amount in theory• No loss of ownership/control of business• Often must be secured against an asset• Must pay interest• Must repay the capital

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Business Angels

•Small private equity Investors

•Wealthy individuals who invest their own money in return for equity in the company.

Suitability• Up to £100,000 individually• Up to £0.5M in club• High return• Control • Less constraints than Venture Capitalists

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Venture Capitalists

• Institutional equity investors

• Raise money in financial markets………...• and invest other people’s money in companies in

return for equity in the company.

Suitability:• £5M - £20M• High growth prospects• High barriers to entry • Management team• Strategic control

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Exit Strategy

• When / How will investors realise return?• What are your personal long term plans?• Exit seems a long way off – but can affect some early

decisions?

Such strategies might include:

• Trade sales• Initial Public Offering• MBO/MBI

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Initial Public Offering

Become Stalitte plc instead of Stalitte Ltd

• Make some of shares available publicly on liquid

stock exchange. • No limit to amount that can be raised (in theory)

Suitability:• £5M +• Highly regulated market with onerous requirements• Analysts will take the company apart in detail• Expensive costs of transactions• High profile• Valuation

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How Much Money Will You Need?

Answer Must prepare a Cash Flow Forecast for the business

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-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

£

Cumulative Cash Flow of a New Business

Cumulative Cash Flow

Valley of Death

Promised Land

How much investment do you need?

- at least double what you think!

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How Much Money Will You Need?

• Cost Projections - Complicated but EASYIn your control - Get it right

Include ALL COSTS

• Revenue Projections - Simple but DIFFICULT = Price x Volume Market research

• Breakeven• What price can you charge? What is minimum breakeven price?• What volume of sales? What is minimum breakeven volume?• When will you breakeven?

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Valley of Death

Shallow and short£50K for 6 months

Deep and Long£50M for 10 years

IT

R&D co. Biotech

Up to you

Up to you

How big is the Promised Land?

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Multiple of revenues or profitsWhat if none for years

None

None

Surprisingly yes!(as part of a management team)

E.g. R&D money spent

Future Profits

Others:

Customer base

Brand

Technologists brain

Spend to date

What is the Value of a New Company?Internal valuation methods:

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What is the Value of a New Company?

We’ll be worth £80M in 6 yrs

As good as any other

External valuation methods:

Comparison to similar companies

£1M per bench scientist(biotech)

Impossible to value correctly so why bother?

Does the value of matter?

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Yes…. if you need equity investment

Offer £5M for 33% equity = £15M

i.e.; current value of company = £10M

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How Will An Investor Value Your Company?

• You want me to invest £1M now

• Your calculations show you expect company

worth £20M in 5 years

• I need 100% pa return

= £16M in 5 years = 80% of the equity

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Company Valuation and Ownership

FoundersSeed FundVCUniversityManagers Note: Shareholdings

will vary

Founders

Seed Fund

University

UniversityFounders

Stage 1: Valuation £10,000 Stage 2: Valuation £750,000

Stage 3: Valuation £10m

50%

33%33%

£6m

60%

5%

50%

33%

5%

5%

25%

COMPANY Guides

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Provision of Early Stage Venture Capital in London

COMPANY Guides

Note: periods shown are for year to 31 December

Source: BVCA Report on Investment Activity

0

500

1,000

1,500

2,000

2,500

1997 1998 1999 2000 2001 2002

£m

MBO/MBI

Expansion

Early stage (seed, start-up and otherearly stage)

Venture Capital Investment by Stage – London (£m)

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UK and OECD countries – VC Investment as % of GDP 1998-2001

Investment in venture capital as a % of GDP, 1995-1999

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

Slova

k Rep

ublic

Japa

n

Austri

a

Hunga

ry

Gre

ece

Portu

gal

New Z

eala

nd

Czech

Rep

ublic

Italy

Denm

ark

Polan

d

Switzer

land

Austra

liaSpa

in

Irelan

d

Franc

e

Norway

Ger

man

yEU

Finlan

d

Belgiu

m

Korea

Sweden

Unite

d Kin

gdom

Nethe

rland

s

Canad

a

OECD

Icela

nd

Unite

d Sta

tes

Early stages Expansion

Source: OECD (note definitions vary) COMPANY Guides

UK