4 March 2008, London Entrepreneurs’ Challenge

1. 4 March 2008, London Entrepreneurs’ Challenge Tim Barnes, Executive Director, UCL Advances Finance for beginners …money, money, money

2. Introduction • The aim of this presentation is to give an overview of the various sources of finance open to new businesses: • Grants • Debt • Equity • We will look at what they are, when to use each of them and how they work.

3. How much finance do we need?

4. The cash-flow model All figures in £ 000

5. What are the sources?

6. Grant funding • Grants are awards of money given to businesses to further specific development aims • They have the obvious benefit that they come with no financial burden (no money has to be repaid and you do not have to give up part of your business) • Provided by a variety of government (and sometimes charitable) organisations • Awards may be in cash, equipment or credit for services • Always look for grants before any other form of funding! • Be aware of the requirements: • Reporting • Limits on business activities • E.g. Award for Research and Development

7. What is debt finance? • Debt finance is another term for taking a loan • It is money provided by a bank or other organisation, usually for a specific purpose • The value of the loan is repaid over an agreed period together with interest • Debt often needs to be secured against an asset, which is taken in place of the money if the loan cannot be repaid • For new companies, which have no assets, personal security may be offered • Different forms have different advantages • Overdraft - no security, smaller amounts • Commercial loan - larger amounts, lower rate of interest, no personal assets as security

8. What is equity investment? • Equity investment is the process of selling part of business in order to bring additional money into the business • As such, it is an alternative to debt or other forms of finance for a business and has different characteristics • It is the company selling shares in itself in order to grow bigger - the existing shareholders do not receive any of the new funds • There are many sources of equity investment, but they are collectively known as venture capital providers • May be provided by: venture capital providers, government agencies, business angels • These are collectively known as venture capital providers • Think also about “sweat” equity

9. Which is right for me?

10. Equity or debt? • Consider stage of the company • Consider types of assets, revenues, cash-flow of your company • Can the company pay interest? • What happens in distress i.e. bankruptcy? • Will the company give up equity => smaller portion of larger pie? • What value to put on equity? • What do the investors look for?

11. The case for debt finance • Straight forward • Regular repayments are easy to plan for • No control of the business is given up and no dilution in ownership • Can be used for: • Working capital • Investment in equipment • To cover short term cash flow • Available from banks, suppliers and angels

12. The case for equity finance • Probability of financial distress increases with debt • Lenders will not provide operational input; equity investors will • Absence of free cash flow-> equity funding • What is the investment for? • Growth options but few tangible assets • Equity finance is ideal for reducing credibility problems on the way to building a profitable business • Helps to overcome each hurdle

13. When do you raise finance?

14. This is a serious problem What and when Public Markets DEBT Value Private Equity Venture Capitalists VCT FUNDING GAP Angels FFF Time

15. Tiers of debt finance Project Evaluation Company Formation Seed stage Development Research Growth 1 - Personal loan 2 - Small commercial loan or overdraft 3 - Small commercial loan or overdraft Strategic choice on how to develop business IP Assessment & protection Incubation & development of business plan Opportunity search/ Awareness creation Funding process Source: Adapted from Clarysse and Moray, 2003 Research Start-up Growth and sales

16. Tiers of equity finance Project Evaluation Company Formation Seed stage Development Research Growth 1 - Proof of concept - c.£3k 2 - Seed Stage - c.£5k-£50k 3 - Round One - c.£50k-£200k Strategic choice on how To develop business IP Assessment & protection Incubation & development of business plan Opportunity search/ Awareness creation Funding process Source: Adapted from Clarysse and Moray, 2003 Research Start-up Growth and sales

17. What do finance providers want?

18. Lenders and investors look for… • Sufficient market size, with expansion opportunities or multiple paths • Market positioning • Strong management team • A combination of vision and implementation • Partnership’s, Alliances and Endorsements • Less crowded spaces • Clear customer commitment and momentum

19. How do you get there? Drive Operating Results Drive Process Prepare Homework

20. Operating results • Best efforts cannot mask underlying business issues • Get costs and head count right • Make the business as straight forward as possible • Minimise anything that might put doubt or confusion in the minds of finance providers • Build sales momentum and pipeline • Develop clear understanding of operating factors, such as: • How much it costs to service each customer • Understand what happens if targets are not met

21. Sources of equity finance

22. Business Angels • Relatively small amounts (<£1m) but • Help bridge the ‘funding gap’ to where VCs become interested • Capital intensive businesses such as in biotech and semis require more than £500K to prove interest to most VCs • Business Angel Networks e.g. • Hotbed, Angel bourse, PI capital, The Entrepreneurs Club, Envestors, BACapital, One London Angel Network • Angels provide management, finance and marketing skills • Many Angels go on to non-executive or executive roles within the company

23. Venture Capital Firms • Can be a pivotal factor in growing your company • Put you on track for IPO or a trade sale • Bring a broad perspective of experience • VCs only succeed if you succeed: • VCs help entrepreneurs secure further funds (Fund Raising and Intermediation) • VCs sit on Board of Directors • VCs recruit executive talent • VCs help structure/reincorporate the company • VCs can help build partnerships and alliances • BUT • Can be very expensive • Interests are not always aligned with those of the entrepreneur

24. University-related sources • Great contacts right here to tell you all about • Commercialising research • SMART Awards/ LINK/ R&D grants/ EU funds • University Spin Out/Technology Transfer • Advisory roles for UCL • UCL Angels • UCL Business (http://www.uclb.com) • University Challenge Funds up to £250K • Combined London Colleges University Seed Fund • Challenge Funds are reaching their 4 year end and drying up • Seed Institutional VCs focused on Academic base e.g. • Sussex Place Ventures (UCL and LBS) • Quester

25. Selecting an investor • Fewer rather than more investors (not always an option) • Choose sophisticated people who understand the business • Pay attention to reputations • Pick investors who have good contacts/strong networks, i.e. value-added • Angel investing is usually a intensely fragmented and private affair • Angels have a tendency to make decisions based on personality, intuition and experience rather than an industry segment view • Distinguish between Angels/VCs and Finders

26. A little more about equity deals…

27. How are deals done? • Stage 2 • Basis for negotiation • Can be taken to others • Shows interest • Stage 3 • Hard questions covering every aspect of the company • Requirements and contingencies for a deal • Decision time • Stage 1 • Many presentations • Try to get personal introduction • Can take up to 9-12mths DEAL! Roadshow Term Sheet Due Diligence

28. Working through an example… • Existing shareholders • John and Clare own 50% each • Pre-money valuation • £10,000 • Investment required • £5,000 • How much do John and Clare each own after the deal? 33.3%

29. Top tips • Do as much as possible before funding • Customer is the goal • Sell from earliest stage and make connections • Price product by reference to value to customer • Fail often, faster and earlier • Partnerships validate your idea and are valuable • Have a view of financing beyond a single financing event build on a forward financial plan • Plan funding around externally significant milestones • Weigh up both control and economic elements of the deal • Remember that funding is hard to get, however, you approach it so make sure you are a cut above the rest!

30. And finally…

31. An exercise • Make a list of all the things you think you will need to spend money on BEFORE you can make your first sell • Do you REALLY need all of those items? • Do you REALLY have to pay for them? • How much might it all add up to? • Can you convince someone to lend you the money? • What other information might you need to provide to a lender?

32. 4 March 2008, London Entrepreneurs’ Challenge Tim Barnes, Executive Director, UCL Advances Finance for beginners Questions?