SHOW ME THE MONEY!

2. SHOW ME THE MONEY! JOSEPH J. NAJEM AC&E INTERNATIONAL MANAGING DIRECTOR & CEO

3. Today’s Objectives • Discuss potential sources of funding to enable a business’s growth plan • Consider the key requirements of equity and debt providers • Identify some alternative funding techniques and important factors that a business must consider when raising money

4. Agenda • State of the Market • The Funding Spectrum • Securing equity investment • Alternative sources of funding • The Private Equity play book and Business Valuation

5. So what’s the current state of the market?

6. Global Financial Crisis

7. Portugal, Italy, Ireland, Greece and Spain

8. What about the Chinese economy? What if the property bubble bursts (or is deliberately deflated) and economic growth slows in China?

9. How far can you see ahead?

10. How far can you see ahead? You have three choices: Get off the road because you might crash Drive extremely slowly due to low visibility Accelerate at full throttle (safely, because you have some secret ability and line of sight) How do you negotiate the current market conditions without getting injured, or badly hurt? ... and/or how do you take advantage of the storm?

11. Raising funds is fun. (that’s why funds has the word ‘fun’ in it)

12. There is a wide range of funding sources that a business can use Not just cash injections

13. THE FUNDING SPECTRUM Term loan or line of credit Asset based lending and Inventory finance Bonds and Debentures Caveat or PG backed loans Equity Debt Cash (equity) Equity swap (scrip) Joint venture “Securitisation” Structured finance arrangements (including software leasing) Earn-out arrangements Licenses and Royalties Asset sale/ spin off Collateralised Debt Obligations (CDO)

14. The investor assessment What are the 5 key questions an investor asks about your business?

15. The 5 M’s • The Market - size, appeal and potential • Market Niche • Business Model • Management Team • How the business will make Money

16. What characteristics is an investor looking for in an investment? • Attractive and believable business valuation • Multiple sources of income from the business • The type and size of business partners and affiliates • Track record of the management team in terms of delivery and meeting estimates/ forecasts • Personal equity and commitment in the business (founder equity and “pain factor”) • Identity of the lead angel and seed Investor(s)

17. What characteristics is an investor looking for in an investment? • Level of business debt and serviceability • Monthly burn rate and CAPEX estimates • Investment structure and if it provides liquidity, anti-dilution and asset protection • Risk mitigation tactics and strategies (project staging) • Time horizon of the development and potential for slippage, and the resulting Internal Rate of Return (IIR) and Return on Equity (ROE) • Exit strategy and if there are identifiable exit buyers

18. If private equity decides to invest in your business, what are the typical terms and conditions?

19. Board representation and special decision veto • Active or passive operational involvement by the investor • Financial, budget and cash management controls • Performance, ratchet and earn-out clauses • Anti-dilution protection and drag-along/ tag-along provisions • Restrictive covenants • Preference shares and voting structures • Convertible debt and equity arrangements • Restrictions on trade if leaving the company and anti-competitive employment agreements for key people • Mandated Investor signoffs on major stipulated changes

20. A few important questions before proceeding with equity investment into your business 

21. Investor and Investee goals are different – are you aligned and congruent? • Do you really need that money? All in one tranche? Or is it a nice to have? • Investor will get involved in your decision making – are you prepared for that? Are you ready to share or give up control? • Are you capable of stepping aside and appointing a new executive or executive team if needed? • Take less money if you can – don’t solicit too much money, the more money you take on the more issues you have to deal with.

22. Bank debt facilities are a viable source if the business is mature and stable enough to secure and service bank loan facilities

23. Bank Considerations • Lending Determinants • Management team • Track record of the business • Normalised earnings and resulting free cash flow • Assets – debtors, equipment and stock • PGs and security offered • Adequate interest cover • Principal take out source • Disposal value of the business and assets • Viable charge over the company

24. What about other funding structures?

25. Contract Finance • Structured finance using ‘other’ asset based collateral or CDOs • Software Leasing for Software plus Services business models • Joint venture funding arrangements (potentially with buy-back provisions) • Performance based funding arrangements (eg. earn-out structures) • Rights, royalties and license structures • Securitising cash flows (invite investors to contribute cash to underwrite development, marketing or operating costs through an SPV)

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27. www.aceinternational.com.au ... and go to the Ideas section

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29. A piece of advice regardless of whether you are raising equity, debt of some form of hybrid finance …

30. get yourElevator Pitchright

31. The Private Equity and Venture Capital approach to growing and expanding a business … and how a business is valued

32. Growing your business – how do PE and VC firms do it ? • Define the full potential – the target is increased equity value (share price) • Focus on growing cash flow by pursuing a few core initiatives only (not everything on the project list) • Develop a roadmap to reach the full potential - not a pipe dream, emphasise measurable outcomes • Accelerate performance in every way possible with tools, talent, discipline and monitoring (and get the metrics right because you get what you measure, and what you incentivise)

33. Growing your business – how do PE and VC firms do it ? • Harness the talent with the right incentives to recruit, retain and motivate the best talent (get them to think and act like owners of the business, not employees working for wages) • Make equity sweat by using debt and leverage, disciplined capex control, and aggressive management of working capital and the balance sheet • Create a results oriented mind set aligned to the vision and the roadmap – and focus on creating genuine and sustainable value, and real assets that build a balance sheet (and valuation will follow)

34. Valuation is highly negotiable in early stage investing - examples of methods: Dollar Limit Never invest greater than a specified amount Stage Based Illustrative example is the total investment value ranges from $1-$6 M, starting with $200K and adding $1 M each for a sound idea, a prototype, a quality board, or any roll-out sales, and adding $1-2M for a quality management team Rule of Thirds 1/3 to the founders, 1/3 to the capital providers, and 1/3 to management Angel Standard Asking for less than $2M often implies the venture lacks progress and greater than $5 M means the entrepreneur is overvaluing the company or is ready for VC investment Multiplier Method Multiply a key number in the business plan times an industry standard (eg. Multiple of EBITDA)

35. Valuation is highly negotiable in early stage investing - examples of methods: DCF Method Identifying a potential value for the company in the future, by discounting cash flows at a specified rate recognising the risk of achieving those cash flow forecasts/ targets VC Method Uses multiplier and DCF methods to determine how much of a company to own to achieve a predetermined ROE requirement hurdle Value Add Method Giving support to a company in exchange for equity (sweat equity) Pre-VC Method Angel invests cash in a startup with no shares exchanging hands and no set price, understanding that the angel’s terms will be the same as those in the coming capital raising round at a discount to that round

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