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Sources of finance. Financiers and their habits by Mr Ties van der Laan Ties Corporate Finance 10, rue des Alouettes, L-1121 Luxembourg-Cents Luxembourg m +352 691 427 566, t/f +352 427 566 e ties@ties.lu, i www.ties.lu. Who am I?.
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Sources of finance Financiers and their habits by Mr Ties van der Laan Ties Corporate Finance 10, rue des Alouettes, L-1121 Luxembourg-Cents Luxembourg m +352 691 427 566, t/f +352 427 566 e ties@ties.lu, i www.ties.lu
Who am I? After nearly ten years in Dutch venture capital companies (ING Group) I am coaching since 1999 entrepreneurs and management teams to raise finance, first through LIFT and from mid 2002 as an independent business coach
Life cycle/finance/financiers Life Cycle Finance Financiers Research Grants Public sector Start-up Equity Sponsors Early stage Seed capital Founder, friends, family Expansion Venture capital Banks Buy-out/in Private equity Business angels Turnaround Mezzanine Corporate venturers Loans Venture capitalists And will finish with a summary and a step-by-step plan!
Public sector • Characteristics • Who are they? • What do they seek? • How do they operate?
PS: characteristics • (Life time) civil servants • Public money • Funds: from € 1 m to € 1bn • Deals: from € 10k to several € m • Agenda is political • Job creation • Stimulation economy
PS: who are they? • Governments • Local, regional, national, European • Development agencies • Innovation support organisations
PS: what do they seek? • Prefer projects to companies • Non / pre-commercial • Universities, research centres • Prefer companies with non-profit sector • Technology driven / innovation • Young / female entrepreneurs
PS: how do they operate? • No misuse of public money: • Auditors rules • Bureaucratic • Writing and lobbying • May take up to 2/3 years • Give: • “free” money: no repayment or • “soft” loans: low interest / repayment • Prefer to match others • Limited interest after spending
Founder, friends & family • Characteristics • Who are they? • What do they seek? • How do they operate?
FFF: characteristics • NB. 1st F=Founder so your money first! • From savers to successful entrepreneurs • Own money • Small funds: from € 100k to € 0,5m • From € 10-100k • Old money: older persons (>50) • New money: younger persons (> 35)
FFF: who are they? • Close to entrepreneur • Personal relationship • Long time contact • Grandparents, aunts, uncles etc.
FFF: what do they seek? • Any industry • Objective is help not return • Information only, no control
FFF: how do they operate? • Through personal network • No due diligence • Give money, ask nothing • Could give unasked advise • Time frame in days • Hands-off even if going badly • Bankruptcy could mean end of relationship
Sponsors • Characteristics • Who are they? • What do they seek? • How do they operate?
Sponsors: characteristics • Companies • Own money • Fund: small, prefer barter deals • Deals: from € 100 - € 20k (goods/services) • Active managers (30-60) • Good network
Sponsors: who are they? • Local / regional companies • CEOs (SMEs) or marketing managers • New product (line) managers
Sponsors: what do they seek? • New customers: natural win-win • Contribute to their reputation • Show their expertise • Softly spreading their know-how
Sponsors: how they operate? • Through personal network • Strategic and thematic selection • No due diligence • Give goods /services • Ask promotion, contact details, exposure • Time frame in days, maximum weeks • Often the start of a long-lasting relationship
Banks • Characteristics • Who are they? • What do they seek? • How do they operate?
Banks: characteristics (I) • Professional lender • Loans (=lending) not equity (=investing) • (Life time) bankers • Other people’s money (3-6–3) • Funds: from € 10m to several € bn • From € 1k to several € 100m • Aged from 25 to 60
Banks: characteristics (II) • Focus on history • Risk averse, low return • Subsidiaries for asset-based finance • Leasing (cars, computers) • Factoring
Banks: who are they? • Commercial banks • Local, regional and national • No private banking banks • No merchant / investment banks
Banks: what do they seek? • Any industry (mostly) • Internally organised by sector/market • Demand security or collateral • Preference for existing/mature businesses • Lower risk bankruptcy • Lower risk non-payment (interest/redemption) • Good entrepreneurs / managers
Banks: how do they operate? • Intake through network • Low due diligence (referrals, analysis) • Time frame depends on size of loan/office • From weeks to months • Standard contracts • Focus: interest%, repayment schedule • Regular information • Hands off unless going badly
Equity investors General characteristics: • Focus is on future • Seek risk, expect high return • Buy shares • Temporary involvement • Seek (serial) managers/entrepreneurs
Types of equity investors • Business angels • Corporate investors • Venture capitalists • (Institutional investors)
Business angels • Characteristics • Who are they? • What do they seek? • How do they operate?
BA’s: characteristics • Successful business(wo)men • “Have been there, done that” • Invest their own money • Funds: up to € 1m, few larger • Deals: from € 15-200k, typically € 75k • Aged between 50-70 years, few younger • Driven by “giving something back” • Other agendas - fun, involvement • Profit less significant
Who are the BAs? • Executive angel • Active entrepreneurs, executives or consultants • Investments between € 50k - € 100k • Extra turnover, networking, hobby • Job seeking angel • Redundant executives • Work in the € 30k - € 70k area • Busy, active • Retired angel • Workaholics • Smaller amounts (€ 15k - € 50k) • Busy, active
What do BAs seek? • Small companies • Mostly active in markets they know • Growth in growing, large, empty niche markets • In 7-10 years potential turnover >100m • Also invest in seed phase • Nearby • Return • Profit through tradesale or IPO • Dividend, interest and fees • Likeable persons • In business (entrepreneur) and private (talk) • Mutual trust
How do BAs operate? • Intake • Via friends, family or business (angel) networks • Low due diligence • The deal • Straightforward structure • Veto rights, minority protection, anti-dilution • Time frame from several weeks to one month • After the deal • Close involvement: 1-3 days/week • Hands on unless going badly • Business devils
Corporate venturers • Characteristics? • Who are they? • What do they seek? • How do they operate?
CV’s: characteristics • Large, operating companies • Successful, cash rich • Invest company’s money • Funds: active € 10, passive € 200m • Deals: small (< € 0,2m) or large (> € 5m) • Active managers 30-60 years old • Objective strategic: market reconnaissance • Outside (but close) to own market • Profit less important
Who are the CVs? • Market leaders (or just below) in: • Technology (ICT: Intel, Life Science: BASF) • Telecom (Vodafone) • Consumer products (Unilever) • Capital goods (Siemens) • Quoted on the stock exchange • See www.evca.com
What do CVs seek? Active • Small companies/individuals (in or external) • Focussed on seed phase/technology • Incubate until ready for VCs • Buy when successful Passive • Mature businesses (MBOs, restructuring) • Direct: partner with VC’s • Indirect: fund of funds • Buy or trade sale (IPO)
How do CVs operate? Active • Intake through investment manager • Fast decisions, little due diligence • Simple deal structure • Hands-on even when going badly • Invest for the long run (> 5 years), buy when successful • Enhance your credibility, give access to network Passive • Direct: passive in deal structuring (VC) • Indirect: in investment committee • Sometimes in Board of Directors or Supervisory Board • Hands-off or buy when going badly
Venture capitalists • History of venture capital • Characteristics • Who are they? • What do they seek? • How do they operate?
History of venture capital • Started in USA in early 1900 • Rich families (e.g. Rockefellers) invested outside own conglomerate as business angels • 1st time distinction: ownership/management • After WOII: professional VCs • Early 60s: UK • Early 80s: continental Europe (banks in NL)
VC: characteristics • Professional buyers of share in private companies • Invest money of institutional investors (II) • II = LP, fund manager = GP • Funds: € 10m – € 15bn (!) • Deals: € 1m – several € 100m • Investment managers between 25–55 years old • Dealmakers with financial background • Objective is generating cash • Driven by building profitable/sellable companies
Who are the VCs? • 1. Private equity vs. venture capital • 2. Evergreens (mostly captives) vs. revolving funds • 3a. Large VCs (<10 in EU) • Funds: several € 1bn, deals: € 1m-250m • Sector and/or region specific sections/subsidiaries • Fund of funds • 3b. Medium sized generalists (100-200) • Funds: € 50-300m, deals: € 1m several € 10m • Private equity, venture capital and fund of funds • 3c. Niche VCs (< 100) • Funds: € 10-300m, deals: € 250k-5m • Focused on technology markets or niches • Combine investors with industry knowledge • Mostly venture capital
What do VCs seek? (I) Private equity • 90% (!) of money yearly raised • Mature companies with turnover > € 50m • Buy-outs mostly (MBO, MBI, IBO, BIMBO etc.) • No market specialisation • Return > 20%: € 10 in, 4 years later € 20m out • Financial engineering • Buy and build • Sale
What do VCs seek? (II) Venture capital • Young companies: seed, start-up, early stage • Large, global empty markets • Experienced entrepreneurs • Return > 50%: € 1m in, 4 years later € 5m out • Growth • Sale (trade or IPO) Investing is trust in people • PE = balanced management teams • VC = entrepreneurs
How do VCs operate? (I) • Intake • Receive more plans than read • Introduction via network • Selective: invest in 1% of business plans read • Extensive due diligence: 2 to 6 months • Market(ing), technology, management, legal, financial • PE: mostly external specialists • Syndicates (so no competition between VCs) • Deal-sourcing in other regions • Follow-on investments • Prevent entrapment • Control with minority share • Cross-border only with local lead
How do VCs operate? (II) • The deal • Sometimes complex deals • Management option scheme • Veto-rights, minority protection, anti-dilution • Board representation • Monthly or quarterly reporting • Control over exit • Investment committee decides • Typically 2 months
How do VCs operate? (III) • After the deal • Real work starts • Frequent contact in beginning • Support: knowledge, experience and network • Focus on: • Growth • Reporting • Exit • Hands-off unless going badly • No good money for bad money • Sell healthy part of company via network
Conclusion equity investors • BAs: money + market experience + network, long term, < € 0,2m in small fast growing companies, not for return only, local, hands-on • CVs: money + market knowledge + network + credibility, long term or short term, < € 0,2m or > € 5m in companies close to their market, active + hands-on or passive + VC, buy when successful • VCs: money + experience + network, professionals in private mostly mature companies (PE), PE: financial engineering & buy/build & exit, VC: growth & exit, return only, prefer syndication with local party, due diligence: 4-8 months
From start to finish (I) The more steps you complete the easier it becomes to raise finance: 1. Finalise your product (grants) 2. Find entrepreneur (yourself?) 3. Found company (own money, house, FFF) 4. Find business partners (sponsors) 5. Find customers and sell (auto-finance) 6. (Accelerated) growth (raise finance) continued on next slide
From start to finish (II) continued from the previous slide 7. Raising equity finance: • 1. Prepare business plan/presentation/pitch • With help of dedicated professionals? • 2. Research financial world • Business Angel Networks (BANs, www.eban.org) • EVCA/local VCAs (www.evca.com) • Networking • 3. Approach chosen potential investors • With help of dedicated professionals? 8. Later stage: MBO/MBI/Turnaround 9. Raising equity finance: see 7. 10. Sell: tradesale or IPO