Topics

1. Topics • The “City” • Sources of money to finance new/early stage companies • How much money do you need? • Company valuation

2. The “City” What is the “City” Do we need it? What does it do? Whose money is it?

3. 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!

4. The “City” - Example Collectively we have lots of money Companies need finance to fund business activities and growth Banks, fund managers, Pension funds etc Need large sums of money for years Lots of small amounts of money deposited for short periods

5. The “City” - Example • Exporting company wins $50M contract in USA. • Get paid on completion June 2014 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 2014 at today’s rate (future contract)

6. 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?

7. 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

8. Sources of Funding You, your friends & family Venture Capitalists Banks IPO Stock Exchange Grants & awards Business Angels Mature company Startup Maturity of Business or………… organic growth

9. The Funding Ladder Capital required Possible sources for finance £10m+ IPO £5m+ Trade sale £5m - £20m Venture capital FUNDING GAP £25k - £500k Business angels, Seed funds, Grants <£25k TTOs , Friends and family, Grants Note: Requirements & sources vary, e.g. trade investors at any stage

10. 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

11. 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

12. 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

13. 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

14. 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

15. How Much Money Will You Need? Answer Must prepare a Cash Flow Forecast for the business

16. Cumulative Cash Flow of a New Business Promised Land Cumulative Cash Flow Valley of Death How much investment do you need? - at least double what you think!

17. How Much Money Will You Need? • Cost Projections - Complicated but EASY • In your control - Get it right • Include ALL COSTS • Revenue Projections - Simple but DIFFICULT • = Price x VolumeMarket 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?

18. Valley of Death How big is the Promised Land? • IT • R&D co. Biotech • Shallow and short • £50K for 6 months • Deep and Long • £50M for 10 years • Up to you • Up to you

19. What is the Value of a New Company? Internal valuation methods: Future Profits Others: Customer base Brand Technologists brain Spend to date • Multiple of revenues or profits • What if none for years • None • None • Surprisingly yes! • (as part of a management team) • E.g. R&D money spent

20. What is the Value of a New Company? External valuation methods: Comparison to similar companies £1M per bench scientist (biotech) • We’ll be worth £80M in 6 yrs • As good as any other Impossible to value correctly so why bother? Does the value of matter?

21. Yes…. if you need equity investment Offer £5M for 33% equity = £15M i.e.; current value of company = £10M

22. 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

23. Company Valuation and Ownership Stage 1: Valuation £10,000 Stage 2: Valuation £750,000 Founders University 33% 33% Founders 50% 50% Seed Fund University Stage 3: Valuation £10m 33% 25% Founders Seed Fund 5% VC 5% University Note: Shareholdings will vary Managers 5% £6m 60% COMPANY Guides

24. Provision of Early Stage Venture Capital in London Venture Capital Investment by Stage – London (£m) Note: periods shown are for year to 31 December Source: BVCA Report on Investment Activity COMPANY Guides

25. UK and OECD countries – VC Investment as % of GDP 1998-2001 Investment in venture capital as a % of GDP, 1995-1999 UK Source: OECD (note definitions vary) COMPANY Guides