Breakout is an Epi-V initiative, delivered by Transitions.

Module 7 – Where Angels Dare and VCs Fear to TreadShai Vyakarnam and Simon Pratten

VC Investment CriteriaVC Investment Criteria

• Global sustainable under-served market need

• Strong management team

• Defensible technological advantage

• Believable Plans

• 60% IRR

Defensible advantageDefensible advantage

• Intellectual Property Rights for example

• Patent

• Copyright

• Trademark

• Defensible market leadership

• against well-funded competition

• Niche Market share

• Brand

• Your personal values, culture, networks etc.,

Believable Plans – Exit ReadinessBelievable Plans – Exit Readiness

• Balanced Scorecard

• Business Plan

• Development Plan

• Marketing plan

• Adverts, mail shots, web-sites

• Sales Plans

• Distribution, Direct Sales

• Quality Plans

• Financial Projections

• Budget

• 60% IRR• Pay back financing in third year

• Cash flow

Rule of thumb – VC 101

• $1 = say 25%

• Post money = $4

• Need 10x = $40m value of company

• If PE ratio is say 8

• Need sales $320 to pay back VC

Why stages?Why stages?

• Risk/Reward profile differ

• Successive dilution

• Typically 30% dilution each stage

• Investment = pre-money valuation/2

• “Squeeze the Angels”

Round Investment Pre-money Post-money Founders FFF Angel VCA VCBand staff options

FFF 50 100 150 67% 33%Angels 500 1000 1500 44% 22% 33%VCA 5000 10000 15000 30% 15% 22% 33%VCB 10000 20000 30000 20% 10% 15% 22% 33%Total 15650Exit 100000 20000 10000 15000 22000 33000

All 15550 100 0.64%

Case Study

• Chance meeting in Liverpool and shared interest

• Set up informal joint venture leading to NewCo

• Where the final exit value was not considered – but the next tranche of money was…

Stages so far

1996 982004 05 06 07

LiverpoolHotel Coffee shop

100k 60k

New team

Early formation of teamBrainstormTechnical stuff

300

2m

AllOf zero

1/3rd

Of zero

8%

7.09%

Setting a desired exit valuation

Round 1 Round 2 Round 3 Round 4

001 01 10 100

Sh1 Issues shares

%

Sh2

Sh3

Sh4

Options

10,000,000

Seed round Angel/early VC Development C Round

Entrepreneurial/creativity = hard work, poor pay, informal communication

Direction = sustained growth; functional org structure,, capital mgmt, incentives, budgets and standard processes

Delegation = decentralised; operational and market level responsibility,; profit centres; decisions based on periodic reviews, top management acts by exception; formal communication styles

Co-ordination = Product groups; formal planning centralisation of support functions; corporate staff oversees coordination; corporate capital expenditure; accountability for ROI; lower level profit sharing

Collaboration = evolutionary path; team actions for solving problems; cross functional task teams; decentralized support staff, matrix Organisation; simplified control mechanisms; team behaviour education programms; advanced information systems and team incentives

Leadership

Autonomy

Control

Red Tape

Internal Growth?

Larry Greiner – Growth model

Recognise the realities of growth and be prepared for them

Crises of…

Growth through

Personal transitions…

Optimism

Pessimism

Time (n years+/-)

Sceptical

Raised money

Prototype slow

Bugger – no sales yet!

Business is suffering – spending too long on internal perspectives

Awayday we can do it

Dark nights

Major client signs

Hey maybe worth it

It works!

Aargh; Maybe; Denial of need for change; See small changes; success; reluctant acceptance; try new behaviours; makes a difference; not so bad; new behaviours are the norm…

To achieve desired valuations

• Management Team = A team/C product

• Customers, revenues – evidence

• IP

• Systems and procedures in places

• Governance

• Captured in the Balance Scorecard

Entrepreneurial business

Established business

Questions

• How will you look when you grow up?!

• Draw an Organisation chart as you are now

• And as you need to be at the time of exit

• What systems will you have put in place

• What KPIs will you have established and delivered?

• These are the crunch issues as you grow