institut for produktion og ledelse danmarks tekniske universitet john heebøll vÆksthus+ agenda,...

Institut for Produktion og LedelseDanmarks Tekniske Universitet

John Heebøll

VÆKSTHUS+

AGENDA, Thursday, 26 October 2006

Meet Your Assistant Teachers

Financing Technology Ventures


John Heebøll

VÆKSTHUS+

Meet Your Assistant Teachers

• Anne Louise Johansen• Baya Tuvshintugs• Esben Christensen• Hjalte Højsgaard• Knud Lundgaard-Karlshøj• Lars Høy


John Heebøll

VÆKSTHUS+

FINANCING Technology Ventures

• Financing Technology VentureJohn Heebøll

• SEEDCapital Denmark Peter Tøttrup

• Vækstfonden Eric-Alan Rapp


John Heebøll

VÆKSTHUS+

FINANCING Technology VenturesAgenda• Capital: for what ?• The Sources: Origin of Capital• Types related to Business Development• Investors: types• The Capital Market• The Investor’s Judging Criteria• Evaluation of Companies• Example


John Heebøll

VÆKSTHUS+

Capital: for what?Business Development!

Risc MindedPatientCompetent

Time

Cash flow


John Heebøll

VÆKSTHUS+

The entrepreneur’s most importantCapital Sources

• FFF Family, Friends & Fools• In Kind Other people’s

ressources• Your first customer: The more pain, the

better• Investors’ money Last resort


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Origins of Capital• You make it unnecessary

Live on a Rock Start selling!

In kind• You have it: Savings, personal

fortune• You get it: Grants• You borrow it: Loan capital• You sell shares: Share capital

private equity


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VÆKSTHUS+

GRANTS• Public Industrial Development Programs• Ministerial focus area• Private Foundations• Etc.! See www.finansieringsguiden.dk

Comments:• Dream-capital for start-ups• Hard to find but it happens• In EU: limit: 100.000 EUR• Grants are taxable income, but expenditures

are tax deductable.


John Heebøll

VÆKSTHUS+

LOAN CAPITAL• Banks• Credit Institutions like FIH• Private debt providers• Special products like Vækstkaution, Mezzanine

capital etc.

Comments:• Cheap for the entrepreneur – Expensive for the Company

Paied back by the company. The entrepreneur preserves ownership• Personal collateral mandatory in the start-up phase.

If business flops: repayment after personal tax. No tax-deduction!• Investor runs a business• Never forget it in the momentarily enthusiasm


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LOAN CAPITAL - 2The Convertible Loan• Normal interest and repayment profile• Can be converted into share capital on specific

conditions and specific milestones

Comments:• Some advantages in the start-up phase

Less initial dilution of the founders.Investor may convert to preserve ownership at new funding rounds.

• Check the conditionsInvestor gets a strong handle barConversion right linked to milestone specifications. Eg.: conversion rate linked to quantified performance.


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SHARE CAPITAL – private equityInvestor buys shares in the company• At kick-off with the founders• Later: at capital increase (Funding rounds)

Comments:• Expensive for the entrepreneur – Cheap for the Company

Nothing to pay back - but founders are diluted. Think about that, when valuation passes a gazillion.

• Possible mismatch in longterm objectivesThe investor wants a rapidly expanding business – to be sold at the right time, whereas the founders may have completely different personal goals and they are probably also more risk adverse


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EXITThe inherent consequence of equity financingInvestor converts assets to cash

• IPO: Initial Public Offering Rare but rewarding

• Trade Sale Acquisition

• Management buy-out/buy-in Not best but ROI > 0

• Earn-outs Even worse but ROI > 0

• Repayment of loans Not sustainable for VC

• Enforcing preferences Cutting the loss


John Heebøll

VÆKSTHUS+

Capital and Business development• Ante - Kick-off

Pre-seed investment: own ressources, grants, in-kind, FFFVenture Cases: also special share capital

• Start-upSeed investment: share capital, special loans, own money

• Growth and commercial developmentEarly stage, 2. round etc.: share capital, special loans

Time

Cash flow

Technology w

ears out

Inflection Point: first customer!


John Heebøll

VÆKSTHUS+

InvestorsPre-seed

FFF Innovation environments

Seed – Early StageSEEDCapital DenmarkBusiness AngelsVenture Capital companies (VC)Vækstfonden

Second round, follow-onVC and Corporate Venture CapitalCredit InstitutionsBanksVækstfondenSome stock exchanges like First North


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The Danish VC MarketInvestments in mio. DKK

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

1998 1999 2000 2001 2002 2003 2004

Mio

. kr.

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

Årl

ig v

ækst

I alt (venstre akse) Årlig tilvækst (højre akse)

DO

T-C

OM

col

laps

e

Sep

tem

ber

- 11


John Heebøll

VÆKSTHUS+

The Investors Valuation Criteria

4P• Perspectives Pain, quantified pain-relief, exit-op.• Persons Track records, competencies, ambition• Platform Proof of principle, concept, value, pull, profit• Process The project acc. to the Business Plan

Comments:• Must be a Venture Case: ROI > 10 in less than 5 years.

(126 rule)• The team is the singlemost important precondition• Platform: the more commercial proofs, the better.

Commercial proofs reflect risk and competence


John Heebøll

VÆKSTHUS+

The Investors Perceived Valuation - 1

Valuation

Time

IPR estb

l.

First s

olid cu

stomer f

eedback.

Growth potentia

l substa

ntiated

Proof o

f Prin

ciple. Pro

of of C

oncept.

Proof o

f Marke

t

Proof o

f Exp

andability

Exit opportu

nities s

ubstantia

ted

Proof o

f Pro

fit

Proof o

fGro

wth


John Heebøll

VÆKSTHUS+

The Investors Perceived Valuation - 2

Management

Mar

ket P

oten

tial

Saleability

Valuation


John Heebøll

VÆKSTHUS+

Dancing with Woolves Or how to deal with investors• Capital always Wins• Your adversary has done this many times• Your adversary is not dependent on you• Your adversary has lots of time

Negotiating tactics:• Freedom of Maneovre

Never enter negotiations without having fall-back positions.• No major payments that jeopardize your project

Your investor will find out at ”due diligence”• Don’t go for money unless you can do without

Make that clear from the beginning• If you are asked for exclusivity: it costs (all claims cost)

Exclusivity reduces your freedom of maneovre• Try to get more investors into the game – transparently• The more proofs before investment – the better• Strategic partners also an asset• Get yourself a management team before opening the game


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EXAMPLE: GBQ Ltd.PRECONDITIONS

Kick-off: DKK 125.000 + DKK 250.000Founders + pre-seed investorPrivate equity + convertible loan

First Milestone: DKK 500.000Pre-seed investor: private equity

Second Milestone: DKK 5.000.000Venture Capital Company: private equity

Exit: Profits (EBITDA) > 20 mio. DKKEBITDA: Earnings Before Interest, Tax, Depreciation and Amortization. P/E ~ 10


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Price per 1 kr. Nominal 1,00Nominal Contribution Ownership

Founder 100.000 100.000 80%Investor A 25.000 25.000 20%Total 125.000 125.000 100%

Kick-offDKK 125.000 shares and DKK 250.000 loanShares: founder + pre-seed investorLoan: Pre-seed investor

DKK 125.000 is paied to the bank account of the newly formed company. (DKK 10.000 is paied in start-up costs)

Convertible loan, DKK 250.000 is paied to the bank accountTotal input of cash: DKK 375.000


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VÆKSTHUS+

1. Milestone Contribution through capital expansionLoan converted into shares at the same time

DKK 500.000 is paied to the bank accountTotal input of cash at MS1: DKK 875.000

Founder 100.000 0 0 100.000 62%Investor A 25.000 500.000 25.000 50.000 31%A's loan 250.000 12.500 12.500 8%Total 125.000 750.000 25.000 162.500 100%

Valuation pre-money: 2.500.000Valuation post money: 3.250.000

Value of founder's shares: 2.000.000 postValue of investor's shares: 1.250.000 post


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VÆKSTHUS+

2. Round Contribution through capital expansionNew VC investor enters

DKK 5.000.000 is paied to the bank accountTotal input of cash at 2R: DKK 5.875.000

Price per 1 kr. nominal: 46,15

Nom. ante Contribution Contrib. Nom Nom. Post OR post

Founder 100.000 0 0 100.000 36,9%Investor A 62.500 0 0 62.500 23,1%Investor B 5.000.000 108.333 108.333 40,0%Total 162.500 5.000.000 108.333 270.833 100,0%

Valuation, pre-money: 7.500.000Valuation, post money: 12.500.000

Value of Founder's shares: 4.615.385


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Exit

Rule 126: 100 mio T/O, 20% revenues (EBITDA) in 6 years

Profits (EBITDA) = 20 mio. DKK. (T/O ≈ 100 mio. DKK, 30 – 60 employees)

P/E ~ 10

Price: 10 X 20 mio. DKK = 200 mio. DKK

• Founder: 36.9% 74 mio• Investor A 23,1% 46 mio ROI = 60• Investor B 40,0% 80 mio ROI = 15


John Heebøll

VÆKSTHUS+

Phew!

institut for produktion og ledelse danmarks tekniske universitet john heebøll vÆksthus+ agenda,...

Documents

mezzanine capital

origins of capital

capital market

origin of capital types

loss slide

north slide

enthusiasm slide

risk adverse slide