what investors look for_serhat görgün

Entrepreneurship (from Investor’s Perspective)

Serhat GörgünInovent Inc.

General Manager06.07.2009

METU, Ankara

© Inovent 2009 - Confidential

AGENDA

• Stages of Financing• The Process of Acquiring Financing• Investment Decision Criteria• Investment Turn-Offs• Attributes of Great Investors• Investors’ Contribution


Stages Of Financing


Stages Of FinancingSeed stage financing• The venture is still in the idea formation stage and

its product or service is not fully developed. • The founder/inventor is given a small amount of

capital to come up with a working prototype. • It's rare for a venture capital firm to fund this

stage. • In most cases, the money must come from the

founder's own pocket, from the "3 Fs" (Family, Friends, and Fools), government grants, seed funds and occasionally from angel investors.


Stages Of FinancingStart up financing• The venture at this point has at least one commercial

prototype and/or customer paid for the product/services.

• The venture has at least one principal working full time. • The search is on for the other key management team

members and work is being done on testing and finalizing the prototype for production.

• Seed and early stage VC investors as well as angels invest at this stage


Stages Of FinancingFirst -stage financing• The venture has finally launched and achieved initial

traction. • Sales are trending upwards. • A management team is in place along with employees• The funding from this stage is used to fuel sales, reach

the breakeven point, increase productivity, cut unit costs, as well as build the corporate infrastructure and distribution system.

• This stage is where VCs play active role in investment


Stages Of FinancingSecond -stage financing• Sales at this point are starting to snowball. • The company is also rapidly accumulating

accounts receivable and inventory. • Capital from this stage is used for funding

expansion in all its forms from meeting increasing marketing expenses to entering new markets to financing rapidly increasing accounts receivable.• Venture capital firms specializing in later stage

funding enter the picture at this point


Stages Of FinancingMezzanine or Bridge financing• At this point the company is a proven winner and it is agreed to

take it public within a defined period of time (eg 6 months).• Mezzanine or bridge financing is a short term form of financing

used to prepare a company for its IPO. This includes cleaning up the balance sheet to remove debt that may have accumulated, buy out early investors and founders deemed not strong enough to run a public company, and pay for various other costs stemming from going public.

• The funding may come from a venture capital firm or bridge financing specialist. They are usually paid back from the proceeds of the IPO.


Stages Of Financing

Initial Public Offering (IPO)• The company finally achieves liquidity by

being allowed to have its stock bought and sold by the public.

• Founders sell off stock and often go back to the beginning with another startup.


Why Early Stage Investment is needed?

1. Financing of product development2. Financing of market penetration3. Financing of investments4. Working capital financing to secure operative

continuity5. Maintaining liquidity to be able to cover daily

payments


Being in Need vs Being Ready• Entrepreneurs don't understand the difference between having a need

for capital and being ready to ask for it. Because entrepreneurs are motivated to seek capital based on need, not readiness.

• When an entrepreneur is driven by a strong sense of need, the message they send to an investor is one or more of the following:– I'm unwilling to invest any more of my money, so I need yours. – I haven't been able to raise money from anyone else, so I need you to save me.

• On the other hand, when an entrepreneur has "done their homework" and truly understands what it takes to run a business, the message they send is:– I'm ready for a partner to help me take this to the next level. – I have a handle on my product, my market and my customers, and I'm ready to accept an

investment that'll help me grow. – I've researched the various sources of capital available to me and I'm ready to work with

you because you're the best match.


The Process of Acquiring Financing

Introduction Meeting Due-diligence

•Fast Pitch•Executive Summary

•Quick view•Informal Dialogue•Informal Due-diligence•Formal Presentations•Business Plan

•Investment Decision •Formal Due-Diligence•Closing Documents•Valuation

% 90 Fail100 => 10

% 50 Fail10 => 5

% 50 Fail5 => 2-3

Investment

Term-SheetShareholders’ Agreement


Introduction

• This is the stage where most (about 90 %) of all proposed projects are rejected.

• The initial assessment is made relatively rapidly and therefore the company should pay attention to two aspects:

• a short description of the company (elevator pitch),and/or• a well-prepared business plan summary is the best

means of attracting and convincing the investor.


IntroductionFast Pitch Checklist1. Who We Are

Profile yourself and your team’s capabilities. 2. What We Got

Describe your opportunity, market need/pain and solution. Specifically describe your traction in your market space. For example, letters of intent from marquee customers or recurring revenues.

3. Where We’re GoingOverview of your growth benchmarks/milestones and the market potential of your technology.

4. What We NeedDo not offer specific financial needs. Just be prepared to answer privately. Consantrate on non-financials.

5. Why NowState what has changed in the world that opens up the window to your particular opportunity.

6. What We OfferDescribe a basic understanding of how you will provide a return on investors’ money.


IntroductionExecutive Summary:Very few Investors read detailed Business Plans in the very first stage. Instead

you need a 1 or 2 page “Executive Summary” which includes such things as: a company background, a description of the business, what problem you are solving, what is special about the way you are solving it, the management team, details about the market you are addressing, summary financial information, a technical presentation your business model.







% 90 Fail100 => 10

% 50 Fail10 => 5

% 50 Fail5 => 2-3

Investment

Term-Sheet Shareholders’ Agreement


MeetingAfter you’ve made a great first impression, your next objective

as an entrepreneur is to make an even better second, third, fourth and fifth impressions.

And this requires continuing to clearly communicate the value that you and your business idea bring to the table.

Should the investor decide that the investment request meets his criteria, the following step is a meeting arranged with the company management.

A presentation of the business is required.Experience has shown that about half of the remaining

companies are discarded at this stage


Presentation:1. Cover Slide

This first slide and discussion should help position your venture so the investors have a framework for listening. - Include the name of your venture - The presenter’s name, the title - A concise one-sentence Value Line statement (”What we do”)

2. New Business Venture Opportunity and Analysis - Problem: describe the pain of the customer, why they need your product - Describe how the customer addresses the issue today - Solution: describe how your solutions, value proposition, makes the customer’s life better. - Market size: describe how much headroom is available, how big is the market? - Competitor analysis: what we do better, what they do better

3. Business Strategy and Competitive Advantage - Business Strategy; Competitive Advantage and Business Model

Meeting


Presentation:4. Venture Team Development and Management

- Founders and management - How came together, how funded - Board of directors and advisors

5. Controlling and Allocating Critical Capital Resources - Where are you in the product pipeline, roadmap? - Briefly discuss your product features - What kind of special resources required?

6. Market Entry Strategy - Prepare a simple “Value Map” - Describes how your product physically gets to the end customer

Meeting


Presentation:7. Marketing and Sales Strategies

- Who is leading the venture team for sales? - Revenue Model: can describe it in 1 minute or less! - Revenue event, when? How?

8. Managing Rapid Growth - Which type of growth strategy? - How will you manage the growth (prevent a stall?) - How about going global?

Meeting


Presentation:9. Financing Strategy

- How much? (Answers: “what do you need to get this done?”) - When do you need the money? Other rounds down the road?

10. Exit Strategy and Exit Goals - What are some potential exits? - What are some of the examples in the space? - What are you doing today for these to happen?

11. Conclusion Slide - Focus on Why Now - Describe the inflection points in your industry - Describe recent trends that makes your solution viable today - How your company is set on capitalizing on the recent trends

Meeting







% 90 Fail100 => 10

% 50 Fail10 => 5

% 50 Fail5 => 2-3

Investment



Due Diligence• Due-Diligence stage (also called Negotiation Stage),

involves a thorough study of the target company by the investor who assesses the company on the basis of his own, weighted investment criteria.

• At this stage it is critical to assess:• the market and the opportunity• the entrepreneur and the management team• the technology• competition• the financials


Due Diligence

Assessing the Opportunity• How big is the market?• How competitive is the space?• What’s the average product cycle time?• Will this define a market?• Where is the competition heading?• How hard is it to sell?


Due Diligence

Assessing the Entrepreneur and the Management Team• Understanding motivations• Determining commitment level • Determining willingness to sacrifice• Judging appetite for risk• Assessing expertise• Appraising entrepreneur’s leadership abilities and

vision


Due DiligenceAssessing the Technology• Is it a breakthrough or just evolutionary?• Is it protectable?• How easy is it to replicate or substitute?• “Nice to have” vs “Must have”• Is the success of the enterprise dependent on the success or

uniqueness of the technology?• How mature is the technology?• What’s the time to market?• What’s the technical risk?


Due Diligence

Assessing the Competition• Understand where the competition is going,

not just where it is today• Rate how innovative the competition is• Predict how they will respond to your offering• Compare leadership teams• Consider switching cost


Valuation:• Early-stage valuation is an art, not a science.• Needs to be high enough to reward entrepreneurs for risk

(quitting job, etc.)• Needs to be low enough to allow step-up at Series B round.• Irrational but true: Valuation depends on the amount of

money being raised!• There are two approaches to making investment decisions by

means of discounted cash flows. One is the net present value method (NPV), and the other is the internal rate of return (IRR) method.

Due Diligence







% 90 Fail100 => 10

% 50 Fail10 => 5

% 50 Fail5 => 2-3

Investment



Investment Decision CriteriaProduct-Market Factors:• Market Growth And Attractiveness• Uniqueness Of Product And Technology• Degree Market Already Established• Market Size• Seasonality Of Product-Market• Sensitivity To Economic Cycles


Investment Decision Criteria:Strategic-Competitive Factors:• Ease Of Market Entry• Ability To Create Post-Entry Barriers• Sustained Share Competitive Position• Nature And Degree Of Competition• Strength Of Suppliers And Distributors


Management Team Factors:• Leadership Potential Of Management Team• Leadership Potential Of Lead Entrepreneur• Recognized Industry Expertise In Management Team• Track Record Of Lead Entrepreneur• Track Record Of Management Team

Management Competence Factors:• Marketing/Sales Capabilities Of Team• Process/Production Capabilities Of Team• Organizational/Administrative Capabilities Of Team• Financial/Accounting Capabilities Of Team

Investment Decision Criteria:


Financial Factors:• Time To Breakeven• Time To Payback• Expected Rate Of Return• Ability To Cash Out

Fund Factors:• Business Meets Fund Constraints• Business And Product Fit With Fund Portfolio• Ability Of Investors To Influence The Deal• Location Of Business Relative To The Fund



Deal Factors:• Stage Of Investment Required• Number And Nature Of Co-Investors In Deal• Ability To Syndicate Deal• Scale And Chance Of Later Rounds Of

Financing• Importance Of Unclear Assumptions



Turn-offs• “Me too”• Low Barriers to Entry• Entrepreneur’s willing to cash-out with the

investment• “Missionary”• Large follow - on capital needs• “Keep the lights on” capital raise• Multiple target markets addressed at early stage of

company

35© Inovent 2009 - Confidential

Post Investment Challenges

• Developing the team• Bringing products to market• Use of Funds• Beating the competition– Focus on reliability and performance rather than

features– Be responsive to customer needs and take the

customer’s point of view



• In the end, the investment is made in about 2 to 3 % cases of all received investment requests.

• The parties finally make a shareholder agreement to establish practical operating rules.

• Investor’s exit could be anything between liquidation and IPO.

• The intention is to liquidate the shareholding in early phase companies after 4-8 years and in companies with follow-on funding after 1-3 years


Attributes of Great Investors• Bets on people not trends• Driven by the big idea• Looking for the big winner• Not afraid of failure• Knows how to thread the needle to get success• Understand how to develop and manage a portfolio of risk• Serves as a fantastic coach• Does his/her best work outside of the board room• Not waiting for validation from other Investors


Strategic

- Serve as a sounding board in crafting and flight testing ideas and strategies.

- Business consultant with unique industry experience.

- Developing, negotiating agreements, and executing strategic partnerships.

- Developing and executing acquisition strategies.

- Developing financial plans and assisting in follow-on rounds of funding.

- Developing a global business strategy.

- Negotiating licensing or royalty agreements.

Investor’s Contribution to Entrepreneur


Social and Supportive

- Company building experience.

- Can help manage the transition from entrepreneurial to professional

management structures.

- Been around in hard times, providing sound advice and encouragement.

- Have a complete repertoire of mistakes and stories to share.

- Knowledgeable of industry trends and exposed to insider knowledge seeing

deals and plans.

- Vital business coach, mentor and personal friend, confidant.

- Support for, during and after initial public offerings or other liquidity events.



Network Effect

- Credibility to venture team.

- Helping recruit key management and board members.

- Providing access to industry experts and knowledgeable advisors.

- Providing access to the right professional service providers, e.g. legal and accounting firms.

- Instrumental in opening doors to key marquee customers that otherwise might not take a new

venture seriously.

- Instrumental in opening doors to key suppliers.

- Introducing the venture team to other private equity investors.

- Providing access to the investment bankers for preparing a viable exit.

- Providing access to executives overseas for strategic alliances, investments and resources.

- Making key contacts with banks and leasing companies.

- Providing a close-knit relationship with other ventures in the portfolio.



Due-Diligence (The Other Way Around)

• Structure of an Investor

• Questions to Ask About Investors When in the entrepreneurial life cycle do they prefer to invest?

What business sectors/niches do they prefer?

How much do they typically invest per deal?

What is their average size of investment? Minimums and maximums.

Do they have any industry experts in their firm?

In which ventures in your space have they already invested?

How are their investments typically structured? Do they prefer to lead deals?

With whom have they completed conjoined deals?

What is their geographic focus?

Who are the key partners? What are their backgrounds (degrees, companies, etc.)?

What is their network effect potential?


Turkey’s intellectual property management and innovation commercialization HUB


THANK YOUTHANK YOU

Serhat GörgünSerhat GörgünInovent Inc.Inovent Inc.General ManagerGeneral Manager

Address: Hacı Muhittin SkAddress: Hacı Muhittin SkKanlıca/Beykoz/İstanbul/Turkey Kanlıca/Beykoz/İstanbul/Turkey

0 216 537 72 000 216 537 72 00

www.inovent.com.tr


http://www.inovent.com.tr/

Serhat GörgünInovent A.Ş.Genel Müdür

Adres: GOSB Teknokent High-Tech Bina41480 Gebze/Kocaeli/Türkiye

0 262 678 89 00www.inovent.com.tr

10.04.23 © Inovent 2009 - Confidential

http://www.inovent.com.tr/

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