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How to attract investors
Funding schemes and private investors
Paris
November 27th 2007
By
Uffe Bundgaard-Jørgensen, Ph.D.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 1
Gate2Growth is supported by the European Commission
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The paradox and the problem!
•
•
There is no lack of funding possibilities!
But there are thousands of good projects in vain seeking financing!
•
•
Private sources of funding require a competitive risk adjusted return of capital.
But only few projects offer this return.
•
•
Investors can only analyze very few projects.
But entrepreneurs think they read it all, do not know how to find the right investors.
•
•
Few project are tailored to meet investor requirements.
And investors are really looking for high growth opportunities they can understand!
BUT the diagnose of the”combined paradox & problem” is:
”LACK OF CAPITAL” !
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 2
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Sources of innovation financing.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 3
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Besides public support there are basically three
sources for innovation financing.
• Loans
– Provided by banks
• Equity
– Provided by investors
• Revenues !!!
– Generated from sales !
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 4
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Different view on the same project.
•
If you gather 10 Bankers in a room and ask them to judge if a loan appliaction shall
be granted.
–
–
–
•
In most cases they will agreee – at least on the principles.
The loan decision is rather objective than it is subjective.
Each bank will have the capacity to process a lot of loan applications.
But if you put 10 Investors in a room and ask them if they will invest in a project
presented.
–
–
–
8 of the Investors might prefer to ”run away” while the two remaining investors might be facinated by
the opportunity.
The investment decision is rather subjective than it is objective.
In contrast to the bank, the individual Investor only has the capacity to process a few selected deals.
•
Loan applications are typically processed by standardised methods.
•
Investment opportunities are assessed based on personal preferences and interest,
and through a thorough and sometimes lengthy due-diligence process.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 5
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The deal funnel
- Partner in the Gate2Growth initiative
Screening
process
Investor questions:
500 new deals/year
250 selected deals
10 min/deal
If I believe in the business
plan and the budgets
can I make money?
150 selected deals
20 min/deal
Do I believe in the business
plan and the budgets?
75 analysed deals
4 Hours/deal
Is it realistic ? Can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 6
Gate2Growth is supported by the European Commission
InvestorNet
The deal funnel
500 new deals/year
- Partner in the Gate2Growth initiative
Screening
process
2 min/deal
Investor questions:
Do I like the business
concept and - model ?
250 selected deals
10 min/deal
If I believe in the business
plan and the budgets
can I make money?
150 selected deals
20 min/deal
Do I believe in the business
plan and the budgets?
75 analysed deals
4 Hours/deal
Is it realistic ? Can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 7
InvestorNet
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Sector or business fit.
• If the Investor has experience from e.g. the Energy sector,
he will immediately be interested if you say:
– We can cheaply store and release MW of energy in the form of
hydrogen at room temperature and at atmospheric pressure –
and we have demonstrated it in ”real life”!
• If his experience is from e.g. consumer goods, he will
probably look elsewhere for new deals.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 8
Gate2Growth is supported by the European Commission
He may InvestorNet
be attracted by bigger and cheaper flat screens !
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Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 9
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… but only if the technical solution is good !
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 10
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The product shall be easy to understand
If you are not a scuba diver, you would not know what this strange product
is – Uffe
and
why it is good! © InvestorNet - gate2growth.com 2007- page : 11
Bundgaard-Jørgensen
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And the product shall solve a real need !
Uffe Bundgaard-Jørgensen
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What troubles investors in the clean tech and
energy sector ?
•
•
•
•
•
•
•
•
•
How efficient is competing technology ?
How energy price sensitive is the project ?
What does it cost to protect the concept and can it be done?
How easy/difficult is it to scale up/internationalize?
Barriers from rules & regulations in other countries?
Is there a real proof of concept under realistic conditions?
Dependence on political “whims” !
Often very capital intensive projects
Lack of understanding of barrier for market uptake
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 13
Gate2Growth is supported by the European Commission
InvestorNet
The deal funnel
500 new deals/year
- Partner in the Gate2Growth initiative
Screening
process
2 min/deal
Investor questions:
Do I like the business
concept and - model ?
10 min/deal
If I believe in the business
plan and the budgets,
can I then make money?
75 analysed deals
4 Hours/deal
Is it realistic ? Can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
250 selected deals
150 selected deals
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 14
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 15
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- Partner in the Gate2Growth initiative
Gate2Growth is supported by the European Commission
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Innovation
- Partner in the Gate2Growth initiative
Pre-Seed
Seed
Develop
business
application
Validate
innovation
potential
Round A
Spin out /
license
Structure /
grow
business
Labs
~ € 20k - 100k
~ € 100 – 500k
~ € 500k – 5m
Risk Profile
Funding Need
Time line
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 16
Round B /C
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The risk of Dilution
If more rounds of financing is expected, the
early investors face the ”risk of dilution”.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 17
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More rounds and increase in valuation.
Pre-money valuation
Series A
Uffe Bundgaard-Jørgensen
Amount invested
Series B Series C
Series D
© InvestorNet - gate2growth.com 2007- page : 18
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More rounds and decrease in valuation.
Pre-money valuation
Series A
Uffe Bundgaard-Jørgensen
Amount invested
Series B Series C
Series D
© InvestorNet - gate2growth.com 2007- page : 19
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How it should be !
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 20
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But be prepared for this!
Multiple attempts
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 21
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What does 30% or 50 % IRR mean?
Required growth in company value
16000
14000
12000
10000
8000
6000
4000
2000
0
-2000
Year 1
Year 2
year 3
Company value (30 % IRR) or 3 times back
Uffe Bundgaard-Jørgensen
Company value
year 4
year 5
Company value (40 % IRR) or 4 times back
© InvestorNet
- gate2growth.com
2007- page
: 22ownership)
(50 % IRR)
or 5 times
back
Investment
(33%
Gate2Growth is supported by the European Commission
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5 years growth requirement & ownership %
25000
Required company value in year 5
20000
15000
Investor ownership 50 %
Investor ownership 33 %
Investor ownership 20 %
10000
5000
30 %
IRR
40 %
IRR
0
Uffe Bundgaard-Jørgensen
30% IRR
© InvestorNet
40% IRR - gate2growth.com
50%2007IRR page : 23
50 %
IRR
Gate2Growth is supported by the European Commission
InvestorNet
The deal funnel
500 new deals/year
- Partner in the Gate2Growth initiative
Screening
process
2 min/deal
Investor questions:
Do I like the business
concept and - model ?
250 selected deals
10 min/deal
If I believe in the business
plan and the budgets
can I make money?
150 selected deals
20 min/deal
Can I trust the business
plan and the budgets?
75 analysed deals
4 Hours/deal
Is it realistic ? Can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 24
InvestorNet
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- Partner in the Gate2Growth initiative
NABI discovered that the highest-cost element to municipalities was
not the price of the bus per se, but rather the cost that came after
the bus was purchased: Maintenance of running the bus over its
twelve-year life cycle.
This made NABI create a bus unlikely any the industry has seen before.
NABI adopted fiberglass in making its busses killing “five birds” with one stone:
•
Fiberglass bodies are corrosive-free
•
Body repair is faster, cheaper and easier
•
Light weight (30-35% less than steel) cut fuel consumption
•
Light weight allowed the use of lower-powered engines and
•
fewer axles
All examples from the
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 25
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The NABI “blue ocean” strategy!
High
Average U.S. transit bus
Low
Initial
Corrosion
Purchase
price
Maintenance Fuel
Environmental Aesthetic
cost
consumption friendliness
design
Life Cycle cost
Source: Blue Ocean Strategy, Kim & Maubogne, 2005
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 26
Customer
friendliness
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The NABI “blue ocean” strategy!
High
NABI would not have won any tender
if they had not influenced the tender criteria from
Average U.S. transit bus
-Product price
to
- Life cycle cost
Low
Initial
Corrosion
Purchase
price
Maintenance Fuel
Environmental Aesthetic
cost
consumption friendliness
design
Life Cycle cost
Source: Blue Ocean Strategy, Kim & Maubogne, 2005
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 27
Customer
friendliness
InvestorNet
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ProRett examples – could ETV have been used ?
•
Solar cell related project
–
–
–
•
Recyckling project
–
–
•
Academic inventor with limited business experience
No serious scalable proof of concept
Energy storage
–
–
–
•
Interesting technology
Academic inventor with limited business experience
No serious scalable proof of concept
Interesting technology
Limited competitor analysis and price sensitivity analysis
Can be turned into an investment proposal
Biofuel project
–
–
–
–
Proof of concept outside lab missing
Limited competitor analysis and price sensitivity analysis
Business plan revised through ProRett intervention
Found investors and is now on a growth track
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 28
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The ”investor puzzel” to be solved
Energy
efficiency
documented
Uffe Bundgaard-Jørgensen
Technology
verified
Market access
estimated
Market
Size
estimated
Competitors
evaluated
Capital
requirement
correctly
estimated
Return of
investment
meeting
investor
requirement
Regulatory
compliance
Management
capabilities
© InvestorNet - gate2growth.com 2007- page : 29
Gate2Growth is supported by the European Commission
InvestorNet
The deal funnel
500 new deals/year
- Partner in the Gate2Growth initiative
Screening
process
2 min/deal
Investor questions:
Do I like the business
concept and - model ?
250 selected deals
10 min/deal
If I believe in the business
plan and the budgets
can I make money?
150 selected deals
20 min/deal
Can I trust the business
plan and the budgets?
75 analysed deals
4 Hours/deal
If it is realistic, can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 30
Gate2Growth is supported by the European Commission
InvestorNet
The deal funnel
500 new deals/year
- Partner in the Gate2Growth initiative
Screening
process
2 min/deal
Investor questions:
Do I like the business
concept and - model ?
250 selected deals
10 min/deal
If I believe in the business
plan and the budgets
can I make money?
150 selected deals
20 min/deal
Can I trust the business
plan and the budgets?
75 analysed deals
4 Hours/deal
If it is realistic, can this
management deliver the
promised results ?
50 negotiation
10 Days/deal
Ok, would you like to
meet us and discuss?
5-10
investments
1 month/
investment
Are you ready to start
serious negotiations.
490 rejected deals
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 31
Gate2Growth is supported by the European Commission
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Investor
Investor
Investor
Investor
Investor
Investors
Management
company
A typical
VC fond
Fund I
Porteføljeselskaber
Porteføljeselskaber
Porteføljeselskaber
Fund I
Fund II
Porteføljeselskaber
Porteføljeselskaber
Portfolio companies
Portfolio
companies Portfolio companies
PortfolioPorteføljeselssskaber
companies
Portfolio companies
Porteføljeselssskaber
Portfolio Companies
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 32
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Need 2 % to manage and will
request 10 – 20 % carried interest
Management
company
Investor
Investor
Investor
Investor
Investor
Investors
Fund I
Porteføljeselskaber
Porteføljeselskaber
Porteføljeselskaber
Porteføljeselskaber
Porteføljeselskaber
Portfolio companies
VC Fund I
Investors request
not less than Libor
+ 8% to 10 %
Fund II
Each Fund shall receive 15 % IRR
Portfolio
companies Portfolio companies
PortfolioPorteføljeselssskaber
companies
Portfolio companies
Porteføljeselssskaber
Porteføljeselssskaber
If risk is 50 %, then each Portfolio co. shall have the potential to generate 30+ % IRR
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 33
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New trends in the market.
Capital requirement
IPO/Stock market
Corporate investors/
Large Venture Funds
Business
Angels
Venture
Funds
FFF
Seed
Bank loans
Start-Up
Uffe Bundgaard-Jørgensen
Development
Growth M&A/Restructuring
© InvestorNet - gate2growth.com 2007- page : 34
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Understanding investors is imperative !
•
There is a need to understand how investors think and why they act as they do.
•
It is also relevant to know how they analyze investment opportunities.
•
There is a need to understand the fund raising process – from the start – to the
investment has been made and finally to the exit.
•
There is a need to understand how to structure the offering to the Investor and how
to make a business plan that become “the project of his dreams!” .
•
There is a need to know about the most important documents, and how they play a
role in the negotiation process.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 35
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 36
Gate2Growth is supported by the European Commission
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InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 37
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 38
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 39
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 40
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
InvestorNet
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 41
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
InvestorNet
Gate2Growth is supported by the European Commission
- Partner in the Gate2Growth initiative
What is considered as a good investment ?
• The business potential and strength and competence of the management
team.
• Good fit with investor preferences.
• The possibility to “protect” the business concept and the growth potential.
• Substantial capital gain possibilities.
• Predictable environment = not too much depending on political decisions
• Clear and realistic exit possibilities for the investor.
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 43
InvestorNet
InvestorNet
Address :
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DENMARK
Phone: (+45) 39 307 307
Fax : (+45) 39 642 396
Mobile: (+45) 40 521 645
E-mail: [email protected]
Uffe Bundgaard-Jørgensen
© InvestorNet - gate2growth.com 2007- page : 44
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- Partner in the Gate2Growth initiative