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AGENDA, Tuesday, 8 January 2008 Financing
Technology Ventures
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• Announcements
• 5-liner on Pain, Value creation Jury
• to johe_at_ipl.dtu.dk by end this week, please

Example Group NN is working within software
development Pain the new multi-core processors
require new programming techniques that are
difficult for programmers to adapt Value
creation group NN offers a software tool that
makes multicore programming easy and efficiant.
Companies will save money and stay competitive.
Software products will run better. Programmers
will maintain professional skills. Jury
programmers and software company management

• Sign up to the 3 min. Pitch, Tuesday next send a
  mail to
• Torben at TorbenHaugaardJensen_at_gmail.com

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• FINANCING Technology Ventures
• Agenda
• Capital for what ?
• Types of Capital
• Types vs. Business Development Phases Investor
  types
• The Investors Quality Criteria
• Evaluation of Companies
• Example cracking the numbers

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Capital for what? Business Development!
Risc Minded Patient Competent
Cash flow
Time
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• The entrepreneurs most important
• Capital Sources
• FFF
• In Kind Other peoples ressources
• Your first customer The more pain, the better
• Investors money Last resort
• unless you are in an extraordinary need for
  speed

Family, Friends Fools
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• Types of Capital
• You have it Savings, personal fortune
• You get it Grants
• You borrow it Loan capital
• You sell shares Share capital
• private equity
• equity capital

Try to reduce dependancy! Live on a Rock
Start selling! In kind
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• GRANTS
• Public Industrial Development Programs
• Ministerial focus area
• Private Foundations
• Etc.! See www.finansieringsguiden.dk
• http//www.investorwords.com/1873/factoring.html
• Comments
• Dream-capital for start-ups
• Hard to find but it happens
• In EU limit 200.000 EUR
• Grants are taxable income, but expenditures are
  tax deductable.

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• 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 - 2
• The 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 conditions
• Investor gets a strong handle bar
• Conversion right linked to milestone
  specifications. Eg. conversion rate linked to
  quantified performance.

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• SHARE CAPITAL private equity
• Investor 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 objectives
• The 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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• EXIT
• The inherent consequence of equity financing
• Investor converts assets to cash
• IPO Initial Public Offering Rare but rewarding
• Trade Sale Acquisition
• Management buy-out/buy-in Not best but ROI gt 0
• Earn-outs Even worse but ROI gt 0
• Repayment of loans Not sustainable for VC
• Enforcing preferences Cutting the loss

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• Capital types in Business development
• Before Kick-off
• Pre-seed investment own ressources, FFF,
  in-kind, first customer
• Venture Cases also special share capital
  (pre-seed)
• Start-up
• Seed investment share capital, special loans,
  own money
• Growth and commercial development
• Early stage, 2. round etc. share capital,
  ordinary special loans

Cash flow
Technology wears out
Time
Inflection Point first customer!
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Investors Pre-seed FFF the Business Angels
Innovation environments Seed Early Stage SEED
Capital Denmark Business Angels Venture Capital
companies (VC) Vækstfonden Second round,
follow-on VC and Corporate Venture
Capital Credit Institutions Banks Vækstfonden
Some stock exchanges like First North
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• The Investors Valuation Criteria
• 4P
• Perspectives Pain, market size/share
  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 gt 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

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Value

• Investors Valuation
• Principles 1

Valuation
Proof of Profit Proof of Scalability
Proof of Market Proof of Management
Growth potential substantiated
Exit opportunities substantiated
Risc
IPR estbl.
Proof of Concept.
First solid customer feedback.
Time
Proof of Principle.
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Investors Valuation Principles 2
Sellability
Valuation
Management
Market Potential
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• Dancing with Woolves
• Or how to deal with investors
• Capital always Wins
• Your investor has done this many times
• Your investor is not depending on you
• Your investor has lots of time
• Negotiating tactics
• Freedom of Maneovering
• Never enter negotiations without having
  fall-back positions.
• No major payments that jeopardize your project
• Your investor will find out at due diligence
• Dont 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 maneovering
• 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. Capital need lt DKK 1 mio -gt
Proof of Business app. DKK 5
mio -gt Proof of Market Kick-off DKK 125.000
DKK 250.000 Founders pre-seed
investor Private equity convertible loan First
Milestone DKK 500.000 Pre-seed investor
private equity Second Milestone DKK
5.000.000 Venture Capital Company private
equity Exit Profits (EBITDA) gt 20 mio. DKK
(Earnings Before Interest, Tax, Depreciation and
Amortization) Valuation based on Price
/Earnings (P/E) 10
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Kick-off DKK 125.000 shares and DKK 250.000
loan Shares founder pre-seed
investor Loan Pre-seed investor
DKK 135.000 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 account Total input of cash
DKK 375.000
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1. Milestone Contribution through capital
expansion Loan converted into shares at the
same time
DKK 500.000 is paied to the bank account Total
input of cash at MS1 DKK 875.000
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2. Round Contribution through capital
expansion New VC investor enters
DKK 5.000.000 is paied to the bank account Total
input of cash at 2R DKK
5.875.000
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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
• Founders 36.9 74 mio
• Investor A 23,1 46 mio ROI 60
• Investor B 40,0 80 mio ROI 15

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The End of the Game