Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.

1. The Art of Raising Money
Dr Peter Kelly
Director, Helsinki School of Creative Entrepreneurship

2. Business Plans = Sales Substance

3. Business Plans Sales Hype

4. Questions Your Business Plan
Must Address
1. Where is the company now?
2. What is your product or service?
3. What is your market?
4. How will you reach the market?
5. Who will you be competing against?
6. How will your product be produced?
7. Who are the people?
8. What are your financial projections?
9. How much money will you need?
10. What are the risks?

5. Of What Use is a Business Plan?
• it is a basis for convincing
yourself (and others) of the
underlying logic of the
opportunity
• compass
• venture capitalists “need to
have one on file” to signal
competence to their funders

6. The Uniqueness “Trap”
a supermarket typically carries 30.000 products
20.000 new products are introduced each year
285 varieties of biscuits (21 types of chocolate chip biscuits)
75 different choices among iced tea
230 choices available of soups
120 different pasta sauces
175 versions of salad dressing
360 choices among shampoos, conditioners and the like
200 distinct offerings of tea bags ...

7. The Uniqueness “Trap”
an electronic gadget store ...
74 types of stereo tuners
55 versions of CD players
32 tape players
50 sets of speakers
which can be combined in 6.512.000 ways!

8. An Enlightening Read ...

9. You Need To Have Competitors
We have no competition ... (we are
that clever!)
if there is none, there is no market
and/or
you have not done any background
investigation at all
Identify them, then profile them
what can we do that they can’t
what can they do that we can’t
Status quo is competition

10. You Need to Keep “Odds” in Mind
2000 business plans
200 are moderately
credible
100 are interesting
enough to read
40 undergo due
diligence
10 get
1 makes

11. Investors Read Exec Summaries
Not Business Plans
A good executive summary
captures the reader’s interest and imagination
conveys a clear picture of what you are trying to do
highlights the salient features of the proposition
establishes the management’s credentials at the outset
encapsulates the financial opportunity and key
projections
And thus persuades the reader to keep reading !

12. You Need A Mantra
two sentence max
description “what we
do” and “why should I
care” (what / so what)
10 / 20 / 30 rule
10 slides
20 minutes
30 point font +

13. Ten Slides In A Nutshell ...
1. Title slide
2. Problem
3. Solution
4. Business model
5. Underlying magic
6. Marketing and sales
7. Competition
8. Management team
9. Financial projections and key metrics
10.Current status, milestones, timeline, use of
capital

14. Backers Want To Know Why It Works?
Printer Ink Priced Like Oil ...
Brand Name Printer Ink $34 per ounce
Chanel No 5 Perfume $29
Dom Perignon Champagne $13
22 yr old Single Scotch Malt $ 7
$30 from HP Franchisor that fills similar
cartridges for $16.50

15. And Consider Why It Won’t Work?
$4,995 + taxes

16. Muslim on Mobile
phone designed for
world’s Muslims (1,4
billion potential)
loaded with Koran
alerts user for prayers
compass points direction
to Mecca
Ikone Mobile Telecommunications

17. In Touch

18. Style Not Stink
ventilated shoes
smelly feet are global
problem
company has numerous
patents
400 million in sales in
2004
Geox Corporation

19. No More Hangovers
“night before” sick leave
costs business $150
billion a year
Congress does not
require proof of concept
just proof of safety
50 remedies on market
but few back claims with
scientific proof
$7 million sales growing
at 160% per year
www.chaserplus.com

20. Immortal Status
You can’t apply for it!
Need to spend at least
$150.000 per year to
keep it
$2500 annual fee, 43
page manual
personal concierge

21. Deals Fall Apart Because of
Divergent Valuation Expectations

22. The Law of Valuation
Entrepreneurs always tend to place a high value
on what they do ... because ...
Investors always tend to place a lower value on
what an entrepreneur does ... because ...

23. Valuation In Perspective
Value is created when you satisfy burning
customer needs better than anyone else ...
Value has much less to do with number
crunching, spreadsheets, and sophisticated
financial engineering ...
Ask yourself, “what value am I creating?”

24. What Value Am I Creating?
Do I have something that?
• I can claim exclusive rights over
• actually works like we say it does
• is in demand
• can be exploited
• is scalable & profitable

25. What Value Has Been Created?
Do you have?
• patentable claims
• a working prototype
• paying customers
• a competitive advantage
• scalable & efficient business model
In the absence of any of this ...
what is the value?

26. The Value of a Raw Idea
In essence, you are trying to
put a value on unknowns, or
“thin air” ...
As we all know, air is a free
good, as such, the value of
thin air is ZERO

27. Implications
If outsiders see the value as zero, you have little
choice but to prove yourself by yourself
Financing yourself (bootstrapping) on matters
that boost valuation ...
Don’t obsess with spreadsheet modelling, get
out and see if it sells ...

28. $50 Million Value on Your Head (1998)
Investors throwing money at ...
untested ideas
unproven management team
demonstrably unprofitable business models
people with measurable pulses
who utter “magic words”

29. $50 Million Valuation (2005)
Individuals who have successfully built up a
number of entrepreneurial ventures, that grew in
leaps and bounds AND
Produced enormous wealth for themselves, their
partners, employees and investors in the
process
Been there done that, got several t-shirts!

30. Some Prudent Valuation Advice
Start on assumption that your idea’s value = 0
Valuation is created by tangibly demonstrating
you have something worth protecting (patent)
you have something to sell (prototype)
you have recruited (others buy into vision)
you have sold something (customer buy in)
you have a track record (able to show financial statements &
projections NOT just projections)
you over deliver (exceed objectives)

31. Milestone Valuation Method
Break your project into “digestable bits” ...
Investigating and filing a patent
Development of a working prototype
Securing a pilot customer
Development of a “go to market” product
Signing up x number of distributors
Opening up x number of foreign offices
Each “bit” needs to address technology, market or
people risk (preferably all three at once!)

32. Valuation Working Backwards
What magnitude of capital is required for your
project to really fly?
50 million +
10 million +
5 million +
1 million +
½ million +
or less ...

33. Valuation Working Backwards
What magnitude of capital is required for your
project to really fly
Entrepreneur’s Stake
50 million + 10% or less
10 million + 20% or less
5 million + 40% or less
1 million + 60% or less
½ million + 75% or less
or less ... 90% or less
why is this?

34. Growth Requires Fuel (Capital)...
Capital Requires Return
Early financiers of the company are typically
you, FFFs, and public sector bodies
Business angels and venture capital funds want
to see ...
proof of concept
proof of market (traction)
scalability (business model)
prospect of return (growth story)

35. Angels
Invest their own money and expertise early
Want to see 5x return on capital in 5-7 years
Typically invest with their mates up to 500,000
for minority equity stake (<50%)
My 500,000 for 25% of your firm has to
create a business worth 12 million in
5 to 7 years’ time

36. Venture Capitalists
Invest other people’s money later on
Want to see 5x return on capital in 3-5 years
Typically invest 5 million and more with a major
stake in the business (often 50%+)
My 5.000.000 for 50% of your firm has
to create a business worth 50 million
in 3 to 5 years’ time

37. Non Disclosure Agreements
Few investors actually agree to sign them ...
never ask them to sign one to have a first meeting
never ask if you want to discuss your idea
circulate an executive summary and powerpoint pitch
freely but do not reveal the “magic sauce”
if the investor wants to discuss the “magic sauce” in
detail, then insist upon an NDA
The best protection for an idea is superb
implementation of it (and perhaps a patent) ...

38. Valuation: Some Take Aways
Entrepreneur should consider the following ...
how much money will it take to really fly?
what milestones exist between push back and take off?
how much is required to achieve each milestone?
work backwards ...
Valuations are negotiable particularly when ...
you are a serial entrepreneur
there are numerous bidders
performance against milestones can be tangibly measured
Guy Kawasaki’s Law of PreMoney Valuation ...
for every full time engineer (+$500,000)
for every full time MBA (-$250,000)

39. HIGH RISK
Founder, family,
friends, fools
Business Angels
Venture Capitalists
Corporates
Public Equity
Markets
Commercial Banks
LOW RISK
START-UP MATURITY

40. Fund Raising Advice
Think small: what do I really need?
Wear “investor eyeglasses”
Specify milestones
Do your homework before approaching
Do not be put off by the word “no”
Respect Murphy’s Law of Venture Building