We had Jacques Lapointe of AVAC discuss how to avoid "re-running" the same mistakes that commonly plague startups in Alberta for AcceleratorYYC's March 1 hr Lunch & Learn (slides & audio below).
2. Today’s Topic
Alberta start-up landscape
AVAC has 1000’s of AB companies
AVAC portfolio of 50+ companies
Hands-on experience working with
the Founders of early stage cos.
Start-up stage scaling
operating growth exit.
Seen issues from:
Fund Raising Cash Management
Financial Planning Exit
Etc.
Lots of common patterns
Lots of common mistakes
Avoidable “Re-run Movies”
Avoidable mistakes
2
BACKGROUND
About Me
6+ years at AVAC
Lead/co-lead $19 Mil Investment
12 investee companies
Portfolio has raised over $55 Mil
in equity and debt.
Board Participant/Advisor for
Portfolio
15+ years Prior to AVAC
Product Management, Marketing,
Business Dev., Operations and
Technical experience
(Public/Private Co.s)
NA and International experience
Lead investigation for acquisition
Helped grow revenue $0.5-$14MM
4 awarded patents
MBA, P.Eng.
3. Every company and every situation is unique!!
Some themes / recommendations in this
presentation may apply more to some businesses
versus others.
There’s always more to the issue than we can
discuss!! Some simplification here!
Focus is on early stage companies.
While not obvious, the Focus here is on the Financial
Impact.
This is an Alberta Story!!!!!!! Based on real examples.
Let’s have some discussion 3
REALITY / DISCLAIMER
4. Background
Founders start a business with a product or service idea.
Eventually need money beyond Friends & Family.
4
THE INVESTOR PERSPECTIVE
Management?
Team
Model
Business Model
Market?
Opportunity
Money?
Financing
Magic?
Product/Service/Tech/IP?
Momentum?
Market Traction
5. Mistake / Issue
Many companies BLOW their investment opportunity!
Wait too long to engage investors
Mindset is “Build it and investors will come!”
Many companies have ONLY a basic understanding of the investor’s
perspective (now popularized by TV’s Dragons & Sharks)
Founders consume cycles “learning” while raising money
What an investor is looking for?
Why they invest?
What types of companies?
What stage of progress do they invest?
Investment approach / structure / timing of cash?
How the investor makes money?
5
THE INVESTOR PERSPECTIVE
6. Recommendation
Talk to as many investors, advisors, etc. at conception and
through out the building of your company.
Defining your business
Structuring your business
Business model / pricing model / etc.
Accessing grants and other sources of funding
Before you need to raise money!!
Engage with Start-up groups, Innovate Calgary, TecEdm, etc.
Engage before you need to raise money!!
6
THE INVESTOR PERSPECTIVE
7. Background
Historical fund raising results in growing valuation (Alberta).
Company progress “deserves” higher share price (valuation)
Successive raises take place over time:
Founders, Friends/Family, Connections, Angel Rounds, etc., etc.
7
VALUATION GAP
Founders
Friends/Family
High Net Worth Individuals 1
Other Connections
Angel Round
High Net Worth Individuals 2
Concept
Prototype
V1, V2, V3
Strategic Industry Partner
Media Coverage
V4, V5, V6
Customer Discussions
8. Mistake / Issue
Valuation has grown ahead of:
“REAL” revenue
“REAL” commercial progress.
Ahead of other “REAL” valuation metrics.
Becomes very difficult to finance further growth
Valuation has grown unattractive to new investors.
Unsupportable valuation
Revenue?
Return of Investment?
Market traction?
Views/Visits/Downloads?
Comparable Companies?
8
VALUATION GAP
9. Recommendation
Raise valuation in small increments
Focus on key valuation metrics.
Don’t fall in love with your “development” progress
Don’t drink too much of the Company Koolaid
Keep your valuation attractive for future investment.
YOU WILL NEED TO RAISE MORE MONEY!
Seek advice from investors
Understand what investors are looking for!
Avoid the down round!
9
VALUATION GAP
Down
Round!!
10. Background
Typically companies raise “enough” money
i.e. based on estimated costs to grow beyond cashflow breakeven
(to be self-sustaining).
Or finance certain stages of development
Beta Trial / Prototype
Proof of concept
Product ready for market
Reach Initial sales
10
RAISE MORE MONEY?
Proof of concept
Worked = Continue
Issues = Pivot
Failed = Stop / Quit
11. Mistake / Issue
Companies don’t raise enough money when they can
95.5% of all early stage companies need more money
And on several occasions
Typically and unfortunately progress takes longer than
everyone thinks / hopes.
Raising money gets harder especially when things don’t go
exactly as planned (i.e. takes longer).
Companies don’t raise enough - Dilution and Valuation tend to
be considered versus long term objectives and survival.
11
RAISE MORE MONEY?
Proof of concept
Worked = Continue
Issues = Pivot
Failed = Stop / Quit
12. Recommendation
Take the money while you can.
While there’s interest / excitement!
Expand your Use of Proceeds if needed
Realistically budget more than you think you’ll need.
Add more money to each budget item and consider new items
You can always cut back/re-budget/redefine later (things will change)
Don’t be afraid of dilution
12
RAISE MORE MONEY?
13. Background
For all the “right” reasons and “good” intentions:
Founders and/or Shareholders loan money to the company.
Convertible debt is used for financing from some angels / investors
Accounts Payable Grows because contractors agree to be paid later
for work undertaken:
Legal Firm Patent work $25-50K
S/W development $50-100-200K
Start up loans are utilized i.e. BDC.
All necessary financing steps at the time.
13
DEBT TRAP
14. Issue
When trying to raise money again, Financers can be scared
away when they see the level of debt on the books
Why invest $500K when there’s $350K in debt?
Due Diligence stops!
Investor concerned that money will pay debt and not advance
company
Your financials don’t always explain your plan to address debt:
i.e. SRED will repay Founders/Shareholders
i.e. Convertible debt is planned for equity conversion in Q4, etc.
14
DEBT TRAP
15. Recommendation
Carefully plan debt accumulation versus equity or other
sources of financing. Don’t be afraid of dilution.
Convert loans to equity ahead of fund raising (or at least get
additional notes to the financials such that investors can
understand the repayment plans so their capital is not at risk)
Convert Accounts Payable to manageable, structured long
term debt.
15
DEBT TRAP
16. Background
Start-up builds business and gains traction
Hires a “marquee” or “proven” individual at substantial salary /
options / etc.
Issue
After 8-10 months it is not working
Company is faced with:
Lost productivity / progress
Severance
Options at issue
Time consuming resolution
Money spent
“Community” wondering what happening (NOISE)
16
HIRING KEY PERSONNEL
17. Recommendation
Company and the Marquee individual need to define
deliverables to:
Align expectations with company vision/strategy
Provide tangible attributes for separation
Ensure start-up oriented employment agreement
If the “marquee” individual is looking for big severance that should
be a Red Flag.
Options to be earned with progress or granted over time
17
HIRING KEY PERSONNEL
18. Background
Many early stage company Boards are formed with Investors
This is not surprising:
They believe in you! They may know you (family / friends)
They like your market, your idea, your vision, etc.
They join your Board because they can bring value:
Experience that you can leverage.
Invested in other companies.
Board experience.
Venture Capitalists
Genuine interest = Investor
18
BOARD DEVELOPMENT
19. Issue
Board members are conflicted (Typically major shareholders)
First and primary obligation of the Board is to the company.
WRT Financing: Too often the Board discussion is shareholder
based (about dilution versus adequate funding to achieve
strategic plan).
Companies can be hampered with raising too little or too high
a valuation
19
BOARD DEVELOPMENT
It’s settled. We’ll raise money
at double the valuation!
20. Recommendation
Try to recruit independent Board members that can still add
value to your business
Learn about Board roles, guidelines, competencies, etc.
20
BOARD DEVELOPMENT
21. Background
Founders start a business with mutual intentions
Sometimes friends, relatives or spouses
Split ownership equally, invested equally at start
One decides to leave business but retains ownership share
21
THE PARTNERSHIP
22. Mistake / Issue
An inappropriate structure was established for separation
One founder still has a major influence (shareholder) on the company
but is not involved.
Large voting block of shares remains with former founder
Significant company development still to go
Interests no longer align
Strategic direction, financial decisions, etc. at odds
$$$$
22
THE PARTNERSHIP
23. Recommendation
Consider potential outcomes of your partnership.
Develop structure whereby partners/founders can exit
Amicably in the current and future stages of the company
Some kind of staged approach? Seek legal counsel
23
THE PARTNERSHIP
24. Background
Company has established itself “in-market” and is progressing
Decides its time to exit
24
PREPARING FOR AN EXIT
25. Mistakes / Issues
Fact: Most companies that try to sell don’t get acquired.
Companies hire an M&A (merger acquisition firm) that is referred to them.
Few analyze and evaluate firms
Company has not thought through an Exit “Build it and they will come”
Company has not properly prepared itself for an Exit and has to start
Financial reporting
Company Structure i.e. Equity & Debt status, Board of Directors, etc.
Evidence of progress (the “data room”)
Sales pipeline, material agreements, employee agreements, etc.
IP agreements, IP / Patent applications
Valuation expectations
What are acquirers looking for? Revenue? Strategic? IP? Team?
Could be big financial mistake.
Recommendation
Consider the exit path throughout your journey.
Always keep an eye on the exit strategy and what is required
Talk to advisors. Get to know an M&A specialist/advisor.
25
PREPARING FOR AN EXIT
26. Mistakes / Issues
Not hearing what the investor is asking for – not answering the question
Not giving the investor what they requested
Financial statements, Cashflow, A/R, A/P, Competitive Landscape
Giving the investor something they didn’t ask for
Misguided expectations
All the money upfront
Investment is in the bag
Turn-offs
Slow / No responses to questions and due diligence
Selective answers to due diligence
Aggressive / pushy / want fast response
Big time gaps disappear for a month then asks what is the status
“I think you have everything you need” telling the investor
No shows by team members invited to Due Diligence meetings
I just need $100K and everything will be fantastic not thought through
Distrust / lack of report
Ungracious or inappropriate responses to a decline
26
INVESTOR DISCONNECTS / TURNOFFS
27. Recommendation
Think like the investor
Get to know the investor
Understand the investor perspective
27
INVESTOR DISCONNECTS / TURNOFFS