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Ideas to Deals Building an Investment Ready Business

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We would like to be your business partner…

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<ul><li>Provide your business professional consulting and advising with certified business advisors </li></ul>As your business partner we can…

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<ul><li>Provide you with access to over 70 topic specific seminars and workshops covering pertinent topics for businesses at all stages from start-up to growth and existing. </li></ul>As your business partner we can…

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<ul><li>In 2008, we: </li></ul><ul><ul><li>Advised 961 Small Businesses </li></ul></ul><ul><ul><li>Facilitated $12,844,875 in loans / investment capital </li></ul></ul><ul><ul><li>Won the Ohio SBDC Performance Award </li></ul></ul><ul><ul><li>Awarded the SBDC Service Excellence and Innovation Center Award by the SBA </li></ul></ul><ul><ul><li>Were named one of the top 10 SBDC’s out of over 900 SBDC’s in the country </li></ul></ul>As your business partner we can… <ul><li>Provide your business an experienced and award winning team </li></ul>

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As your business partner we can… <ul><li>Access to numerous resources and networks to support your growth </li></ul>

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As your business partner we can… <ul><li>Provide access to numerous resources and Networking opportunities to support your growth </li></ul>

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Chris Brogan Jim Canterucci Mike Figliuolo As your business partner we can…

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<ul><li>Specific services include: </li></ul><ul><li>Developing export strategies </li></ul><ul><li>Preparing your product or service for export </li></ul><ul><li>International legal considerations </li></ul><ul><li>Shipping your product; pricing, quotation and terms </li></ul><ul><li>Methods of payment and Financing Export transactions </li></ul><ul><li>Business travel abroad </li></ul><ul><li>Selling overseas. </li></ul>As your business partner we can… <ul><li>Provide International Trade Assistance </li></ul>

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<ul><li>Continuous Improvement & Modernization ~ Process improvements, workforce assessments & training, lean operations… </li></ul><ul><li>Inventions & Prototyping ~ Product design, modeling, prototyping, market assessment, Intellectual property, R&D grants… </li></ul><ul><li>Partnering & Commercialization ~ Licensing technologies, capital access, mfg partners, marketing channels, fulfillment strategies… </li></ul>As your business partner we can… Provide Manufacturing & Commercialization Assistance

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<ul><li>Build A Business </li></ul><ul><li>Make Meaning </li></ul><ul><li>Make a difference </li></ul><ul><li>Make Value </li></ul><ul><li>If you succeed in building a business, either funding sources will be fighting to give you money or you won’t need their money. </li></ul>

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<ul><li>Why Develop a Business Plan? </li></ul><ul><li>Provide a Roadmap of How to Drive Your Business! </li></ul>

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<ul><li>How To… </li></ul><ul><li>Develop an Operating Plan. </li></ul><ul><li>Modify the Operating Plan to Fit </li></ul><ul><li>Your Audience. </li></ul>

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<ul><li>“ In preparing for battle I have always found that plans are useless, but planning is indispensable.” </li></ul><ul><li>- Dwight D. Eisenhower </li></ul>

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<ul><li>Key Issues In an Operating Plan </li></ul><ul><ul><li>Why are we necessary? </li></ul></ul><ul><ul><li>What do we do? </li></ul></ul><ul><ul><li>Who are we? </li></ul></ul><ul><ul><li>Who do we serve? </li></ul></ul><ul><ul><li>How and where do we find those we serve? </li></ul></ul><ul><ul><li>How we’re unique? </li></ul></ul><ul><ul><li>Where are we going? </li></ul></ul><ul><ul><li>How do we get there? </li></ul></ul><ul><ul><li>What are the roadblocks? </li></ul></ul><ul><ul><li>Why do we do what we do? </li></ul></ul>

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<ul><li>Key to Writing an Operating Plan </li></ul><ul><ul><li>Do it for you. </li></ul></ul><ul><ul><li>Keep it simple. </li></ul></ul><ul><ul><li>Keep it real. </li></ul></ul><ul><ul><li>Internalize it. </li></ul></ul><ul><ul><li>Work it. </li></ul></ul>

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<ul><li>The key to funding is knowing your business and being honest about what you have. </li></ul>

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<ul><li>Can you answer this: </li></ul><ul><li>What do you do? </li></ul>

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<ul><li>OK… </li></ul><ul><li>Can you put it in a box and sell it? </li></ul>

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<ul><li>What kind of Business Do </li></ul><ul><li>You Have? </li></ul><ul><li>Scaleable, Exponential Growth, Defined Exit? </li></ul><ul><li>Heavy Service Component, Slow/high Growth, No Exit? </li></ul>

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<ul><li>Who is out there to buy our Product? </li></ul><ul><li>How do we get them to buy our product? </li></ul>

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<ul><li>Friends, Family, Founder </li></ul><ul><li>Bootstrapping is building the business from internally generated funds. </li></ul><ul><ul><li>You need to establish a foundation for your business. </li></ul></ul><ul><ul><li>Build credibility and show that your business has customers and a product that people want to buy. </li></ul></ul><ul><ul><li>Focus on customers and cash flow. </li></ul></ul><ul><ul><li>Work hard and be creative in seeking ways to drive revenue while holding expenses down. </li></ul></ul>

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<ul><li>Why are banks in business? </li></ul><ul><ul><li>To make money not to make loans. </li></ul></ul><ul><ul><li>Lending is a tool to making money. </li></ul></ul>

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<ul><li>Banks typically lend for “stuff”. </li></ul><ul><li>Banks are a great option if you have history and are looking to expand. However, for an early stage company with limited history and minimal collateral, getting a loan could prove difficult. </li></ul>Commercial Banks

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<ul><li>When the company is new the entrepreneur should establish a banking relationship and utilize this as far as it will go. The relationship with a bank will be very helpful in the future as the business becomes established. </li></ul><ul><li>There is no 100% financing from a typical commercial bank. </li></ul>Commercial Banks

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<ul><li>Small Business Administration </li></ul><ul><li>SBA is not in the business of making bad loans. </li></ul><ul><li>Once the bank has agreed that the loan is good but in some way outside their guidelines they will seek an SBA guarantee. </li></ul><ul><li>The SBA is there to help you with your cash flow. </li></ul><ul><ul><ul><ul><li>Longer term </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Lower down payment </li></ul></ul></ul></ul>

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<ul><li>What do banks look for? </li></ul><ul><ul><li>Credit </li></ul></ul><ul><ul><ul><li>Credit Score should strive to be over 740 + (A year ago I would have said 700) </li></ul></ul></ul><ul><ul><ul><li>Guard Your Credit Score </li></ul></ul></ul>

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<ul><li>What do banks look for? </li></ul><ul><ul><li>Business Plan </li></ul></ul><ul><ul><ul><li>The business plan tells the bank how you are planning to repay the loan. </li></ul></ul></ul>

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<ul><li>What to put in a business plan </li></ul><ul><ul><ul><li>Executive Summary </li></ul></ul></ul><ul><ul><ul><li>Narrative </li></ul></ul></ul><ul><ul><ul><ul><li>Product Description </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Market Analysis </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Market/Marketing Strategies </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Management Plan </li></ul></ul></ul></ul><ul><ul><ul><li>Financial Data </li></ul></ul></ul><ul><ul><ul><ul><li>Profit and Loss Statement (Income Statement) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Balance Sheet </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Source and Use of Funds </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cash Flow Statement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Personal Financial Statement </li></ul></ul></ul></ul>

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<ul><li>What do banks look for? </li></ul><ul><ul><li>Collateral </li></ul></ul><ul><ul><ul><li>There is no 100% financing </li></ul></ul></ul><ul><ul><ul><li>To a bank collateral is real estate or equipment. </li></ul></ul></ul>

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<ul><li>Working Capital </li></ul><ul><ul><li>Short-term money to operate the </li></ul></ul><ul><ul><li>business. </li></ul></ul><ul><ul><li>Typically financed by a Line of </li></ul></ul><ul><ul><li>Credit. </li></ul></ul>

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<ul><li>Getting the bank to say YES! </li></ul><ul><ul><ul><li>Know your credit score going in. </li></ul></ul></ul><ul><ul><ul><li>Establish a banking relationship </li></ul></ul></ul><ul><ul><ul><li>Keep you plan tight, clear and easy to understand. </li></ul></ul></ul><ul><ul><ul><li>Use common format, don’t be creative. </li></ul></ul></ul><ul><ul><ul><li>Help the banker say yes. Put yourself in the banker’s shoes. </li></ul></ul></ul><ul><ul><ul><li>Structure your ask. Separate working capital, equipment and real estate. </li></ul></ul></ul>

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<ul><ul><ul><li>Angel Investors </li></ul></ul></ul><ul><ul><li>Angel investors are high net worth </li></ul></ul><ul><ul><li>individuals who are interested in investing in </li></ul></ul><ul><ul><li>emerging businesses. </li></ul></ul><ul><ul><ul><li>Two Types of Angel Investors </li></ul></ul></ul><ul><ul><ul><li>Professional </li></ul></ul></ul><ul><ul><ul><li>Strategic </li></ul></ul></ul>

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<ul><li>Professional Investors </li></ul><ul><ul><ul><li>The underlying reason that they will invest is return on their investment. </li></ul></ul></ul><ul><ul><ul><li>They invest in spaces they know. </li></ul></ul></ul><ul><ul><ul><li>They invest with people they know </li></ul></ul></ul><ul><ul><ul><li>They invest based on referrals from people they know. </li></ul></ul></ul><ul><ul><ul><li>Invest based on due diligence. </li></ul></ul></ul><ul><ul><ul><li>Will require professional terms. </li></ul></ul></ul><ul><ul><ul><li>Looking for a big payout based on a liquidity event. </li></ul></ul></ul>

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<ul><li>Strategic Investors </li></ul><ul><ul><ul><li>More interested in the product than the business. </li></ul></ul></ul><ul><ul><ul><li>Invest based on gut reaction. </li></ul></ul></ul><ul><ul><ul><li>May take common stock </li></ul></ul></ul><ul><ul><ul><li>May not look for a liquidity event. </li></ul></ul></ul><ul><ul><ul><li>May be the friends in FFF (or referred by FFF) </li></ul></ul></ul>

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<ul><ul><ul><li>Key points About Investors </li></ul></ul></ul><ul><ul><ul><li>If you take someone else’s money you have a partner. They will want to have some influence on the company to protect their investment. </li></ul></ul></ul><ul><ul><ul><li>You will probably have to relinquish some level of control over the company. </li></ul></ul></ul><ul><ul><ul><li>If you are unwilling to share leadership of the company, investors are not the option for you. </li></ul></ul></ul>

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<ul><ul><ul><ul><li>Institutional Venture Capital </li></ul></ul></ul></ul><ul><ul><ul><li>The only reason that they will invest is return on their investment. </li></ul></ul></ul><ul><ul><ul><li>They only invest in spaces they know. </li></ul></ul></ul><ul><ul><ul><li>They only invest with people they know </li></ul></ul></ul><ul><ul><ul><li>They only invest based on referrals from people they know. </li></ul></ul></ul><ul><ul><ul><li>Invest only based on due diligence. </li></ul></ul></ul><ul><ul><ul><li>Will only require professional terms. </li></ul></ul></ul><ul><ul><ul><li>They are only looking for a big payout based on a liquidity event. </li></ul></ul></ul>

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<ul><li>Seeking Investors </li></ul><ul><li>Investors invest in people and teams that can execute. </li></ul><ul><li>“ A” teams with “B” markets will generally beat “B” teams with “A” markets. </li></ul>

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<ul><li>Investor Business Plan Summary Format </li></ul><ul><li>Summary should be “concise” </li></ul><ul><li>Summary should provide a clear description of the problem you solve. </li></ul><ul><li>How you solve it. </li></ul><ul><li>Your business model. </li></ul><ul><li>The underlying magic of your product. </li></ul><ul><li>Defensibility of your product. </li></ul><ul><li>Summary should be no more than “ four-pages” . </li></ul>

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<ul><ul><li>What is it all Worth? </li></ul></ul><ul><ul><ul><li>Valuation </li></ul></ul></ul>

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<ul><ul><ul><li>Valuation of early-stage companies is a little short of random. </li></ul></ul></ul><ul><ul><ul><li>Valuation is negotiated, there are no hard numbers especially for early-stage companies. </li></ul></ul></ul><ul><ul><ul><li>Provide a good projection of future value at a potential, future liquidity date and discount back. </li></ul></ul></ul><ul><ul><ul><li>Know comparables…What other companies, similar to yours, have generated what multiples of sales at liquidity. </li></ul></ul></ul><ul><ul><ul><li>Build value as you build the company ~ Focus on “Value Inflection Points”. </li></ul></ul></ul><ul><ul><ul><li>Focus on dollars not percentage </li></ul></ul></ul><ul><ul><ul><ul><li>10% of a $20 million company is worth more than 100% of a $1 million company. </li></ul></ul></ul></ul><ul><ul><ul><li>Key Valuation Issues </li></ul></ul></ul>

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<ul><ul><ul><li>Know what investors look for and expect. </li></ul></ul></ul><ul><ul><ul><li>Make sure you and the investors are on the same page. Good investors will want you to have a fair percentage of the company. </li></ul></ul></ul><ul><ul><ul><li>Know why these things are important to investors. </li></ul></ul></ul><ul><ul><ul><li>Understand the factors that influence value </li></ul></ul></ul><ul><ul><ul><li>Anticipate investor questions. </li></ul></ul></ul><ul><ul><ul><li>Look at competitive deals. </li></ul></ul></ul><ul><ul><ul><li>Learn from the process ~ Listen well </li></ul></ul></ul><ul><ul><ul><li>Suggestions for CEO’s </li></ul></ul></ul>

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<ul><li>Pre Investment </li></ul><ul><li>Unit Holders Issued Valuation Pre-investment Post-investment </li></ul><ul><li>John Doe 500k $500k 25% 19% </li></ul><ul><li>Bill Smith 400k $400k 20% 15% </li></ul><ul><li>Jane Brown 800k $800k 40% 31% </li></ul><ul><li>ESO Pool 300k $300k 15% 15% </li></ul><ul><li>Note…ESO does not dilute </li></ul><ul><li>Total Issued $2 mil $2 mil 100% 80% </li></ul><ul><li>Post Investment </li></ul><ul><li>Investors 500k $500k 0% 20% </li></ul><ul><li>Total Issued $2.5 mil $2.5 mil 25% 100% </li></ul><ul><ul><ul><li>Cap Table Example </li></ul></ul></ul>

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<ul><li>Pre Investment </li></ul><ul><li>Unit Holders Issued Valuation Pre-investment Post-investment </li></ul><ul><li>John Doe 481,250 $240,625 19% 11.5% </li></ul><ul><li>Bill Smith 381,250 $190,625 15% 9.5% </li></ul><ul><li>Jane Brown 781,520 $390,625 31% 19% </li></ul><ul><li>ESO Pool 375,000 $187,500 15% 15% </li></ul><ul><li>Investors 481,250 $240,625 20% 11.5% </li></ul><ul><li>Total Issued $2.5 mil $1,250,000 100% 62.5% </li></ul><ul><li>Post Investment </li></ul><ul><li>Investors Rd 2 1,500,000 $1,250,000 0% 37.5% </li></ul><ul><li>Total Issued $4 mil $2.5 mil 100% </li></ul><ul><li>$750,000 raised at $.50 per share; decrease in valuation of 50% </li></ul><ul><ul><ul><li>“ Cram Down” Example </li></ul></ul></ul>

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<ul><li>Pitching </li></ul><ul><ul><li>Question: How can you tell if an entrepreneur is pitching their business? </li></ul></ul><ul><ul><li>Answer: Their lips are moving. </li></ul></ul>

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<ul><li>Tips for Pitching </li></ul><ul><li>Explain what you do in the first minute. </li></ul><ul><li>“ Clearly” explain what you do in the first minute. </li></ul><ul><li>Articulate the problem in the market and what you do to solve it. </li></ul><ul><li>Purpose of a pitch is to “stimulate interest” not to close the deal. </li></ul><ul><li>Keep it tight. 10 slides, 20 minutes, 30 point font. </li></ul><ul><li>Speak to the audience’s interest. </li></ul>

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<ul><li>Investors’ Interest </li></ul><ul><li>How are you going to make money? </li></ul><ul><li>How are you going to generate my return? </li></ul><ul><li>Are you capable of “executing”? </li></ul>

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<ul><li>Don’t When Speaking to Investors. </li></ul><ul><li>Don’t try to BS the investor because they see through it. </li></ul><ul><li>Get your value proposition across early in case you don’t get to the end of the presentation. </li></ul><ul><li>Don’t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will. </li></ul><ul><li>Don’t ask for an NDA!!! </li></ul>

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<ul><li>Don’t When Speaking to Investors. </li></ul><ul><li>Don’t ask for an NDA at initial meetings!!! </li></ul><ul><ul><li>Real investors are not in the business of stealing business ideas and trying to develop them. </li></ul></ul><ul><ul><li>You control what is in the summary and initial pitch. You don’t need to disclose the “secret sauce” at this point. </li></ul></ul><ul><ul><li>Investors will sign an NDA prior to due diligence. </li></ul></ul>

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Recommended Readings

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Resources for Assistance <ul><li>Ohio Small Business Development Center </li></ul><ul><li>http:// sbdcfreeadvice.ning.com , </li></ul><ul><li>614-287-5294 </li></ul><ul><li>TechColumbus </li></ul><ul><li>www.techcolumbus.org , 614-487-3700 </li></ul><ul><li>OSU Center for Entrepreneurship, www.centerforentrepreneurship.com, </li></ul><ul><li>614-292-4085 </li></ul><ul><li>www.ideas2deals.typepad.com </li></ul>

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<ul><li>Everything is always impossible </li></ul><ul><li>before it works. </li></ul><ul><li>That is what entrepreneurs are all </li></ul><ul><li>about – doing what people have told </li></ul><ul><li>them is impossible. </li></ul>

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The Ohio SBDC at Columbus State p. 614-287-5294 http://sbdcfreeadvice.ning.com For Information on SBDC Activities

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“ Pitching the Dream” Mark Butterworth Innovation4ward

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Agenda <ul><li>What investors looking for </li></ul><ul><li>The pitch </li></ul><ul><li>Deal structure </li></ul>

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Angels – Looking For <ul><li>A company where they believe can add value and make money (and have fun) </li></ul><ul><li>An industry they understand and good management team </li></ul><ul><li>Invest based on: Chemistry </li></ul>

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Venture Capital – Looking For <ul><li>A company where they can make lots of money (fun is not a factor) </li></ul><ul><li>Big markets, sustainable differentiation and good management </li></ul><ul><li>Invest based on: Management team </li></ul>

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Good Management – Ideal <ul><li>Experience in a start-up or launching a product within a large company </li></ul><ul><li>Domain knowledge </li></ul><ul><li>Relationships with key customers </li></ul>

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Good Management – Other <ul><li>Broad vision </li></ul><ul><li>Ambitious </li></ul><ul><li>Tremendous energy </li></ul><ul><li>Good listener </li></ul><ul><li>Adaptable </li></ul><ul><li>Know that they don’t know everything </li></ul><ul><li>Hire people better than themselves </li></ul>

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Investment Criteria: Other <ul><li>Sales and marketing strategy </li></ul><ul><li>Competition </li></ul><ul><li>Technology </li></ul><ul><li>Financials </li></ul><ul><li>Exit strategy </li></ul>

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The Investor’s Mindset <ul><li>Their time is more important than their money </li></ul><ul><li>You must manage the process! </li></ul>

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First Meeting – Angel Investors <ul><li>Goal: Get a second meeting not a check </li></ul><ul><li>Format: Short, non-technical PowerPoint </li></ul><ul><li>Message: Within the first three minutes: </li></ul><ul><ul><li>The problem you are solving, </li></ul></ul><ul><ul><li>How you solve the problem, and </li></ul></ul><ul><ul><li>That you have the management team to execute </li></ul></ul>

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First Meeting - Other <ul><li>Do not assume: </li></ul><ul><ul><li>they have read the plan </li></ul></ul><ul><ul><li>that you will get through presentation </li></ul></ul><ul><li>The product or technology is only 5% of the pitch in the first meeting </li></ul><ul><li>One page summary financials </li></ul><ul><ul><li>Assumptions more important than numbers </li></ul></ul><ul><li>How the investor will make money! </li></ul>

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After The First Meeting <ul><li>You must manage the process </li></ul><ul><li>Anticipate the investors needs </li></ul><ul><li>Submit your own Due Diligence Review Manual </li></ul><ul><li>Don not tell them “it is in the business plan” </li></ul><ul><ul><li>Opportunity to customize to their “hot buttons” </li></ul></ul>

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Deal Structure <ul><li>Individual Angels: </li></ul><ul><ul><li>Security: Common stock </li></ul></ul><ul><ul><li>Exit: Share buy-back , Sale or IPO </li></ul></ul><ul><ul><li>Return: 15% to 20% </li></ul></ul><ul><ul><li>Valuation: reasonable </li></ul></ul><ul><li>Organized Angel Funds and Venture Funds : </li></ul><ul><ul><li>Security: Preferred stock </li></ul></ul><ul><ul><li>Exit: Sale or IPO </li></ul></ul><ul><ul><li>Return: 30%+ compound annual </li></ul></ul><ul><ul><li>Valuation: Tough but fair </li></ul></ul>

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Preferred vs. Common Stock <ul><li>Common  Investors and management have same rights </li></ul><ul><li>Preferred has additional rights: </li></ul><ul><li>Liquidation preference – get their money back first </li></ul><ul><ul><ul><li>Anti-dilution provisions – protection against reduction in valuation </li></ul></ul></ul><ul><ul><ul><li>Redemption – investment plus dividends back at predetermined time </li></ul></ul></ul><ul><ul><ul><li>Dividends – 5% to 8% annually </li></ul></ul></ul><ul><ul><ul><li>Veto over strategic decisions (sale, liquidation, IPO) </li></ul></ul></ul>

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Resources: <ul><li>Gerald A. Benjamin and Joel Margulis. Finding Your Wings (How to Locate Private Investors to Fund Your Venture). New York: John Wiley & Sons, Inc. , 1996. </li></ul><ul><li>David Gladstone. Venture Capital Handbook (An Entrepreneur’s Guide to Obtaining Capital to Start a Business, or Expand an Existing Business). Englewood Cliffs: Prentice Hall, 1998. </li></ul><ul><li>Pratt’s Guide to Venture Capital Sources . New York: Securities Data Publishing, 2000. </li></ul><ul><li>www.pwcMoneyTree.com </li></ul>

69.
The Ohio SBDC at Columbus State p. 614-287-5294 http://sbdcfreeadvice.ning.com For Information on SBDC Activities