NEF 2-day Workshop: “Community & Supporter Development” (Entrepreneurial Finance & Pitching) (Part 1)


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Friday 21st and Saturday 22nd March 2014, UCL Idea Campus, London.

The first part of this two day workshop was delivered to us by Itxaso del Palacio of UCL, and also an Investment Analyst from EC1 Capital. Contrary to the original title for the day, Itxaso’s workshop was all about “Entrepreneurial Finance”.

On the agenda for the day we had:

1)      Investment ecosystem in EU vs. US

2)      Sources of Capital (exercise)

3)      Due Diligence (exercise)

4)      Term Sheet

5)      Panel of Investors (5-6pm)

6)      Tomorrow – Pitching to Investors

7)      The VC Game

8)      Closing Remarks – 10 Tips

“Entrepreneurial Finance is not accounting. Accounting is tracking and reporting on something that has already happened or is happening. Whereas Entrepreneurial Finance is about the future…”

Typical Investment Process:

1)      Pitching to Investors

2)      Investors Meeting (associate, analyst)

3)      Investors Meeting (partners)

4)      Term Sheet

5)      Legal Due Diligence (4-12 weeks)

6)      Final Negotiation Milestones

A Term Sheet is not legally binding.

We then had a group discussion about the myths and beliefs surrounding finance available to modern startups. It’s quite well known that, comparative to the UK and nigh-on everywhere else in the world; there’s much more investment in the US, there are larger investment rounds in the US, and more deals have been made in the US.

“Even if you raise money successfully – this does not mean your business is successful!”

The UK is making some strong in-roads in terms of size and quantity of investments though, and there is now a hotbed for startup finance which maybe wasn’t so prevalent or well known before. However, the recent and growing success in the UK also means that:

1)      Investors are more professionalized

2)      Investors are more specific and specialized

3)      Investors know what they want and how they can help entrepreneurs

 

“Taxes to pay on profits from sales or IPOs – are very high in the UK”

Sources of Capital – The VC Game…

Available to us:

–          Tech Stars

–          Wayra

–          Microsoft Accelerator

–          Google Ventures

–          Unilever

–          SeedCamp

–          EC1 Capital

–          Passion Capital

–          Social Innovation Camp

–          Envestors

–          London Business Angels

–          The Bakery

–          Seedrs

–          Crowd Cube

–          Pro Founders

–          Index Ventures

–          Angel Lab

–          Universal

–          T-Venture

–          JamJar

–          Dfj spirit

–          Balderton Capital

–          Connect Ventures

Finance routes:

“3F’s” – family, Friends, & Fools

–          Aka “Bootstrapping”

–          Start small and prove the market asap

–          Learn from your customer (lean startup approach)

–          Keep burn rate low (adjusted to revenue)

Public Funds/Grants

–          Grants or prizes can be public or private

–          Government public grants: regional, national, sector specific…

–          Governments can also eliminate barriers to investment (e.g. through the SEIS initiative)

Crowdfunding

–          Indiegogo (Project/Product based)

–          Kickstarter (Project/Product based)

–          Crowd Cube (UK based)

Accelerators

–          Public or private

–          Y Combinator & TechStars (US)

–          Seedcamp & Springboard (UK)

Angels & Super-Angels

–          Wealthy individuals – investing their own money

–          ‘Usually’ experienced entrepreneurs

–          (Super-Angels = Serial Entrepreneurs)

–          Get involved in day-to-day management

Venture Capitalists

–          Invest others money

–          Looking for extraordinary returns

–          Invest thinking of an exit (acquisition, IPO etc.) – a liquidity event

–          Invest in exchange of ownership (shares, seats on the board etc.)

–          May want to find and install the right CEO

–          Want to see milestones

 

With regards to Angels and VC’s – need to look at their portfolio and know what they focus on, their interests, and what they specialize in…

Before going to raise capital, think hard on:

–          Do I need money now?

–          What do I need the money for?

–          Who to approach: Angels? VCs? Corporates? 3Fs? Grants? Accelerators?

–          Who is making the introduction?

–          Who is the point of contact and where do they fit in the organisation?

–          Have you done your homework (due diligence)?

–          Are your goals really aligned?

–          Do you like him/her/the investment team?

What investors are looking for in Due Diligence – “finding the prince amongst the frogs”…

Looking hard at “the 5 M’s”…

–          Money

–          Management

–          Method

–          Metrics

–          Market

Investors are very concerned about:

1)      The Team

2)      The Market

3)      The Technology

Typical early stage due diligence might involve:

–          Length: 1-2 weeks

–          Up to 100 reference calls

–          Interviews with customers, former employees, competitors, industry experts etc.

Tips to succeed the Due Diligence process as an Entrepreneur:

–          Involve the team

–          Discuss/disclose the potential problems (known risks)

–          Demonstrate financial commitment to the venture (own money? Re-investing revenues properly etc.)

–          Prepare realistic market and sales projections

–          Give detailed information responding to questions

–          Don’t make vague, ambiguous, or unsubstantiated statements

–          Know your target investor

“What is a Term Sheet?”

–          “A non-binding agreement setting forth the basic terms and conditions under which an investment will be made” (investopedia.com)

The goal of a Term Sheet is to achieve alignment of interests between all stakeholders (the founders, and the investors)

There are 3 main types of Shares, and not all shares are equal.

3 Types:

–          Common Stock

–          Preferred Stock

–          *Convertible Note

Typically, when going through a round of funding and issuing shares; a company would also reserve a pool of common shares for employees.

*Convertible Note: a form of short-term debt which converts to equity (most likely in the next round of fund raising)

Valuation is not the only thing a founder should be concerned with and negotiating with the investors over – all of the clauses and points set out on a Term Sheet should be carefully considered too. Preferences in the Term Sheet on rights to shares for example – can prove to be more valuable than initial valuations.

We then had a panel discussion, with 4 Investors invited by Itxaso to come in to join us and answer our questions. This was particularly interesting and a great insight. I think my greatest takeaway from this was the question from one investor – “Have you done everything that you can without money?”