Week 4

Question 1

How to target PE & VC firms

Answer 1

Only target VCs whose investment preferences match your proposition:

• Stage of investment
• Preferred business sectors
• Amount of investment
• Regional preferences

Question 2

Elevator Pitch

Answer 2

Cover:
- Product / service
- Market
- Revenue model
- Team’s background / achievements
- Competition
- Competitive advantage / USP

Need:
- A “hook”
- Passion
- Request (follow-up meeting / referral)

Question 3

What Venture Capitalists look for

Answer 3

Commercially viable
Potential for sustained growth
Management ability - exploit and control growth
Risk vs reward
Return vs. investment criteria

Porter’s 5 Forces

For tech companies:
IP
Market need
USP
‘First mover advantage’ not always necessary for success

Question 4

Deal Flow

Answer 4

• Name and market position
• Unsolicited approaches from management teams
• Introductions from intermediaries
• Referrals from portfolio companies (current and previous)
• Leveraging investors / advisory board members
• Introductions from other PE firms (incl syndication)
• Investment forums
  … and
• Active sourcing of deals
• Personal contact and research
• AI to comb databases, press, regulatory filings.

Question 5

VCs Dilemma (from Kenney and Florida, 2000)

Answer 5

Errors of omission - not investing when one should

Errors of commission - investing when one should not

Rule of thumb - for every 10 investments:
- 3 are complete losses
- 3 or 4 neither succeed nor fail; difficult to extract original investment
- 2 or 3 return > or = 3x
- 1 or 2 return > 10x

Question 6

Differentiation is key for deal flow generation

Answer 6

• Proactive not reactive approach
• Sector focus, executive expertise, management style, empathy, adding-value
• Track record with portfolio companies
• Profile in marketplace
• Understand market, advise on strategy, industry connections

Question 7

Branding of PE firms

Answer 7

Important for PE firms to have a strong brand. PE Branding Survey (BackBay Communications)

Limited Partners - IRR and whether top quartile or decile, communication is key between PE firm and LPs.

Entrepreneurs - trust, support for growth

Deal sourcing - brand (reputation) can be a key reason firm gets to see deal in first place

Question 8

Reputation Building

Answer 8

PE / sector events

PE / sector publications

Press mentions

Involvement with PE industry organisations

Question 9

Other sources of finance for companies

Answer 9

• Improved cash flow management techniques
• The company’s own resources
• Friends, family (and fools!)
• Fellow directors and employees
• Business Angels
• Equity crowdfunding / peer to peer lending
• VCTs, EIS, SEIS
• Government sources and Multilateral Agencies (eg. World Bank, EBRD, Asian Development Bank)
• Strategic partnerships
• Banks - overdrafts, short, medium and long term loans, senior debt,
• Government guarantee loan scheme
• Bonds
• Factoring receivables and invoice discounting
• Asset finance, leasing and hire purchase
• Project finance
• Mezzanine finance (sits between equity and secured debt)
• Listing on AIM or Main Market.

Question 10

Maximise internal sources of finance

Answer 10

• Effective cash flow forecasting systems
• Customer incentives for prompt payment
• Rigorous credit control procedures:
• Customer credit checks
• Prompt sales invoicing
• Incentives for early payment
• Age analysis of debtors
• Monthly statements to customers
• Reminder letters
• Delay payments to suppliers – but within credit terms
• Maximize sales revenues
• Control overheads

Question 11

Business Angels

Answer 11

High net worth individuals who invest their own money into unconnected, unquoted companies for potential financial gain.

16x more start ups funded by BAs than VCs in USA (Business 2.0)

Question 12

Different Types of Angel Investors

Answer 12

Operational Expertise Angels - Relevant Industry Experience but not Relevant Entrepreneurial Experience

Financial Return Angels - No Relevant Industry Experience and no Relevant Entrepreneurial Experience

Guardian Angels - Relevant Industry Experience and Relevant Entrepreneurial Experience

Professional Entrepreneur Angel - No Relevant Industry Experience but Relevant Entrepreneurial Experience

Question 13

To attract angel capital:

Answer 13

• Working prototype
• References from potential customers
• Angels may invest in groups
• And in specific businesses - e.g. tech start ups
• Usually they want a hands on role

Question 14

Crowdfunding

Answer 14

Reward based: delivery of product or service, invitations to events

Donation based: money for a cause, charitable giving

Lending based: peer to peer lending, incl fixed interest rates

Investment based: equity crowdfunding