Prof Russell Smith MD PhD MCAST Presentation April 2018 Funding for Life Key issues in Equity Finance Prof Russell Smith MD PhD

All students are investors Effort Time Loss of earnings? How to get a return on that investment?

Forms of return Salary Profit-sharing Capital gain But… do they all have to come from the same source? Absolutely not!

Employee or Employer? Being an employee is risky… Notice period Same salary no matter how hard you work Unlikely to get a share of business profits Very unlikely to get a share of capital gain … and tedious You have to turn up 9-5 every day Your boss may be unsupportive Work may be boring and repetitive

What is a business? An entity that sells things Only two things that you can sell: A product A service Smart businesses always sell things that solve issues/problems for their customers

You need to think about yourself in business terms You are a “business unit” You own property – intellectual property You can sell: a service, or a product (you may or may not have one yet) You can sell more than one of each!

Case study: Rick Stein – TV chef in the UK Founded “The Seafood Restaurant” in SW England more than 30 years ago Customer problem: hunger Product: range of meals Service: smart restaurant Five month waiting list!

The Seafood Restaurant “Padstein” solving customers’ problems Problem: Padstow is a long way from Oxford which is in the middle of England The Seafood Restaurant

The Seafood Restaurant “Padstein” solving customers’ problems Problem: Hotel is quite expensive Hotel The Seafood Restaurant

The Seafood Restaurant “Padstein” solving customers’ problems Problem: 5-month waiting list is too long and would like a less expensive option Hotel B & B The Seafood Restaurant

The Seafood Restaurant “Padstein” solving customers’ problems Problem: need a family option with variety for all ages at a sensible price Hotel B & B The Seafood Restaurant The Bistro

The Seafood Restaurant “Padstein” solving customers’ problems Problem: where can I get a cheap supper? Hotel B & B The Seafood Restaurant The Bistro The Cafe

The Seafood Restaurant “Padstein” solving customers’ problems Problem: How can I recreate the dish at home? Hotel B & B The Seafood Restaurant The Bistro The Cafe Fish & Chips

The Seafood Restaurant “Padstein” solving customers’ problems Problem: How is a fish gutted? Hotel B & B The Seafood Restaurant The Bistro Books The Cafe Fish & Chips

The Seafood Restaurant “Padstein” solving customers’ problems Problem: How can I learn about cooking fish? Hotel B & B The Seafood Restaurant The Bistro Books The Cafe TV series Fish & Chips

The Seafood Restaurant “Padstein” solving customers’ problems Problem: Can I take some fresh fish home? Hotel B & B The Seafood Restaurant The Bistro Books The Cafe The Cookery School TV series Fish & Chips

The Seafood Restaurant “Padstein” Solving customers’ problems Problem: Where do I get those spices? Hotel B & B Wet fish shop The Seafood Restaurant The Bistro Books The Cafe The Cookery School TV series Fish & Chips

The Seafood Restaurant “Padstein” Solving customers problems Problem: Can I order from home? Hotel B & B Wet fish shop The Seafood Restaurant The Bistro Deli Books The Cafe The Cookery School TV series Fish & Chips

The Seafood Restaurant “Padstein” Solving customers’ problems Different teams needed for different functions Hotel B & B Wet fish shop The Seafood Restaurant The Bistro Deli Books The Cafe Website & Mail order The Cookery School TV series Fish & Chips

Is this one business? Well, all owned by Rick Stein and his ex-wife Different components of the business empire run by different teams Some activities are contracted out: book production and television series production Core content revolves around his know-how Distinguish between ownership and activity

Raising Business Finance

Back to basics then… so what is equity finance? Applies to companies that can issue shares An investor buys a portion of the business and so becomes an owner alongside founders The money paid for the shares goes to the company, not the founders This is because the company issues (and sells) new shares in the company Founders’ % holding is therefore ‘diluted’

Why do companies issue new shares? Usually to generate funds that will support growth With growth should come progress and so the cash should be spent on making progress and not making purchases Only with progress comes an increase in the value of the company

Why do investors buy shares? Investors buy shares for the following reasons: They believe that the company has an opportunity for significant growth This means that they will be able to sell their shares later at a profit and make a capital gain They believe the Management Team capable to deliver the Business Plan on time and on budget They consider the share price sensible

What money can be raised? General rule as follows: Friends and Family max 200,000 Business Angels/VCTs max 2,000,000 Venture Capital max 20,000,000 And usually selling 20-40% of the business each time

Equity - Founders Note that a lot of shares are issued so as to ensure that later rounds have a share price of <10 euros Also note that the pre-money valuation at this stage may be the same as the post-money valuation if the company does not yet have assets

Equity - Friends and family Note that issuing shares to new Owners means that the Founders are ‘diluted’ in terms of the percentage holding However the Founders have 1,000,000 shares worth 460,000 euros

What is a Business Accelerator? A real business accelerator must be able to assist companies to make accelerated progress between meaningful milestones Without a list of milestones this is impossible And so the need for a Business Plan, a Cash Flow Forecast and Milestones that add value is self-evident Accelerators usually have investor networks

Any questions?