Topics The City Sources of money to finance new/early stage companies How much money do you need? Company valuation

The City What is the City Do we need it? What does it do? Whose money is it?

The City What is the CityInternational Centre for financial services Do we need it? Yes! Industry would stop without it What does it do?Facilitates business and investment Whose money is it?Ours!

Companies need finance to fund business activities and growth The City - Example Banks, fund managers, Pension funds etc Collectively we have lots of money Lots of small amounts of money deposited for short periods Need large sums of money for years

Exporting company wins $50M contract in USA. Get paid on completion June 2006 in $ Pay costs (salaries etc) now in £ profit margin is 10% (vulnerable to currency movements) How can they be sure that they will make a profit? Buy the right to sell $50M in June 2006 at todays rate (future contract) The City - Example

Companies Need Finance to Set-Up and Grow A new family run shop selling furniture A biologist with a drug proven to cure lung cancer in mice A software startup with a solution that facilitates international information and knowledge sharing for global companies An engineer with a new type of battery that will give electrical cars far greater range A group of car mechanic setting up a mobile servicing business How much money do you think they need? Where should they get it?

Sources of Money Your own money + friends and family Shows commitment No restrictions Friends probably want equity Grants Cheap money (dont need to repay & no interest) Small amounts Often matching funding for specific project Debt finance (e.g.; bank loan) Interest over a specific period Secured against asset (might lose your house) Equity finance Investor buys a share of the company Investor gambles on return through dividends or selling shares Nothing to repay No asset security No interest

Sources of Funding You, your friends & family Grants & awards Business Angels Venture Capitalists Maturity of Business or………… organic growth Startup Mature company IPO Stock Exchange Banks

The Funding Ladder £10m+ £5m+ £5m - £20m £25k - £500k <£25k IPO Trade sale Venture capital Business angels, Seed funds, Grants TTOs, Friends and family, Grants Capital requiredPossible sources for finance Note: Requirements & sources vary, e.g. trade investors at any stage FUNDING GAP

Loans (Banks) Could be from persons or institutions Suitability Any amount in theory No loss of ownership/control of business Often must be secured against an asset Must pay interest Must repay the capital

Business Angels Small private equity Investors Wealthy individuals who invest their own money in return for equity in the company. Suitability Up to £100,000 individually Up to £0.5M in club High return Control Less constraints than Venture Capitalists

Venture Capitalists Institutional equity investors Raise money in financial markets………... and invest other peoples money in companies in return for equity in the company. Suitability: £5M - £20M High growth prospects High barriers to entry Management team Strategic control

Exit Strategy When / How will investors realise return? What are your personal long term plans? Exit seems a long way off – but can affect some early decisions? Such strategies might include: Trade sales Initial Public Offering MBO/MBI

Initial Public Offering Become Stalitte plc instead of Stalitte Ltd Make some of shares available publicly on liquid stock exchange. No limit to amount that can be raised (in theory) Suitability: £5M + Highly regulated market with onerous requirements Analysts will take the company apart in detail Expensive costs of transactions High profile Valuation

How Much Money Will You Need? Answer Must prepare a Cash Flow Forecast for the business

Cumulative Cash Flow of a New Business Cumulative Cash Flow Valley of Death Promised Land How much investment do you need? - at least double what you think!

How Much Money Will You Need? Cost Projections - Complicated but EASY In your control - Get it right Include ALL COSTS Revenue Projections - Simple but DIFFICULT = Price x VolumeMarket research Breakeven What price can you charge? What is minimum breakeven price? What volume of sales? What is minimum breakeven volume? When will you breakeven?

Valley of Death Shallow and short £50K for 6 months Deep and Long £50M for 10 years IT R&D co. Biotech Up to you How big is the Promised Land?

Multiple of revenues or profits What if none for years None Surprisingly yes! (as part of a management team) E.g. R&D money spent Future Profits Others: Customer base Brand Technologists brain Spend to date What is the Value of a New Company? Internal valuation methods:

What is the Value of a New Company? Well be worth £80M in 6 yrs As good as any other External valuation methods: Comparison to similar companies £1M per bench scientist (biotech) Impossible to value correctly so why bother? Does the value of matter?

Yes…. if you need equity investment Offer £5M for 33% equity = £15M i.e.; current value of company = £10M

How Will An Investor Value Your Company? You want me to invest £1M now Your calculations show you expect company worth £20M in 5 years I need 100% pa return = £16M in 5 years = 80% of the equity

Company Valuation and Ownership Founders Seed Fund VC University Managers Note: Shareholdings will vary Founders Seed Fund University Founders Stage 1: Valuation £10,000Stage 2: Valuation £750,000 Stage 3: Valuation £10m 50% 33% £6m 60% 5% 50% 33% 5% 25% COMPANY Guides

Provision of Early Stage Venture Capital in London COMPANY Guides Note: periods shown are for year to 31 December Source: BVCA Report on Investment Activity Venture Capital Investment by Stage – London (£m)

UK and OECD countries – VC Investment as % of GDP Investment in venture capital as a % of GDP, Source: OECD (note definitions vary) COMPANY Guides UK