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

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

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

4. 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

5. 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

6. 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!

7. 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!

8. 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

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Raising Business Finance

22. 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’

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. Any questions?