| © Copyright 1978-2008, Ben
Livson, BAL Consulting P/L™. All rights reserved. |
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| It has yet to be proven that intelligence has any survival value. | ||
| Arthur C. Clarke | ||
| 2 is not equal to 3, not even
for large values of 2. Grabel's Law |
||
| A true entrepreneur does not need capital: | ||
| HP started with $538 in 1938, Microsoft & Apple capital was $5000 in the 1970s | ||
| DEC-Gen Doriot $70K 1957-> $350m 1971 | ||
| All you need is a customer | ||
| Paul Allen on Microsoft – IBM | ||
| Mail Order – UPS in the USA | ||
| Liquidation value = net assets – full liabilities | ||
| Most companies have net nil or negative value. Assets are realized at a fraction but liabilities have to be paid out in full. | ||
| Build your value by: | ||
| Get investment – prove yourself to investors | ||
| Build a track record of financial performance | ||
| Exit by Private Trade Sale or Public Listing | ||
| The real company value only known at exit | ||
| Founders: keep records & ensure legal separation | |
| Family, Friends & Fools | |
| Doctors & Dentists | |
| Angels | |
| Lead Venture Capitalist | |
| Other VCs à due diligence by referral | |
| Government Funding | |
| Warning: syndicate to keep no of shareholders<10 | |
| Seed | |
| Startup | |
| Early Stage | |
| Expansion | |
| Management Buy-Out/Mature/Exit |
| 20,000 enterprises | ||
| 15,000 – 16,000 fail (75%-80% failure rate) | ||
| 3,000 – 4,000 trade sales (15%-20%) | ||
| 300 NASDAQ IPOs (<2% make it to IPO) | ||
| IPO strategies | ||
| Immediately – founders known in industry | ||
| After proven financial performance | ||
| The market approach – comparative – suitable when value yet another dot.com; | |
| the income approach - recognizes future earnings by calculating the present value of projected cash flows at a reasonable present value discount rate. | |
| and the asset-based approach – results in the lowest valuation based on expenditure. | |
| Financing Round: Seed, First, Second, Third, Mezzanine and IPO | |
| Pre-Money Valuation: post-money valuation of a company at a financing round minus the amount raised at that round. | |
| Step-Up in Value: increase in pre-money valuation between two financing rounds e.g. $10m/$2m = x5 | |
| Return on Capitalization (ROC): annualized change, or growth, in pre-money market capitalization between two rounds. | |
| Economic Profit = Invested Capital x (ROIC – Opportunity Cost of Capital) | |
| How do you forecast ROIC when a startup has no revenue, next to nil physical assets, good will as premium on valuation and IP? | |
| Partial answer: V&V measurable milestones | |
| Minimum ROIC for startups: 40% (30% risk of having to write-off investment altogether) |
| Granted clusters of patents in key markets may be worth millions | |
| 90% of NASDAQ is about true blue chips with 15+ to 100 years of proven financial performance, years of high profitability and massive protected intellectual property: IBM, AT&T, Cisco, Microsoft, HP, Sun .. | |
| Ideas are worth millions – ideas are an unpaid prerequisite – VCs invest in implemented ideas | |
| NASDAQ is about dot.coms | |
| Cost: Provisional $2K à International Search $20K à National Granted $30K à Global $400K à global cluster of patents $multi-million | |
| IP protection is a major business function | |
| Patents are a CSF for many Australian success stories: Cochlear, ResMed, Orbital Engine and Metal Storm | |
| Utility required but no $value is necessary | |
| Watch: IP assignment to company & no sharing | |
| 5+ years provisional à intntl search à pending national à granted national à global cluster | |
| Vast differences in VC performance: | ||
| A quarter of VCs loose their funds | ||
| A quarter of VCs barely maintain funds | ||
| A quarter of VCs gain commercial bank interest | ||
| A quarter of VCs have 30%+ IRRs | ||
| For each ten investments: 3 Dogs , 4 Walking Dead, 2 Cash Cows and 1 Home Run = the reason why you are a VC | ||
| By Gordon Bell DEC & Heidi Mason Regis McKenna | |||||
| When you can measure what you are speaking about, and express it in numbers, you know something about it: but when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind: it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science. | |||||
| -William Thompson, Lord Kelvin 1882-1907) Popular Lectures and Addresses, 1891-94 | |||||
| The four major elements of the Bell-Mason Diagnostic include: | |
| 1. The five stages of company growth | |
| 2. The twelve dimensions that
are measured to assess a start-up |
|
| 3. The rules used to evaluate each dimension | |
| 4. A relational graph plotted
against the ideal model for success |
|
| The twelve dimensions are grouped into 4: | ||
| Technology/Engineering, Manufacturing and Product | ||
| Business plan, Marketing and Sales | ||
| CEO, Team and Board of Directors | ||
| Cash, Finance-ability and Operations/Control | ||
Bell-Mason Dimensions - Stages
| Approach | |
| Offer | |
| Need | |
| Claims | |
| Due Diligence | |
| Key Terms | |
| Negotiation and Deal | |
| Best startups are approached | ||
| Passive 2nd Board Advertising: ASX e.m .. IPO.com | ||
| Conferences as pickups for date | ||
| Well promoted sophisticated web-sites | ||
| Universal Law of <= 6 Degrees of Separation | ||
| Do your homework: no unsolicited approaches | ||
| More than 90% of proposals rejected on approach and many due to primitive approach | ||
| Thorough analysis of your investor(s) is critical before you make your 1st move | ||
| Presentations – meet the key people | |
| NDA+schedule, business plan & financials | |
| Quality and timeliness of obtaining an up-to-date Information Memorandum | |
| VC’s level of good will is very high at the beginning and decreases exponentially over time. Be prepared. You cannot buy time lost | |
| VCs spend >80% waiting for startups to act. | |
| Be specific about the need for investment | |
| Needs are not questioned at the beginning | |
| Need determines investment | |
| Equity = Investment/Valuation | |
| Lead VC equity =>25% and <=50% | |
| If $1m need, valuation =>$2m and <=$4m | |
| If justified, AusIndustry can match $ for $ |
| Self-critique & integrity are priceless and the only way to build a successful business | |
| Never refer to a party without naming it | |
| VCs detest name droppers | |
| Never make claims that cannot be verified | |
| Measurable milestones -> payment schedule | |
| Be careful about forecasting revenue | |
| Referential due diligence strongly preferred | |
| 1st due diligence is costly & takes time | |
| Sloppy cooperation is a big warning sign | |
| DD is about people: key management and advisory group will get reference checked | |
| Books are usually a no-brainer except for the color of money spent | |
| Expert opinion: 1 & 2 pass | |
| Board seats, minority protection e.g. veto | |
| Rights on future capital raisings | |
| Terms on future finance e.g. anti-dilution | |
| Payments driven by verifiable milestones | |
| Handling of undeclared liabilities | |
| Service contracts | |
| Exit mechanism |
| VC’s 1st offer is always the best offer and probably the last offer as well based on 20+ years of experience as an employee and small business | |
| Negotiation must be less 3 weeks – goodwill decreases exponentially over time | |
| VCs are for a WIN-WIN and have every incentive to offer you a good deal |
| Everything centers around the CEO | |
| Wife & husband .. Bros .. business | |
| No hurt money – just personal time | |
| 70% of investment spent in 3 months | |
| J curve or “hockey stick” revenue forecast | |
| Percent of market without milestones | |
| No competition, no research, no disclosure | |
| True partnership of 3-4 founders. CEO is only the first among equals | |
| Coal face paid >75% of expenses | |
| World class advisory group | |
| Hurt money – extra mortgages & give up secure jobs. Startup is not a hobby. | |
| True achievements e.g. US patent granted |