How to Raise Capital to Grow Your Business DOUGLAS, CURTIS &

How to Raise Capital to Grow Your Business
July 12, 2005
DOUGLAS, CURTIS &
ALLYN, LLC
Strategic Advisory • Investment Banking • Private Equity
3721 Douglas Boulevard, Suite 350
DOUGLAS,
CURTIS & ALLYN, LLC
Roseville, CA 95661
www.douglascurtis.com
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SPEAKERS
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SPEAKER – Wael Aburida, Head of Investment Banking
Wael H. Aburida joined Douglas, Curtis & Allyn, LLC in 2005 to lead the growth of DCA’s investment
banking practice, including mergers & acquisitions (sell–side and buy–side) as well as equity and debt
private placements. Mr. Aburida joins DCA with a wealth of investment banking and M&A experience both
as an investment banker and as a corporate acquirer.
Prior to joining DCA, Mr. Aburida was Director of Mergers & Acquisitions for Intel Corporation, based in
Santa Clara, CA. Mr. Aburida was with Intel for 5 years, where he was responsible for structuring and
negotiating acquisitions, divestitures, spinouts and minority equity investments on behalf of Intel. Mr.
Aburida was responsible for sourcing, structuring and negotiating acquisitions, divestitures and carve–
outs ranging in size from $10M–$500M. As part of his activities, Mr. Aburida led the relationships with
many of the leading private equity and venture capital firms in securing funding for a number of Intel’s
most notable spinouts, including LANDesk Software, Tarari, and Shiva.
Prior to joining Intel, Mr. Aburida was a Mergers & Acquisitions Associate at Bowles Hollowell Conner
(acquired by First Union/Wachovia), a leading private M&A advisory firm based in Charlotte, North
Carolina. Earlier in his career, Mr. Aburida worked in the Technology Mergers & Acquisitions group at
Lehman Brothers in New York. Prior to Lehman Brothers, Mr. Aburida was a sell–side equity research
analyst with Prudential Securities in New York.
Before moving to Prudential, Mr. Aburida began his professional career as a financial analyst and then
controller for Roy F. Weston, an environmental consulting firm.
Mr. Aburida graduated from Lake Forest College with a Bachelor of Arts in Political Science and Business
Administration. He also holds a Master’s degree in Business Administration from the J.L. Kellogg
Graduate School of Management at Northwestern University.
Email: [email protected]
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SPEAKER – Jeremy Wolfe, Partner, DCA Capital Partners
Jeremy M. Wolfe joined Douglas, Curtis & Allyn, LLC in 2004. Leveraging a strong background in the
private equity and venture capital community, Mr. Wolfe also leads the Firm’s principal investment effort
through DCA Capital Partners.
Prior to joining DCA, Mr. Wolfe was a Principal at ABS Capital Partners, a leading private equity fund with
over $1.4 billion under management. As a senior member of the west coast office, he was responsible for
sourcing, evaluating, and managing investments ranging in size from $5–30 million, as well as working
closely with the executive teams of both private and public portfolio companies in strategic, operational
and financial planning.
Prior to ABS, Mr. Wolfe was the CFO at Found, Inc., a retail/CPG–focused enterprise software company.
He also spent several years at Goldman Sachs as a member of both the west coast technology
investment banking and private equity teams. Within the Principal Investment Area, where Goldman
managed over $10 billion in capital, Mr. Wolfe was a member of the Menlo Park–based technology
investment team. In investment banking, he was involved in a broad range of financing, M&A, and
restructuring transactions for clients in the technology, communications and services industries. Prior to
Goldman Sachs, Mr. Wolfe was a member of Robertson Stephens’ investment banking group, based in
San Francisco, where he held broad corporate finance and M&A responsibility with an emphasis on the
semiconductor sector. He began his career within the Intel Corporation, in Arizona, working in areas such
as commodity/supply chain management and systems development.
Mr. Wolfe earned his Master’s degree in Business Administration from Harvard Business School, where
he graduated with High Distinction (top 5%). He also holds a Bachelor of Science degree in both
Mechanical Engineering and Management Information Systems from the Massachusetts Institute of
Technology.
Email: [email protected]
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Table of Contents
I.
Private Equity Market
II. Investing Trends
III. Fundraising Process
IV. Alternatives to Venture Capital
V.
The Role of an Advisor
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EXECUTIVE SUMMARY
• Growing a business takes capital
• The capital required to grow your business is heavily
dependant on the stage and type of business you are in.
• Today we will review:
• The Private Equity Market – a Primer
• Investing Trends
• The Fundraising Process
• Alternatives to Venture Capital
• Role of an Advisor
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PRIVATE EQUITY MARKET
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PRIVATE EQUITY INDUSTRY – AN OVERVIEW
Over the past 20 years, the private equity industry has grown significantly by all
measures (number of VC firms as well as dollars allocated to the asset class)
What is a private equity firm?
Typically a private partnership or closely-held corporation
Where does the money come from?
Predominantly from institutional investors who allocate a small portion (2% to 3%) of
their institutional portfolio to alternative investments
• Over 50% comes from public and private pension funds
• Balance from endowments, foundations, insurance companies, banks,
corporations, foreign investors, and individuals
Then what?
The partnership gathers the money committed into a fund from which the partners
actively invest, typically over a 3 to 7 year time horizon.
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THE STAGES OF PRIVATE EQUITY
Market Value
Pr
n
Ve
Concept
Stage
ta
i
p
Ca
e
t ur
eE
t
a
iv
q
BO
L
/
y
uit
l
Development
Stage
Expansion
Stage
Private
Maturation
Stage
Public
Time
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VC & PRIVATE EQUITY – INDUSTRY SNAPSHOT
Venture Capital
• Institutional investment funds that sponsor early-stage businesses looking to
commercialize or develop new products and innovations
• Typically focused around technology-enabled and life sciences sectors
• Investments based on high returns, high risk ("home run" opportunities)
• Typically invest anywhere from $500K to $5mm
Private Equity
• Institutional investment funds that sponsor later-stage businesses looking to
expand to new markets, provide liquidity to existing shareholders, or sell a
majority of the company
• Partner with management teams across multiple sectors
• Focused on moderate returns, lower risk (generally businesses doing $10mm+ in
revenues and profitable)
• Broad range of investment size, with a low-end of $5-10mm
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INVESTING TRENDS
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VC AND PRIVATE EQUITY TRENDS – WHAT WE’RE LOOKING FOR
Same as always...
• Strong management teams with history of success and liquidity
• Differentiated product with competitive advantage
• Big markets with high margins
New...
... in Venture:
• Larger deal sizes (ability to "move the needle")
• Hesitancy to fund ideas and product without proven commercialization
• Traditional sectors still get a lot of $$$ (software, hardware, biotech), but VC's increasingly
looking for new markets
• Long diligence processes - can take up to 60 days to term sheet, and another 60 days to
close
• Spreading less, concentrating more
... in Private Equity:
• Larger deal sizes, looking to deploy capital
• Split between fund philosophies: financial engineers versus operators
– Ability to influence the business outcome
• Recaps and buyouts very popular- providing owner liquidity (diversifying risk)
• Balanced interest in cashflow and growth
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TRENDS IN TERMS – WHAT TO EXPECT
Risk Management
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•
•
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Valuation adjustments up and down based on near-term performance
Return thresholds beyond which management is rewarded
Preferred minimum return to investor in liquidity
"Bridge structures" - giving management credit for future performance
Governance
• Board involvement
• Influence over key strategic and financial decisions
• Putting "industry experts" on the board
Capital Structure
• Preferred position
• Fewer "club deals" with multiple investors
• Focus on clean ownership structures (recap's)
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FUNDRAISING PROCESS
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WHAT YOU NEED TO PREPARE
A Venture Capital firm may see over 1,500 proposals a year of which, less than
100 will be granted a meeting. Have a crisp, clear executive summary which covers
the following:
• Overview of the company – This section should cover what your firm does, plans
for the future, and why someone should invest in your company
• Products/Services – Explain the products or services your firm provides and how
they may be differentiated in the market.
• Market and competition – Demonstrate you have a clear understanding of the
market, who the players are and how you rank against them
• Management Team – The quality of management is very important. Show that
your senior staff is experienced and capable of taking on challenges
• Financials – Give a detailed review of financials to date, forecasted financials,
burn rate, capital requirements and uses for the invested capital
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DO’s AND DON’Ts
DO’s
• Be Brief. Stay focused
• Clearly state objectives and
pain point solved
• Cite total capital needs – near
term and long-term
• Explain reasonable business
risks
• Do be specific. Provide
underlying data and market
information where necessary to
support claims
DONT’s
• Don’t present unrealistic
projections
• Don’t use highly technical
descriptions (keep it simple)
• Don’t dismiss competitive threats
• Don’t request valuation
expectations which may be
construed as unrealistic
• Don’t insist on an NDA too early
in the process
• Avoid overly complex
capitalization structure
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RULES FOR SUCCESS
Realize not all good companies are candidates for venture financing
Research VCs to identify those that know and invest in your space
Target a number of VCs that match your market and size/stage of funding
Warm introduction from a know relationship is critical to insure likelihood it will
be reviewed
Stage the process so the VCs are moving at the same pace
Continuously enhance and refine your pitch based on VC feedback
Stay positive
Assume the process will take 6 months
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QUESTIONS TO ASK THE VCs
Does the VC have experience with similar types of investments?
Do they take an active or passive role?
Are there competing companies in the portfolio?
Are the personalities (VC and management) compatible?
Does the firm have strong syndication ties with other venture firms for future
rounds of financing?
Can they help provide assistance / contacts for strategic partners; can they help
effectively recruit executives when necessary?
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CONSIDERATIONS RELATING TO STRATEGIC VCs
An alternative to financial VCs are the corporate (strategic) venture capital
groups (i.e. Intel Capital, SAP Ventures, Nokia Ventures aka BlueRun Ventures)
Considerations to factor when assessing strategic participation:
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•
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Passive investor (no board seat)
Will rarely lead a round
No issues with funding you AND perhaps, your competitor
May compete against you in the future
• On positive side: positive validation point, usually global access, strong
distribution
Terms to watch for
• CNTS
• Restrictions on working with their competitors
• MFN clause
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ALTERNATIVES TO VENTURE CAPITAL
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ALTERNATIVES TO VENTURE CAPITAL
•
Angel financing - Friends / Family / Angel Groups/ Local Wealthy Individuals
•
Supplier financing
• Extended credit terms provide working capital
• Equity Investment or Equity in return for discounts
•
Receivables financing
• Secured Credit Facilities or Factoring
•
Customer financing
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•
•
•
•
•
Discount for prompt pay
Prepaid orders or credit card payments
Development work billed as custom job
Equity investment (be careful about alienating other customers!)
Government Programs – R&D programs, In-Q-tel
Debt
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•
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•
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SBA
Bank Debt
Mezzanine
Equipment Leasing
Home Equity or Refinance
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THE EARLY STAGES
Bootstrapping “Sweat Equity”
• You may be familiar with this notion. You moonlight or cultivate your concept
in the garage with a partner.
• All start up costs are born by you with the help of friends and family
Angel Funding
• This is the first outside capital the company receives
• Usually from accredited investors
• Typically less than $1M to bridge company to an institutional round
• Financing will likely provide for a discount or warrant coverage to Series A
Illustration
• Receive $500K angel financing with 20% warrant coverage in July 2005
• In Nov 2005, you raise $3.0M at a Series A pre-money valuation of $5M, angel
financing converts into 6.25% of Series A ($0.5M/$8.0M) plus (20% warrant
coverage x 6.25%), an additional 1.25% or total of 7.5% ownership.
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THE ROLE OF AN ADVISOR
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WHY HIRE AN ADVISOR?
Raising capital is a full-time job
Reduces friction between institutional capital and private companies
Increase number of funding alternatives - Enhance shareholder value
Drive the process – resolve issues as they come up
Consideration to advisor is heavily weighted toward successful close of funding
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WHAT TO EXPECT FROM AN ADVISOR
Evaluate marketplace
Valuation assessment
Analysis of various alternative funding sources
Creation of marketing plan & materials
Execute marketing plan
Help funding sources with due diligence
Negotiations, Close
Be prepared for a long process – 4 to 6 months is typical from start to close
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WHAT TO LOOK FOR IN AN ADVISOR
Transaction Experience
• References available
Extensive Relationships
Commitment
• Banker commitment
• Firm commitment
• Resources assigned to your project
Knowledge of your space
Good listener of client’s needs
Client advocate
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CONTACTS
Wael Aburida
Jeremy Wolfe
Managing Director,
Head of Investment Banking
Direct Line: (916) 960-5356
Partner,
DCA Capital Partners
Direct Line: (916) 960-5351
[email protected]
[email protected]
3721 Douglas Blvd, Suite 350
Main Line: (916) 960-5350
DOUGLAS, CURTIS & ALLYN, LLC
Roseville, California 95661
Fax: (916) 960-5360
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