Eric Martin VC financing some aspects on investmen

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VC financing – some aspects on VC investments: 

VC financing – some aspects on VC investments Tartu, Estonia 6th of October 2006 Eric Martin Get the pictures at www.afema.se

Eric Martin: 

Eric Martin In the business of VC and entrepreneurs since 1982 Svetab, largest Swedish VC in early 80´s Företagskapital, first VC in Sweden, founded 1973 TUAB, specialized in university start ups Aldano, VC with Industrifonden and 30 proven entrepreneurs as owners Own consultancy organization since 1984 Afema, business development of entrepreneurial companies Secret talent: Former water ski coach for Swedish national team Present assignments AirNet Holding Azpect Photonics Sourcecom COB Foundation Thonab VIAB Former chaiman of Connect Eastern Sweden and Swedish Venture Capital Association as well as consultant in some 100 entrepreneurial companies BSc in Business Administration with a technical background

What to come: 

What to come Part 1 – In theory Definitions Deal flow The American model Part 2 – In practice The Entrepreneur vs The VC The curve of Akbar What to expect along the way How do you choose your VC

When to choose VC: 

When to choose VC You want to grow fast You are prepared to take influences from the outside on running your business You are willing to make an exit in 2-7 years

Slide5: 

How do VCs act Minority share holder (mostly) Active owner Always a board position 59% have at least one contact a week Basically no fees Active strategy towards exit

Slide6: 

VCs bring in 3C Capital As equity Contacts Often for the most part in finance and law Competence Specialists on rapid growth

Slide7: 

The essence of Love In love Engagement Wedding Marriage settlement Matrimony Happy divorce Venture Capital Deal flow Due diligence Investment Shareholder agreement Monitoring (Business development) Exit

Slide8: 

The development curve of a company

Slide9: 

Development phases and company strategies

Slide10: 

The American management model

Slide11: 

Characteristics for Sweden Salesmanship does not come natural Small home market Few business angels and early phase VCs – limited financing in early phases Only a few companies reach IPO characteristics

Slide12: 

Adaptation to Sweden

The equity possibilities: 

The equity possibilities Pre-seed Seed capital Traditional VC Mezzanine MBO/LBO funds Stock exchange capital

First contact: 

First contact The presentation The pitch (6 sec) The short version The business plan A good executive summary Customer satisfaction well described The sales process well described The key persons well described Team characteristics SWOT analysis Ownership – goals and strategies Exit possibilities The funnel 100 proposals 10 prospects 1 investment Red flags Basics – Out of scoop Characteristics of the entrepreneur Lack in sales Lack in customer satisfaction Limited growth potential Weak exit possibilities Multiple risks Different agenda

Slide15: 

The curve of Akbar Company value Time Distress investments Original idea 1st investment The critical 2nd investment Bankruptcy American philosophy Swedish tradition

Evaluation and Negotiation: 

Evaluation and Negotiation Traditional methods Substance P/e P/s Cash flow Comparisons Consider the p/e-arbitrage Liquidity in the share Minority holding In practice Horse trading Depending on future outcome Magical shares 10%, 20%, 30%, 49%, 51%, 68%, 90% What is the cost of the marginal share Depending on performance

Rate of return on investment: 

Rate of return on investment 10 investments >> 3 total losses 3 +/- zero 3 limited 1 splendid Time of investment 2 – 10 years Desirable rate of return 18-28% p.a. A priori expected rate of return minimum 50% (30%) p.a.

Slide18: 

Shareholder agreement The investment How many share for how much equity Guarantees Business development Board of directors Minority protection Exit Shareholder goals Time frame Quibbling Disputes etc

Slide19: 

Ownership strategies – two tracks Operative reality Turn over and profit Outside relations Customers Colleagues – competitors Enviroment issues Organization Ownership issues Number of partners Single Equal partners Institutional partner Large number of partners Listed company Financing Equity Customers Bank Loans from owners Ownership goals Livelihood company Trade sale IPO

Slide20: 

Business development Management style in growth companies The goals sets the direction, not the cross bar Sales is the engine of growth Invests in sales Everyone is a sales man Organization Task force, puts out fires, monday meetings Prepare for working capital Give priority to time tables before cost savings Focus Outsource Growth through buying functions Prevent narrow sectors

Exit: 

Exit The stock market is an emergency exit Lock up effects Quotation influences Insider issues ”Small stock lists” are one time deals No liquidity for trade and new issues of shares Trade sale Stock market mature Industrial Financial

Slide22: 

The time aspect Rome was not built in one day and neither was IKEA To build organization and company culture is time consuming To build a customer base is time consuming To build a trade mark is very energy and time consuming Immediately start selling and create cash flow No excess financing – live on the hump

Slide23: 

How do you choose your VC Motives Muscles Personal chemistry Track record - references Network Competence

Afema AB: 

Afema AB www.afema.se Segelbåtsvägen 12 SE-112 64 STOCKHOLM, Sweden +46-8-659 86 24 eric.martin@afema.se +46-705-922 899

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