Raising Capital - Venture Capital in Australia

An Information Memorandum that will raise capital An Innovation Catalyst™ Seminar Prepared and Presented by Marcus Tarrant Managing Director Mission HQ Pty. Ltd. ATF the Innovate Trust

Contact Details Marcus Tarrant Managing Director Mission HQ Pty. Ltd. ATF the Innovate Trust Marcus.tarrant@missionhq.com.au +61 3 9005 9710 www.missionhq.com.au © Mission HQ Pty. Ltd. All Rights Reserved 2

Copyright ©2010 Mission HQ. The content, format, structure and communication technique utilised in this document are the intellectual property of Mission HQ Pty. Ltd. This document is strictly classified as “Commercial in Confidence” and intended only for recipients expressly authorised by Mission HQ. Any modification or distribution under altered expression, by any means, in its entirety or in parts, to any person without written approval from Mission HQ is expressly prohibited. Natural Persons or bodies corporate may not copy, retransmit, distribute, publish or otherwise transfer any copyrighted material to third parties or contractors without the express permission of Mission HQ. This document is intended to reflect MISSION HQ’s high-level overview of information memorandum preparation. It does not constitute formal professional advice or a recommendation to potential licensors, tax advisors, inventors or other third parties as to a course of action in respect of the processes addressed, and should not be relied on as such. All care is taken in the preparation of this document but MISSION HQ bears no responsibility as to the contents of this document and disclaims any liability with respect to its use or misuse. Intellectual Property & Disclaimer

What is investable? No Risk Substantial global market Strong intellectual property (monopoly position) 10 X return in 3 years Clear exit path No technology risk Ideal management team In a sector I understand Valuation reasonable Clear value proposition and market entry strategy The 1 in 100 are closer to the above than the 99 © Mission HQ Pty. Ltd. All Rights Reserved 6

But do I really, really want to raise capital? 6-12 months of pounding the pavement Another board member Reporting requirements Forced exit – you don’t choose the timing or price Milestones every six months or no more business Dilution, dilution dilution Expect to be replaced at some point against your will Your baby is now my baby © Mission HQ Pty. Ltd. All Rights Reserved 10

Beware the burn A venture is a bit like a rocket, and funding is the rocket fuel. Burn too slow the rocket goes nowhere Burn too fast and you burn up Burn just right and you might achieve your objectives. 11 © Mission HQ Pty. Ltd. All Rights Reserved

So what is an information memorandum? The culmination of a lot of work, not a lot of work in itself A document that describes a potential M&A or capital markets transaction (including project descriptions and financing details). It is used during the marketing and due diligence phase of a transaction. It differs from a business plan in that it covers both past and future activity. © Mission HQ Pty. Ltd. All Rights Reserved 12

What is an information memorandum used for? Capital raising Grant Funding Mergers and Acquisitions A Business or Intellectual Property transaction Joint venture formation Structured partnerships © Mission HQ Pty. Ltd. All Rights Reserved 13

So, where should I start? Don’t start writing just yet... Raising capital takes time, energy and money A quick raising would take at least 3 months after completion of your IM Most raisings take 6-9 months Writing your IM or selecting a template is definitely not the best place to start the process. © Mission HQ Pty. Ltd. All Rights Reserved 14

Funding Sources Different investor groups have their preferences. Venture Capital Funds Angel Investors Individual Angels Angel Groups Capital Raising Schemes ASSOB Wholesale investor FFR Self Financing/Bootstrapping Government grants (in combination with any of the above) © Mission HQ Pty. Ltd. All Rights Reserved 22 1. Select the appropriate source of capital for your opportunity

Venture Capital Funds Australian VC’s typically moving towards later stage investments Pre-seed funds currently very limited Required IRR of 30-35% Be mindful of the fund lifecycle – it is not the VC investing but the fund. IP IPIP – execution plays are generally not considered Own the customer Have a clear exit timeline Not interested in Australian market except for as testing purposes Usual take large minority interest Not suited to highly capital intensive industries © Mission HQ Pty. Ltd. All Rights Reserved 23 1. Select the appropriate source of capital for your opportunity

Angel Investors Individual or Angel Groups Angel investors are high net worth individuals Successful entrepreneurs, technologists Make personal investment decisions based on areas of comfort Are often known to start-up founders, even if as remote acquaintances. Depending on profile of investment background, understand the need for follow on rounds of funding Can make high level introductions etc. © Mission HQ Pty. Ltd. All Rights Reserved 24 1. Select the appropriate source of capital for your opportunity

Capital Raising Schemes Assob & Wholesale Investor Provides a structured and compliant approach to raising capital under and exception to the corporations act for small scale offerings. Need to be come a public company (.Ltd rather than Pty.Ltd.) Generally relies on your existing networks but provides a structures capital raising platform and associated credibility Many and varied investment requirements © Mission HQ Pty. Ltd. All Rights Reserved 25 1. Select the appropriate source of capital for your opportunity

Self Funding/Bootstrapping Financing growth from previous cash flow and personal funds Need to be in revenue to consider Most bootstrapped companies come from services or consulting companies that are productising their offering Usually close to existing customer and have a strong understanding of customer needs Development is usually constrained by incoming cash flows Can miss out on substantial opportunities as a result of not having access to substantial capital. © Mission HQ Pty. Ltd. All Rights Reserved 26 1. Select the appropriate source of capital for your opportunity

Government Grants Aus Industry State Government Grants Awards and Prizes Most government funding is matching funding at the rate of 50/50. © Mission HQ Pty. Ltd. All Rights Reserved 27 1. Select the appropriate source of capital for your opportunity

FFR Friends Fools Relatives A lunch and a strong relationship is usually enough They invest in you rather than the venture. © Mission HQ Pty. Ltd. All Rights Reserved 28 1. Select the appropriate source of capital for your opportunity

Start with the venture diamond Give the same idea to 10 different entrepreneurs and you will end up with 10 entirely different businesses. © Mission HQ Pty. Ltd. All Rights Reserved 30 2. Use the Venture Diamond to select the best business model

The venture diamond Model © Mission HQ Pty. Ltd. All Rights Reserved 31 2. Use the Venture Diamond to select the best business model Market Size Ownership of customer Sustainability of Position Value Chain Position

Mapping our Venture © Mission HQ Pty. Ltd. All Rights Reserved 32 Market Size 2. Use the Venture Diamond to select the best business model Sustainability of Position Ownership of customer Value Chain Position

Investor requirements © Mission HQ Pty. Ltd. All Rights Reserved 33 Market Size 2. Use the Venture Diamond to select the best business model Sustainability of Position Ownership of customer ,[object Object]

What do they want a business to look like?

What are some of their key go/no-go decision points?

Why are they investing?Value Chain Position

Changing the business model Enables us to target the venture profile to the preferred investor group (Choose the right diamond facet) Provides a framework for the detailed documentation of the information memorandum Establishes the key modelling assumptions and parameters for the financial model. Enables us to ensure that the model is internally consistent prior to becoming bogged down in the detail © Mission HQ Pty. Ltd. All Rights Reserved 34 2. Use the Venture Diamond to select the best business model

The business model matrix © Mission HQ Pty. Ltd. All Rights Reserved 36 2. Use the Venture Diamond to select the best business model Value Proposition – What are you offering? Capabilities/Resources – What skills and capacity do you require? Partnership – Who do you need to work with? Activities – What will you do? Costs – What are your significant costs likely to be? Relationship – What formal and informal relationships are required Channel – What are our channels to market? Revenues – What will our customers pay for? Customers – Who are our customers?

Preparing the Pitch Pack The next slides will discuss the key elements to be prepared as part of your pitch pack. We will use a business I launched back in 1995 (Tuckertime) as a backdrop to the discussion © Mission HQ Pty. Ltd. All Rights Reserved 43 B. The Pitch Pack

The Market What is the size of the market? Why is it really that big? How are you viewing the market? Justify your view of the market © Mission HQ Pty. Ltd. All Rights Reserved 45 B. The Pitch Pack Cheese Vs Meat

The Problem How big is the problem Will people pay to solve it Use key facts to define the problem on your terms Develop a clear graphic to explain the solution. Often the same graphic snapshot with some modification will suit the solution. © Mission HQ Pty. Ltd. All Rights Reserved 46 B. The Pitch Pack

The Solution The problems with existing solutions How your solution works harder for the customer Graphical or pictorial images helpful This slide is to carefully craft your technologies USP. But in terms that are meaningful to the potential investor © Mission HQ Pty. Ltd. All Rights Reserved 47 B. The Pitch Pack

The high level vision Link your business intentions with your underlying technology If possible let the potential investors visualise your potential technology “In Situ” © Mission HQ Pty. Ltd. All Rights Reserved 48 B. The Pitch Pack ,[object Object],[object Object]

Products and Services Explain what it is that you are going to sell How many different products? Rationale for the range? Any customer feedback on why the range of products or services is required. Clearly explain exactly how you will connect your USP with your customer. © Mission HQ Pty. Ltd. All Rights Reserved 50 B. The Pitch Pack

The business model An image of the business model will generate interest and discussion in a pitch session. You will find that you come back to this over and over and over. © Mission HQ Pty. Ltd. All Rights Reserved 51 B. The Pitch Pack

Everything needs to be aligned If you have undertaken the process to the best of your ability then assumptions will most likely be dis-connected Your IM has a market size of $100 million and your financial model is showing $25m Inconsistency Reduces confidence Makes understanding what you are saying impossible Kills deals © Mission HQ Pty. Ltd. All Rights Reserved 59 F. Align all documents

Tips from the street The value of creating a “Buzz” The “Buzz” created by an opportunity can be worth more than the opportunity itself. Raising money is as much about having the right people say the right things about your opportunity as it is anything else. A seat on the board Clear exit path in 5-7 years (Depending on fund stage of life) 10x-30X Multiples Not interested in pre money valuations above $5m Minimum 10% equity Strong intellectual property position Product/disruptive rather than license to existing approach Great team ideal, but dependent on venture stage of development. Remember a VCis running a portfolio approach – a bit like a book maker! The book maker doesn’t know which horse will win. Have a risk appetite but don’t want to take risks © Mission HQ Pty. Ltd. All Rights Reserved 61 4. Creating the Buzz

Raising Capital - Venture Capital in Australia

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