Presentation was given at the 2nd Annual NEI Venture Capital Symposium

1. Effective Communication
in the Acquisition of Private Equity Financing
Northeast Indiana
GROWTH CAPITAL SYMPOSIUM
April 22, 2009
Sweetwater
Remound Wright
Northeast Indiana Innovation Center

2. ho am I?
• Remound W. Wright, Inaugural Director, Center for
Entrepreneurial Excellence (CEE) – (7 Years with the NIIC)
• Duquesne University – MBA
• Business Development, Strategic & Corporate
Financial Planning (6 Years w/ Phelps Dodge & NAVL)
• Public Accounting + Internal Audit (10+ Years with
Touche Ross & Co. & Westinghouse Electric)
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3. hy an Innovation Center presenter?
• What is NIIC?
• 501 (c) 3 Non-profit business technology based
incubator & accelerator;
• Innovation Park is 55 acre campus adjacent to
IPFW our host at Stellhorn and Hobson Roads;
• 70K+ square feet in 2 bldg (biomedical wet lab
space and office space) including the new EGC
• ISO 9000-2001 Certified
• 11.5 FTE staff
• 5 Clients have graduated since inception
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4. revenue
he Venture Financing Chain Maturity
Expansion
IPO,
Acquisitions
Growth
Banks
Gestation
Inception Roll-out
Venture Capital Firms &
Prototype Corporate Investors
Founders
Angel Investors
Time
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5. Why Discuss Effective Communication?
Because….
There is Art in the Ask!
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6. The worlds of business and fine art
have much in common.
Money and Music
Finance and Fiction
Profits and Paintings
A painter puts oils on a canvas…
A writer puts pen to paper….
An entrepreneur takes a business
idea and brings it to life.
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7. How you ask questions is very important in
establishing a basis for effective communication.
1. Effective questions open the door to knowledge and
understanding. The art of questioning lies in knowing
which questions to ask when.
2. Address your first question to yourself: if you could
press a magic button and get every piece of
information you want, what would you want to know?
The answer will immediately help you compose the
right questions.”
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8. Why Discuss Effective Communication?
Effective communications critical to the
success of all private equity (PE) relationships
-This is a relationship business.
-People have choices:
•Who to invest in;
•Who to invest with;
•Who to take term sheets from;
•Who to work deals with;
•Who to establish and maintain relationships with.
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9. Four Goals of Effective Communication
• To inform – you are providing information for use in
decision making, but aren’t necessarily advocating a
course of action;
• To request for a specific action by the receiver;
• To persuade – to reinforce or change a receiver’s
belief about a topic and, possibly, act on the belief;
• To build relationships – some messages you send
may have the simple goal of building good-will
between you and the receiver.
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10. Effective Communication…
1. Achieves shared understanding
2. Directs the flow of information
3. Helps people overcome barriers to open
discussion
4. Stimulates others to take action to active
goals
5. Channels information to encourage people
to think in new ways and to act more
effectively
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11. The 5 Essentials of Effective
Communications
1. Know your audience and match your
message to the audience.
2. Respect your audience and suspend
judgments.
3. Know exactly what you want to achieve.
4. Think and organize before you proceed.
5. Think from your audiences point of view.
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12. Many entrepreneurs don’t get the funding they seek
because they don’t know the investors criteria.
If approaching an angel investor you must
have thought through these key questions…
2.How much money do you need?
3.What do you intend to do with the funds?
4.How much return will the investor realize on the
investment?
5.When will the investors realize a return?
6.How will the investor realize a return?
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13. Investors typically analyze an opportunity
by its stage of development.
•Pre-seed Stage •Proof of Concept
•Seed Stage •Pre-sales, pre-profit
•Early Stage •Early sales, pre-profit
•Mid-stage •Growing sales, breakeven
•Late-stage •Growing sales, profits
•Exit •Large growth potential
Entrepreneurs must know the intended outcome of
investment based on their stage of development.
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14. Entrepreneurs must know who typically
invests at each stage of their development?
Stage Amount Source
Pre-seed Stage $100,000 Family, Friends & Founders
Seed Stage $500,000 Angels
Seed Stage $2,000,000 Venture Capital
Early Stage $5,000,000 Venture Capital
Mid-stage $8,000,000 Venture Capital
Late-stage $10,000,000 Venture Capital
Exit $11,000,000 - $1B Investment banks,
companies
Entrepreneurs must know when and where (the
appropriate places) to look for investment.
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15. An investors expected rate of return by
stage development.
Stage Source ROI
Pre-seed Stage Family, Friends & Founders 20X in 7 Years
Seed Stage Angels 10X in 6 Years
Early Stage Venture Capital 5X in 5 Years
Mid-stage Venture Capital 3X in 3 Years
Late-stage Venture Capital 2X in 2 Years
Exit Investment banks, 1.35X in 1 Years
companies
Entrepreneurs must know when and where (the
appropriate places) to look for investment.
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16. Effective communication demands that
entrepreneurs to know the ?’s.
If approaching a banker for investment you
must address these key questions…
•Ownership
•Business Plan
•Cash Flow
•Contingency Plan
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17. Effective communication demands a well
written strategic business plan.
It is vital in today’s world that the entrepreneur
realistically understands how their product is
positioned in the market place.
The Big 8 key strategic questions relate to:
5.What market problem or need does the product address;
6.How big is the problem;
7.Why is this product the best solution and why will customers buy;
8.What management skills are required to bring the product to
market;
9.How much money is required;
10.How will those funds be used;
11.How will competitors be neutralized, and
12.How much money will this venture make?
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18. Beyond the previously mentioned criteria,
we let clients know that investors look
for...
•Great deals, not good deals;
•Exceptional Return on Investment (ROI);
•Dominant competitive advantages;
•Proven management;
•Large and growing markets;
•In their sweet spot; and
•Synergy with other portfolio companies.
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19. For entrepreneurs the results of effective
two-way communication are…
•Develop & Maintain Better Relationships
•Trust
•Rapport
•Credibility
In this environment – information travels quickly
•Stronger Skills in:
•Leadership
•Negotiating
•Relationship building
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20. iCARE – where effective communication
about venture financing begins.
Investment Center for Advancement of Regional
Entrepreneurship
An Entrepreneurial Preparedness Program of the
Northeast Indiana Innovation Center
A “one-stop-shop” where entrepreneurs find out every
thing they need to know about venture financing.
Come and learn more about “Art of the Ask”!
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21. THANK YOU
Contact Info:
Remound W. Wright
Director
Northeast Indiana Innovation Center
Center for Entrepreneurial Excellence
3201 Stellhorn Road, Fort Wayne, Indiana 46815
rwright@niic.net
260-407-6462 DD
260-402-1920 Cell
http://www.niic.net
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22. Venture Capital Glossary
What We/They Say… What We/They Really Mean…
Acquisition strategy The current products have no market
Adverse customer selection Existing customers can’t stand the product;
no positive customer references
Basically on plan Revenue short fall of 25%
Dotcom business model Potentially bigger fools have been identified
Considerably ahead of plan Hit plan in one of the last three months
Currently revisiting the budget Financial plan is in total chaos
Cyclical industry Posted a huge loss last year
Entrepreneurial CEO Totally uncontrollable, bordering on maniacal
Funding interruption Existing investors tapped out and unwilling to
provide additional funding
Ingredients are there Given two years we might find a workable
strategy
Investing heavily in R&D Trying desperately to catch the competition
Limited downside It can’t get much worse
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23. Venture Capital Glossary
What We/They Say… What We/They Really Mean…
Long selling cycle Yet to find a customer who likes the product
On a manufacturing learning curve Can’t make the product with positive margins
Possibility of a slight shortfall A revenue shortfall of 50%
Repositioning the business Multi-million dollar investment recently
written off
Somewhat below the plan Revenue shortfall of 75%
Too early to tell Results to date have been grim
Turnaround opportunity Lost cause
Unique No more than 6 competitors
Upgrading the management team The organization is in complete disarray
Window of opportunity Without more money, the company is dead
Work closely with management Talk to them on the phone once a month
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24. Alternative Guide to Venture Capital
VC Term… What It Really Means…
Accountants As in investigating accounts, an oxymoron
Business Plan Winner of the Booker Prize for Fiction. Vital to securing an
investment. Treated like an embarrassing relative post-
investment.
DCF Analysis Deceit by Computer Fraud. Highly scientific and extremely
unreliable method of valuing companies.
Due Diligence The (sometimes optional) process of finding out what your
buying. Ideally before buying it.
Envy Ratio The ratio between how much money a management team
makes and how many workers they make unemployed.
Exit The only door a VC can see.
(David) Frost on Sunday A VC’s favorite interviewer. Also the first letter of FOSB – an
impolite decline. Also: Failure. Unimaginable.
Hockey Stick Every self respecting business plan should have one. Shows
the smooth line progression from heavy start up loss to Microsoft
levels of profitability that is in every startup’s birthright. Hockey
sticks are useful for beating management over they head when
they don’ t happen.
Internet The medium by which a number of stupid and unlikely people
have made millions. And lost them again. To be approached
with caution.
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25. Alternative Guide to Venture Capital
VC Term… What It Really Means…
Incubator Where teenagers lecture entrepreneurs on the facts of business
life (how much they would sell their Pokémon cards for, the
latest Teletubby stories, etc.) Would-be investment executives
work at incubators until they are old enough to join a proper firm.
Jersey Where many VC funds are domiciled. Because they like the
weather.
Kindergarten See Incubator.
Lawyers A necessary evil, apparently.
Management To be blamed for poor investments.
NPV – No Positive Value Another widely used and largely useless valuation technique.
Profit and P45 Form given to departing employees. VCs seek to make one by
handing out the other.
Private Equity VCs like to keep private how much equity they own.
Portfolio Company Like children – Cute to look at in the early stages, then they start
spending your cash and ruining your records, before you finally
lose patience with in and boot them out of the family home.
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26. Alternative Guide to Venture Capital
VC Term… What It Really Means…
Quantum Leap What lemmings believe in before they invest in dot-com start ups
Also: Question. Obvious and usually unacceptable evidence of
disbelief.
Receivership An alternative exit strategy. Very popular with American VC
firms in the late 80’s early 90’s.
Stock Exchange Where large numbers of old economy companies have
historically been put out to pasture. A slow lingering death
awaits. A happy hunting ground for VCs. An unlikely exit
scenario unless you have little revenue and no profits.
Trade Sales What a VS tells his investment committee when he can’t think of
how to exit a deal. Also: Terrible deals. What the competition
does.
Unions A VCs greatest ally. Particularly helpful in restructuring dying
businesses to meet the needs of the market economy. We’re all
capitalists now.
Warranties and A guarantee (backed up with financial penalties) from the vendor
Indemnities to say they’ve been honest .”
Window of Opportunity What a management team always promises.
Youngster Dot.com manager.
Zero Sum Game Pleasant way of generating M&A fees.
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