How to close investment deal (an introduction)

Benno Groosman
www.groosman.info
A first introduction on
How to close an investment deal
www.groosman.info
Twitter: @Benno_Groosman
Pinterest: bennogroosman

BENNO GROOSMAN
RELEVANT EXPERIENCE
• The Netherlands
• Master in Business Adminstration
• Entrepreneurship & New Business Venturing
• Specialization: entrepreneurial finance
• Experienced startup entrepreneur
• > 10 years
• Involved in startups and incubation/acceleration
• Award winning healthcare company
(3 international patents, 3 products,
€1.4M funding, 2 termsheet negotiations)
© www.groosman.info

DISCLAIMER
▶ This presentation is based on investor studies in
USA, UK, Germany, Israel and The Netherlands,
▶ combined with my own experience in my company
in The Netherlands.

TYPES OF INVESTORS
• Friends, family and fools.
• Governments, universities, larger companies.
▶ We will talk about:
• Business angels (informal investors)
• Venture capital funds

BUSINESS ANGEL / INFORMAL
▶ Individual with personal capital and experience in
entrepreneurship or a certain branche available.
▶ Typically wants to use his money AND time for your
company: “smart capital”.
Indication of investment range $10-100k.
Can make syndicates with other investors to expand
network and make bigger total investments.

VENTURE CAPITAL FUND
Fund collects money from companies, governments,
investors, pension funds, etc.
Funds typically have a 5-7 year investment range and
do multiple investments in that time. $500k and more
per investment.
Fund managers and investor managers are responsible
for ROI on the fund capital. Investors in the fund want
to monitor this, so there’s more “paper work”.

OTHER FUNDS
• Investing pension funds;
• Corporate venture capital;
• Government seed and growth capital;
• Equity funds ($10M and up)
And many more, but usually for the high-growth stage
of a company (for example: after 3 years, $10M+ in
revenues).

STAGE AND TYPE OF MONEY

SIZE OF INVESTMENT
Ask the money that you really need,
not too little,
and about 15-25% extra for unforeseen expenses.
Informal investors don’t like to pay for marketing, big
office space and high salaries. They want to build the
business by investing in prototypes, production, sales,
patents, strategic positions etc.
Use the money to grow the value of your company.

TIMING OF INVESTMENT
Best position to negotiate is when you don’t really
need the money yet.
Investors can delay the dealmaking, so make sure you
have a financial buffer.
Informal investors / business angels: 3 months.
VC funds: 6 to 12 months.
+ time you need to get to get them in your network!

POSTPONE AN INVESTMENT
Get money from:
• Selling your test product
• Make customers pay in advance
• Use governmental subsidies and grants
• Consultancy (but don’t loose your focus!)
▶ ... TO BE ABLE TO MAKE A BETTER DEAL.

INVESTMENTS AND THE BANK
In later stages you can use the investment as a
multiplier to get bank a bank loan.
Example:
€300k investment could enable a €600k bank loan.
Banks don’t like risks. Investor money reduces their
risk. Banks finance working and growth capital, not
marketing, salaries and research and development.

MULTIPLE INVESTMENTS
You might need more investments to start, grow,
expand your company.
First investment deal is considered to be the most
important,
as the terms determine the ease of acces for future
investments,
and the dilution of shares starts here.

EQUITY DILUTION

WHAT DO INVESTORS WANT
• Control
• Preference rights for future rounds
• Big percentage of shares

WHAT DO YOU WANT TO GIVE
• No control
• No preference rights
• Only a small percentage of shares
▶ So… a negotiating process is needed to make the
deal.

COMPANY VALUATION
▶ Valuation of startups is not just a numbers game.
It’s more about expectations, feelings, investment
limits etc.
▶ But, start to quantify your value by:
• Real option pricing;
• Discounted cash flow;
• Comparing to other startups.
▶ Science, art or random?

REAL OPTION PRICING

DISCOUNTED CASH FLOW

OTHER VALUATIONS
• Investor policy, e.g. “the maximum post-money
valuation for seed money is $2M”
• Investor divides the numbers the entrepreneur
provides by 10
▶ Entrepreneur knows, so multiplies by 10, etc.
• Profit times 5, revenue times 2 (or any number),
industry multipliers, β
• Tens of other methods

DEAL MAKING PROCESS
▶ GO / NO GO decision after every stage:
• First contact, pitch
• Personal connection
• Business plan and/or presentation
• Term sheet
• Negotiations
• Signing term sheet (exclusivity phase investor)
• Due diligence
• Participation contract
• Deposit of money and changes of legal structure

KEY NEGOTIATION POINTS (1)
Valuation
• With VCs it’s easier to ask more money than give away
less shares, with informal investors it’s the other way
around.
• Investment in multiple stages (one contract) can lead
to better valuation. E.g., $200k at once will come at
lower valuation than $100k upfront and $100k after
first customer.
▶ More risk for you: what if the customer comes too
late?

Preferred stock and influence rights
• Tag-Along right
• If big shareholders sell, small shareholders are
forced to sell too
• Pre-emption right
• Before another shareholder comes in, the existing
shareholders can buy shares at the same price
• Right of first refusal
• Like the previous, but with pre-specified terms

Preference rights, exit options, and penalties
• What if it goes very good?
• More important: what if it goes bad?
• Will you lose your shares?
• Will you lose your management position?

TRY TO TAKE CONTROL
• It is your business
• Don’t get controlled and sucked up by the game
• Be hard on the content, but soft on the relationship
• Don’t get intimidated by negotiating tactics
• If you don’t like the deal, take time to negotiate
• Use an experienced and trusted
advisor/mentor/lawyer
▶ … and dare to walk away and cease the deal. Be
nice though, it gives you credits.

AFTER THE INVESTMENT
• Keep working on the relationship
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely

Benno Groosman
www.groosman.info
www.groosman.info
Twitter: @Benno_Groosman
Pinterest: bennogroosman

How to close investment deal (an introduction)

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