Thursday, 26 March 2015

Of entrepreneurs and capital raising . . . free advice from the IBCyclist

I don't care what type of entrepreneur you are, whether it's tech, mining, pharmaceutical, mechanical or financial I just need you to answer some very straight forward questions in our first meeting.

1. Opportunity: What market are you attempting to satisfy? 

It's an easy question, but you'd be surprised how many fledgling companies don't state it right up front. I've seen some great presentations, and they usually start with a clear value proposition:

Did you know that the average amount spent on a taxi fare in New York is X? Total income for the industry, last year was X.

Did you know that the average automobile has X meters of copper wire in it? And if every third Chinese or Indian household owned a car we'd require X amount of new copper production . . .

Obesity is the single biggest killer of adults under the age of retirement. Spending on related solutions is likely to grow at X% over the coming decade?

2. Concept: What are you offering that satisfies the opportunity you identified? 

Show me your solution. Don't use words when pictures, maps and numbers will best highlight things.

Our app is a unique solution that enables the user to connect with the nearest taxi directly and offers passengers a rebate for frequent use.

The "Big Deposit" copper mine can be operating within 18 months and produce ore at a rate of . . . 

"Nofatsilose" is currently in stage 2 of clinical trials and we hope to confirm that it reduces cholesterol by X% in the first year of use.

3. Demonstrate: Walk me through the process.

How do we get the solution working. Give me a timeline and state various hurdles, be they regulatory, physical construction or software testing.

Here's a mock-up version of our app. It's taken 12 months to get to the beta phase and $100k. As you can see the user's location is automatically identified, and all they need to do is select a destination either from their address book or by inputting it in the address bar like this . . . 

This map shows the mine location. You'll notice the proximity to transport, both road and rail. The pit depth for stage one needs to be . . . 

If we pass stage 2 the drug goes to final FDA approval which should take 12 - 18 months. In that time, we'll need to conduct some additional studies . . .

4. Funding: How much do you already have? How much do you need? How much cash are you burning per month?

Entrepreneurs need to demonstrate they have a grasp on their business costs. Don't ask me for a million dollars today if you need to come back in 3 months for more because you didn't understand the risks of cost blow-out, etc.

The app needs 300k users to breakeven. We estimate total operational costs (developers, testing, etc.) in the first 18 months to be $850k. In addition using recent data from X, Y or Z, we're estimating those first 300k users to cost us $4.50 each. That will be attributable to marketing and database maintenance. All in we're raising $1.5m, allowing us a contingency . . . 

The basic mine infrastructure is likely to cost $40m, but that excludes a rail track extension for the last 9km. That costs $3m, but the weather means we need to double that contingency if the rains fall early. We have $10m in cash, which will last us nine months . . . 

We have $30m in cash on hand. The final trials will cost $38m, but if the regulator needs extra evidence we don't want to be coming back to the market in the middle of the process. We think it makes sense to raise an additional . . . 

5. What's in it for the investor?

What is the current capital structure (who owns the business)? How long before you breakeven? What is the dilution effect of the capital raising you're conducting? If you have to raise money again do I get first right of refusal on new shares?

Post breakeven we estimate that each new users will generate around $2.50 of income. Of that roughly 30% will be needed for operational costs and 20% for ongoing marketing. In terms of valuation comparables . . . 

Total cost per ton of Ore will be XXX. That means we'll be the lowest cost producer in the market. Stage 1 is likely to be exhausted in 3 years at which time we will have shipped XXX . . . .

Once FDA approval is granted, we estimate marketing costs (via conferences, literature, etc.) to be approximately $26m when implying the same model Fizer used for it's inferior product that launched in 2008. That means that once we're on the approved list we'd expected take-up in the EU and the US of around 50m patients at a cost of . . . 


Obviously the more facts and figures you have, the better it is and the better your credibility. Some entrepreneurs have an advantage in that they come from a very numeric background. If you're more about style, then you need to have a good CFO that you can toss to in case deep divers (like myself) start throwing out detailed questions. It's not the end of the world if you can't answer the questions, but you do need to show that you understand what's being asked.

Finally some words on your presentation.

If you're a hedge fund and I'm an institutional investor I don't want to come to your office and see six traders dressed in shorts playing air hockey because nothing is happening in the market today.

If you're a miner and you've just entered the car park in a $300k Ferrari I'm going to wonder why you need my money.

If you're tech looking for $1.5m it's probably best if you're not wearing a $75k Patek Philippe and $1500 John Lobbs, Christian Louboutin's or Jimmy Choo's. I'm going to ask why you're not funding this yourself.

If you're a pharmaceutical . . . . don't get me started.


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