January 2015

From Idea to Investment

Workshop and mentorship 1-day program

Douglas Abrams

2

6XXXX

Douglas Abrams

About the facilitator

• Wharton MBA

• JP Morgan – Vice President - IB Technology, Global Markets Internet Marketing

• Parallax Capital Management – Co-founder and MD - Venture Capital

• Extream Ventures – Co-founder and MD - S$20 million VC fund

• Expara – Founder and MD - IDM Ventures Incubator, fund, advisory, training

• NUS – Adjunct Associate Professor, Business School, Entrepreneurship

• Sasin – Visiting Professor, Venture Capital

3

6XXXX

Douglas Abrams

From Idea to Investment

Day 1

9:00 AM Investment: why and how

10:30 AM Break

10:45 AM Key elements for success - value proposition and innovation

12:30 PM Lunch

1:30 PM Case study

3:00 PM Break

3:15 PM Fund raising and financial plan

5:00 PM End

4

6XXXX

Douglas Abrams

From Idea to Investment

• Investment: why and how?

• Key elements for success

• Financial plan and fundraising

5

6XXXX

Douglas Abrams

Why do ventures seek investment?

• A big piece of a small pie?

• A small piece of a big pie?

• Risk and return?

Founder

Investors

Investors

Founder

6

6XXXX

Douglas Abrams

Why do investors invest in ventures?

• Risk and return are highly correlated

• You cannot increase return without taking more risk

Return

Risk

Potential outcomes

7

6XXXX

Douglas Abrams

Risk and return – small versus scalable business

• Small business: limited scope,

complication and risk. Slow

growth.

• Scalable business: significant

scope, complication, and risk.

Rapid growth.

8

6XXXX

Douglas Abrams

How do entrepreneurs fund growth?

• Internally generated

• Debt

• Hybrid

• Equity

9

6XXXX

Douglas Abrams

Cost, control, growth and risk

Internal

Debt

Equity

Source of funds

Cost Lose Control Growth $ Risk

Impact of funding

Low Somewhat High

10

6XXXX

Douglas Abrams

Financial leverage and firm value

11

6XXXX

Douglas Abrams

Companies founded with venture capital

www.nvca.org

12

6XXXX

Douglas Abrams

Industries created by venture capital

www.nvca.org

13

6XXXX

Douglas Abrams

How does a venture capital fund work?

Fund Investors

VC

8

$ 10 mm

2

$ 10 mm

$ 58 mm

25%

75%

Fund size 10,000,000$

Life of the fund 7

Management fee 2.5%

Investable 8,250,000$

Investment size 1,031,250$

Companies 8

Fail 4 50%

Break even 2 25%

Exit 2 25%

Investor's required ROI 35%

Fund multiple return 5.76

Fund size at exit 57,600,000$

Carry @ 20% 9,520,000

Distribution 48,080,000$

Fund return multiple 4.81

Fund ROI 35%

Required return per exit 28 times

Equity per company F/D 15%

Required value of equity at exit 28,800,000$

Required co value at exit 192,000,000$

14

6XXXX

Douglas Abrams

Why invest in venture capital?

As of 31-Dec 2014 The Cambridge Associates LLC U.S. Venture Capital Index® is an end-to-end calculation based on data compiled from 1,569 U.S. venture capital funds (1,002

early stage, 175 late & expansion stage, 386 multi-stage and 6 venture debt funds), including fully liquidated partnerships, formed between 1981 and 2014.

1Pooled end-to-end return, net of fees, expenses, and carried interest. Sources: Cambridge Associates LLC, Barclays, Dow Jones Indexes, Frank Russell Company, Standard &

Poor's, Thomson Reuters Datastream, and Wilshire Associates, Inc. *Capital change only

Case Shiller Real Estate Index 4.1

Expara IDM Ventures (2) 47.00

15

6XXXX

Douglas Abrams

The investor’s decision tree

Innovative?

Yes

Value proposition?

Yes

Fast-growing market?

Yes

Exit

No

No

No

16

6XXXX

Douglas Abrams

Exit markets at an inflection point

17

6XXXX

Douglas Abrams

What should be in your business plan

1. Executive summary

2. Value proposition and

innovation

3. Market identification and

analysis

4. Marketing and sales strategy

5. Sustainable competitive

advantage

Overview, innovation, market

6. Company products and services

7. Team

8. Expansion plan

9. Operational plan

10. Finances – Revenue and cash

flow, valuation, funding required,

equity offered, ROI

Execution and financials

18

6XXXX

Douglas Abrams

Entrepreneur and investor communication

• Executive summary – 1-3 pages

• Business plan – 25 – 50 pages

• Investor presentation slides

• Verbal presentations to investors – informal and formal

19

6XXXX

Douglas Abrams

Getting to gatekeepers

• It’s not what you know; it’s who

you know

• Network, network, network

• Strong ties and loose ties

20

6XXXX

Douglas Abrams

Getting past gatekeepers

• Why are presentations important?

• Understand gatekeepers’ incentives

• Avoid raising red flags

• Attention to detail

• Get it right the first time

21

6XXXX

Douglas Abrams

Effective presentations are simple

• Your message needs to be clear, concise and simple

• Clean visual design – avoid chart junk and “design-itis”

• On presentation slides, less is more – slides, bullet points, text

• Use meaningful titles

• Do not read your slides

22

6XXXX

Douglas Abrams

Practice and test

• Analyze the details of your presentation, then master those details

by practice, practice, practice.

• Arrive early and if you are using any technology, test it

• If you can not get in early, try to test the night before

• It is OK to be nervous before you begin

23

6XXXX

Douglas Abrams

Nailing the Q&A

• Audience has a chance to ask you about what is on their mind.

• Q&A is do or die time.

• Prepare for Q&A by studying your material in-depth

• Anticipate likely difficult questions and formulate answers

• Note questions you are asked and if you did not have a good

answer to a specific question, formulate one for next time.

• Don’t disagree - agree

24

6XXXX

Douglas Abrams

From Idea to Investment

• Investment: why and how?

• Key elements for success

• Financial plan and fundraising

25

6XXXX

Douglas Abrams

Key elements for success

• Develop an innovative product – Innovation

• Solve a problem for customers – Value proposition

• Identify your customers – Market identification and analysis

• Reach your customers – Marketing strategy

• Compete when others enter - Sustainable competitive advantage

• Make money – Business model and financial plan

• Team – A team or B team

26

6XXXX

Douglas Abrams

Problem Solution

Key

Metrics

Cost drivers Revenue model

Value

proposition

and

innovation

Sustainable

competitive

advantage

Channels

Customer

segments

Market size

Customer

archetype High concept

Existing

solutions

Top 1-3 customer

problems

How are these

problems solved

today?

Your solutions to

customer

problems

Key numbers that

tell if you are

succeeding

What is innovative

about your

solution? Why are

you better than

existing solutions?

One sentence

that says it all

How will you

create barriers to

entry for

followers?

How will you get

your product to

customers?

Who are your

target

customers?

How big is your

market and how

fast is it growing?

Characteristics of

your key

customers

How do you

generate

revenue?

What are your

key cost drivers?

Expara Business Model Canvas

27

6XXXX

Douglas Abrams

Questions to answer

• Innovation

• Value proposition

• Market identification and analysis

• Marketing strategy

• Sustainable competitive advantage

• Financials

28

6XXXX

Douglas Abrams

Don’t go too early or too late

Measure of

performance

Measure of effort invested

The technology adoption S curve

29

6XXXX

Douglas Abrams

Value proposition and innovation

1. What is the painful problem you are solving for customers?

2. What is your product and what is innovative about it?

3. What are the shortfalls of the current solutions?

4. How do you solve this problem and can you quantify your benefit?

5. How does your innovation enable you to accomplish this?

30

6XXXX

Douglas Abrams

Diamond Rio versus iPod

31

6XXXX

Douglas Abrams

Disruptive business model or disruptive tech

• Diamond is the first mover in

portable MP3 in 1998

• Apple enters in 2003 and

captures 90% of the market

• Business model innovation –

hardware + software + service

32

6XXXX

Douglas Abrams

Business model innovation: Gillette to Google

• Gillette – razor and blade

• Southwest Airlines – budget airlines

• Dell Computer – mass customization

• Charles Schwab – on-line broker

• Amazon – ecommerce

• eBay – peer to peer marketplace

• Google – search-based advertising

33

6XXXX

Douglas Abrams

Market timing – entering at the inflection point

Measure of

performance

Measure of effort invested

The technology adoption S curve

34

6XXXX

Douglas Abrams

Types of markets

• Existing markets

• Re-segmented markets/niche market

• New market

• Clone market

35

6XXXX

Douglas Abrams

Top-down market sizing

Total addressable market

Target market

Target segment

Market share

36

6XXXX

Douglas Abrams

Bottom-up market sizing

37

6XXXX

Douglas Abrams

Market identification and analysis

1. What is your market type?

2. How big is your market and how fast is it growing?

– Top-down approach

– Bottom-up approach

3. What are trends in your market are favourable for you?

– Technological, social, demographic, regulatory

4. Who are your direct and indirect competitors?

38

6XXXX

Douglas Abrams

Case study: Value proposition

39

6XXXX

Douglas Abrams

From Idea to Investment

• Investment: why and how?

• Key elements for success

• Financial plan and fundraising

40

6XXXX

Douglas Abrams

In the financial section of the business plan

1. Business model – Revenue model – Cost structure

2. Financial projections

3. Valuation

4. Funding required and equity offered

5. Use of Proceeds

6. Exit Strategy and ROI

41

6XXXX

Douglas Abrams

Elements of a business model

• Revenue models

• Cost structures

42

6XXXX

Douglas Abrams

Calculate investor’s ROI including dilution

43

6XXXX

Douglas Abrams

Stages and sources of funds

Founder’s

Capital

Seed/

Angel

Series

A, B, CMezzanine Pre-Exit Exit

VC hurdle rates 60-100% 40-60% 20%

OM

F,F&F

Incubators

corporations

government

Customers, suppliers,

strategic partners

VCs, Banks for VC loans

R&D Establishment GTM/Rollout Accelerated Expansion Maturity

Enablement growth

44

6XXXX

Douglas Abrams

Cap table

45

6XXXX

Douglas Abrams

Key elements of a term sheet

• Board of directors

• Protective provisions

• Drag-along agreement

• Conversion

Control

• Price-per-share

• Valuation

• Amount of financing

• Liquidation preference

• Vesting

• Options pool

• Anti-dilution

• Pay-to-play

Economics

46

6XXXX

Douglas Abrams

Contact us

• Douglas Abrams

• Expara Pte. Ltd.

• dka@expara.com

• www.expara.com

• 65-6323-3084, 65-9780-5381 (hp)

• Block 71 Ayer Rajah Crescent, #02-10/11 Singapore 139951