Term Sheets – Negotiating the Perfect Deal

Securing an investor is an important aspect of growing your business. For early stage companies seeking financing, the term sheet will outline the key terms of the proposed investment. Sharing company equity with a VC is a negotiable challenge. In this seminar, the panelist will outline the basics of terms sheets, and share best practices with entrepreneur when it comes to negotiating a term sheet.

Join us for Term Sheets – Negotiating the Perfect Deal at our “Growing Your Business” breakfast event series 7:30 to 10 a.m., Thursday,  May 12 at the University of Toronto Mississauga’s Faculty Club

Guest Speakers:

Eric R. Klein, Partner, Farber Financial Group  is the Leader of Klein Farber, the Corporate Finance & Transactions practice of Farber Financial Group. Eric’s practice focuses on providing value-added financial advisory services to mid-market companies. Eric focuses on complex mergers, acquisitions, divestitures, business valuations, strategic partnerships, exit and succession planning, and financings as well as joint ventures of mid-sized Canadian corporations. A consummate negotiator, Eric works with all parties to obtain the best possible outcome for his clients in transactions. He is a frequent lecturer and speaker on corporate finance and entrepreneurship and is involved in various charities.

David Pamenter, Partner, Gowlings,  is the National Leader of Gowlings Technology Industry Group and specializes in business law and practices in the Toronto office. He has more than thirty years of experience in private financings (including venture capital financings), M&A and technology licensing. He advises a wide spectrum of domestic and international clients on matters of both a day-to-day and a strategic nature. David has represented clients on a diverse range of transactions including commercialization of intellectual property. David is active in the Intellectual Property, International Law and Small Business Committees of the Section of Business Law of the ABA.

Paul Chipperton, CEO and Co-founder, Profound Medical Inc.,  is responsible for all aspects of the corporate and operational advancement of the company. He has significant successful international biotech “start-up” and New Product Development (NPD) management experience, and has previously led Business Development & Marketing with a number of companies, most notably CRi & Beckman-Coulter, PerkinElmer, and DNAGenotek. He is also a co-founder and Board member of InDanio Bioscience Inc, and a guest lecturer at both McGill University and University of Toronto on managing innovation and entrepreneurship in the Life Science sector.

The Research Innovation Commercialization (RIC) Centre hosts the 10-event series, which runs from September to June 2011. Gowlings is the session sponsor.

For a complete schedule visit riccentre.com

Pre-Registration $25, Pay at Event $30 (covers breakfast and parking). To register, visit www.riccentre.com.

For more information, contact Jasmeet at  289-373-3050 or by email at jasmeet@riccentre.com

The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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What VCs look for and what to look for in a VC – Lessons from the Venture Capital Investment Competition

By Shantanu Mittal

I recently had the opportunity to participate in the Venture Capital Investment Competition organized by The Rotman School of Management. In this competition student teams played the roles of Venture Capitalists and had to evaluate two real business opportunities and negotiate a termsheet with one.

This was a great opportunity to sit on the other side of the table and analyze a business from a VCs point of view. Our team had to critically analyze the business plans, listen to the entrepreneurs pitches, carry out due diligence sessions and successfully negotiate the terms of a deal with the entrepreneur. Through this exercise, I was surprised to learn some things which at first seem counter intuitive for start-up businesses looking to raise money from investors

1. Forecasting large revenue projections for pre-revenue companies is an exercise in vain:

• All companies forecast a ‘hockey stick’ revenue growth curve in hopes that when investors look at their projected growth, they will value them higher. In reality, investors rarely value a pre-revenue company based on its projected revenue (a method of valuation known as Discounted Cash Flow). Instead investors like to see a well thought out revenue model, in which growth is based on sound assumptions and a niche target market.

2. Don’t go to an investor if the only thing he or she can offer is money.

• Money is certainly important to grow your business, but investors, especially VCs, can offer a lot more value to the company. For starters, find a VC who shares your enthusiasm for your business idea and has similar vision for the growth of the company. Also, look at what else the VC can offer in terms of networks and marketing or technical expertise. This can really speed up the growth of your company and help you find opportunities previously unavailable to you.

3. Don’t fight too hard to keep a very large share of your business.

• All entrepreneurs want to keep control and a large portion of their business. But would you rather have 10% of a $1 million company or 100% of a company worth $0. Because, in reality, a pre-revenue company is essentially worth $0. VCs decide how much to invest for what percentage of the company by valuating the business based on various factors such as the management team, market growth and recent acquisitions or investments. It is important in the negotiation to understand the highest valuation the VC will go to, so you can get the best deal. You can also negotiate on other terms to maintain control, such as board structure and shareholders rights. Eventually it is a partnership, so you want to ensure that both parties are happy on signing the deal.

Well, my team managed to win 2^nd place at the competition, beating out 6 other MBA teams.

Overall what I learned from this experience was this: Making a deal with a VC is like getting into a long-term relationship; there will be ups and downs, but both parties need to ensure they understand each other well enough to get through the tough times.

Shantanu Mittal is graduate student pursuing his Masters of Biotechnology from the University of Toronto Mississauga. He is currently the communications officer for the RIC Centre, a role which has helped him understand the world of entrepreneurship and business development. With his expertise in the life sciences and green technology sector, he has been able to provide valuable feedback to clients along with the entrepreneur-in-residence. Shantanu hopes to pursue a future in business development in the biotechnology or green technology industries.

The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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The Angels and Demons of Investing

Rob Koturbash of the Maple Leaf Angels and Bryan Watson of the National Angel Capital Organization (NACO) were recently featured on the ‘In Business’ show on Rogers TV.

Rob and Bryan talked about who angel investors are, what businesses they invest in and what are some of the important differences between Angels and VCs. They also talked about the upcoming co-investment summit on June 8th and the importance of organizations such as the RIC Centre to help innovative companies on the path of commercialization.

Check it out here.

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The view ahead for 2010

By Hari Venkatacharya

After having returned from my fourth trip to India in the last year three weeks ago, I’ve been thinking hard about where I believe Canadian companies need to focus in the next twelve months to create momentum, and buffer themselves against the vagaries of the US economy.

Although the overall sentiment in North America is certainly more upbeat than it has been in 12 months, there is no doubt that most people, including myself, are very sceptical about whether the US, and so also the Canadian, economy is now on a growth path, or simply making up some of the lost ground from the carnage of last year.

Although we saw some good growth in the job market in Canada in November, this was more than compensated for by more losses in December 2009. In addition, the new US budget is not only including significant deficit spending, but is also hinting at tax increases.  In Canada, our finance minister has indicated that at least five years of budget cuts will be needed to again balance the books. Where does this leave the entrepreneur?

I believe that there is still the potential for huge growth for companies that target a specific niche market, and look at both organic and inorganic growth in emerging countries. I do not believe that the North American markets will grow anywhere near the 9-10% GDP growth that is being predicted for India and China, for this year. We may be lucky to simply not have our economies shrink!

Here are some predictions for 2010:

• SME companies in Canada will start to de-couple from an exclusive US-focused growth strategy and will engage with companies in emerging markets.
• The traditional VC model will cease to exist. More investments will come from strategic partners, government agencies, and angel investors.
• The Canadian economy will shrink an additional 2%
• We will have a new government in Ottawa.
• Canada will allow significantly more foreign investment from Asian companies, specifically focused on the clean technology sector, like the recent Samsung deal in Ontario.
• Canadian government-backed innovation programs will more aggressively pursue US and foreign VCs to leverage their investments.
• Canadian early stage investments will go down by 20%, with more funding allocated to M&A and consolidation plays.
• The oil sands will be forced to focus future development on a more environmentally friendly model, mostly due to international as opposed to national, pressures.

Fundamentally, Canadian companies at any stage need to re-focus their attention to non-US markets, or they will be left behind in the huge growth opportunities that exist globally. The urgency has never been greater to diversify our base of business, and to take advantage of true global networks and connectivity.

Hari is a seasoned entrepreneur with over a dozen years of experience in building and exiting businesses in Canada, US and India.

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Raising cash from Angels and VCs

Session 5 of Keep Growing Your Business focuses on raising cash from Angels and VCs. The seminar is scheduled for January 20 at the Faculty Club, South Building University of Toronto Mississauga at 3359 Mississauga Road from 7:30 to 10 a.m. Pre-registration is $20, at the door $25.  Registration fees include parking and breakfast.

The seminar is sponsored by RIC Centre (Research Innovation Commercialization Centre) and the Ontario Centre for Environmental Technology Advancement (OCETA).

Listen to our expert panel talk about the roles of Angels and Venture Capitalists along the innovation continuum. Our panel includes:

Robert Koturbash, Managing Director of Maple Leaf Angels, is the founding Managing Director of the Maple Leaf Angels, an angel investment group based in the Toronto area. He is an active investor and has invested in several early stage companies. He also sits on the investment committee of the Investment Accelerator Fund administered by the Ontario Centers of Excellence. Rob holds a BSME from Tufts University and a M.Sc. in Engineering Management from Stanford University.

Tim Jackson, Partner, Tech Capital Partners, is a founder and Partner of Tech Capital Partners where he focuses on investment opportunities in the wireless, communications, new media, and internet sectors. Prior to founding Tech Capital in 2001, Tim was CFO and CEO at PixStream, a technology company focused on distributing and managing digital video across broadband networks. At PixStream, Tim successfully raised more than $60 million in equity capital and negotiated the $550 million sale of the company to Cisco Systems, one of the largest technology company acquisitions in Canadian history.

Nic Morgan, VP Business Development, Morgan Solar Inc,has developed a breakthrough solar energy technology – a unique design for a high-efficiency, low-cost solar panel. It started as a family venture co-founded by John Paul, Eric and Nicolas Morgan, supported by a growing team of engineers, technicians and business staff. Initially family funded by angel investor Eric Morgan, Morgan Solar has recently completed their round A fundraising by putting together a consortium of strategic and venture capital investors. As VP of Business Development and Marketing, Nicolas led Morgan Solar’s efforts in contacting and connecting with investors.

Don’t miss this opportunity to learn first hand how to raise cash from Angels and Venture Capitalists. Register here

Visit www.riccentre.com for more information.

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Management and its ability to execute

By David Pasieka

We have seen some exciting new technologies in the past couple of months and our work to “accelerate the path to commercial success” has been intensifying. Of particular interest are some of my clients with Waste to Energy, Solar, Water Treatment and Smart Grid technologies. Those organizations will be the backbone of the Ontario economy in the not too distant future.

As we work with these early stage organizations, a set of patterns are starting to emerge that are worthy of emphasis. Clearly, these technology companies are focusing in exciting and growing sectors. They are based in science and are well on their way to securing Intellectual Property (IP) protection for their inventions. Businesss models although initially “a little crude”, are being re-worked to demonstrate the ability to successfully “turn a profit”. Any investor who takes a “quick look” is quickly impressed on all three fronts.

So why aren’t we reading more about the successful financing of these companies by Angels, VC’s, Government grants and larger institutions?

A quick canvas of any investor group will tell you that management and its ability to execute often eclipses the process for securing early stage funding. Due diligence teams will ask the leadership team questions such as:

• How many years of experience does the team bring to the table?
• Have you successfully built other organizations to a successful exit?
• Does the CEO have the depth and breadth to move the organization to its next level?
• Are all key functional disciplines appropriately represented by the organization?
• Does the management actually act and respond as an effective team?
• Is the team able to articulate an action plan and deliver those promised results?
• What kind of dashboards are used to track weekly, monthly and quarterly success?

These are extracts of a long list of diligence questions that any investor will need to be comfortable with before opening the cheque book. How about the one that Kevin O’Leary made famous on Dragon’s Den: “What if you get hit by a bus and you’re road pizza?”

The key for these emerging technology companies will be to do a detailed assessment of their team and its story around executing strategy. The assessment will no doubt uncover several holes that will need to be proactively addressed to mitigate investor risk. These may include:

1. Identifying key hires that will be added once funding is secured
2. Assembling that Advisory Board and ensuring that they are engaged
3. Hiring part-time Mentors to work with lessor experienced executives
4. Encouraging the completion of supplementary training programs
5. Joining key sector networking forums and in some cases
6. Identifying that the existing CEO may need to step aside in favour of a “been there, done it before” leader.

The good news for Entrepreneurs is that if their technology really is a “Game Changer”, the “Path to Profitability” is reasonable and the tactics to augment the “Execution Strategy” are sound, many seasoned investors will take a “serious second look” at the company with great result.

David Pasieka is the Entrepreneur-in-Residence at the RIC Centre. Learn more here.  Visit Our Contributors page for more information about David. Read his blog at www.cedarvue.blogspot.com

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