Finance In Brief

ESA SME Training Course B: Financing Innovative Projects ESTEC, Noordwijk, 17-21 September 2001

„Finance in Brief“ JOERG KREISEL International Consultant & Partner @ GENES GmbH Venture Services Germany Joerg Kreisel International Consultant

2001J.Kreisel- GENES

What do We Need to Know: „The Big Picture“ • Finance Is Much More than Figures & Money! It Is Key to Success! • Dimensions of Finance • Sorts of Finance • Sources of Finance • Stages of Development & Phased Financing Approach • The „Financials“ • Valuation & Return Issues • Finance Drivers • The Challenge is: How to get Started & How to Do it Well! (Help) The Focus is Not Budget or Project Finance! Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Genesis of New Commercial Business © J. Kreisel/GENES

Requirement & Boundary Condition: “Long-Term-Strategy / Policy“ (Vision, Business Acumen, Commitment, Intruments/Processes, Advice …) Challenge No. 1 „Creativity“

Challenge 2 „Professionalism“

Challenge 3 „Implementation“

Core or Exit?

„0“ •Status •Activity •People

Idea

Business Plan

•Real World Issues •Creativity •Assets •Know-How •Capacity •People

•Market & Business Case •Experience & Know-how •Sexy Story & USP •Finance (internal) •Support •People

Effort (EUR)

~50-200k

Joerg Kreisel International Consultant

Go / No-Go

~200-2.000k 2001J.Kreisel- GENES

Commercial Business •Startup Activities •Management / “People“ •Partnership •Finance (internal & external) •Organization & Structure •Advice Go / No-Go

~2.000-20.000k

Go

New Business Creation Process “from Complexity to Feasibility”

© J. Kreisel/GENES

Gadget (Technology)

Markets Strategy/Policy (Economy)

Already at this Stage Financing Is Crucial

Alternatives

Idea

Business Plan

GOALS ? Growing Complexity

Joerg Kreisel International Consultant

Growing Feasibility

2001J.Kreisel- GENES

Finance in Brief - Dimensions • • • • • •

Supporting the “Due-Diligence” Process Business Plan Private Placement Memorandum Public Placement Document Bank/Investor Relations Venture Managers/Intermediaries

Banks

•

Public Participation Companies

•

Venture Capitalists

•

Stock Markets

•

Industrial/Strategic Investors

•

Public Bodies

•

Employee Participation Models

•

Underwriters

•

Investment Banks

•

M&A-Consultants

Reasons for Financing When?

Instruments How?

Internal • Entrepreneurs/Founders • Internal Financing • Private Sources • Employees External •

© G E NES

• • • • • • • • • • •

Seed/Start-Up Growth MBO/MBI Diversification R&D Finance Project Finance Joint Ventures/ Internal Ventures Subsidiaries Mergers & Acquisitions Consolidation/Turn-Around etc.

Types of Finance What? Commercial Space Business

• • • • • • • •

Sources of Finance Where From?

Joerg Kreisel International Consultant

Financial Needs What For?

2001J.Kreisel- GENES

• • •

•

• • •

Equity Quasi-Equity Debts & Loans – Long Term Loans – Short Term Credit Lines Mezzanine Finance Bridge Finance Leasing Factoring Subsidies Other Supporting Programs etc.

Fixed Assets – Intangible Assets – Tangible Assets – Financial Assets Current Assets – Stocks/Inventories – Receivables – Liquidity Projects Losses etc.

Sorts of Finance • Equity

Investors

• Debt

Lenders

• Grants/Subsidies

Public

• Revenues

Business

Major Financing Needs • Losses • Capital Investments

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Equity vs Debt - Simplified Definitions • Equity = Liable Capital – – – – – –

Is Provided by Investors Is Capital Gains Oriented (No Interest Payments) Dividends Are Being Paid Performance-Related Does Not Require Collateral (= Unsecured) Covers the Business Risk Defines Shareholder Structure

• Creates a Company or Finances Growth, Consolidation, Turn-Around ... • Covers Start-Up Losses • Enables for Further Financing • Creates Good Standing • Requires Business Plan, Partnership, Risk Readiness & Upside Potential • A Buffer When Something Goes Sour

Mezzanine: Semi-Equity &/or Semi-Debt • Debt = Basically a Loan – – – – – –

• Provides Cash Is Typically Provided by Banks • for Investments, Requires Interest Payments & Repayments (Scheduled) Stocks, Receivables, Requires Collateral (Needs to be Secured) & Healthy Equity Ratio Project Finance ... • Requires the Ability Interest Payments Are Not Performance Related to Serve the Loan and Reduced Risk/Risk Bearing: Different Risk Classes a Good Standing Does Not Represent Ownership in the Business

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Equity Classes & Venture Capital Players

© G E NES

Equity

Public Equity

Main Market

Private Equity

Parallel Markets

Pre-IPO

Joerg Kreisel International Consultant

Venture Capital •Independent •Corporate •Captive •Business Angels •Mezzanine

2001J.Kreisel- GENES

Later-Stage Equity •Independent •Corporate •Captive ••Mezzanine

Sources of Finance - Young/Growth Business

© J.Kreisel - GENES

Internal

External

• Entrepreneurs/Founders

•

Banks

•

Public Participation Companies

– “Sweat Equity” – Contributions in Cash – Contributions in Kind

• PE & Venture Capitalists

– Shareholder Loans

•

• Internal Financing – from Cash Flow – (by Asset Stripping) • Private Sources – Family – Friends

– “Business Angels” (passive)

Stock Markets

• Industrial/Strategic Investors •

Public Bodies

•

Employee Participation Models

•

Underwriters

•

Investment Banks

•

M&A-Consultants

• “Business Angels” (active) Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Searching Financial Partners (Companies) • • • • • • • • • • • •

Profil/Terms of Conditions Image Financial Strength Continuous Coaching and Monitoring Market Know-How/Expertise Antitrust Issues Interest Conflicts Decision Making Policies Readiness to Take Risk Independence to Act (Management) Timing Aspects Value Adding

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Profile of Early-Stage Equity Investors Independent Venture Capital & Active Business Angel Industrial Investor

© G E NES

Understanding of Financial Need

good

weak

Ability of Further Financing

high

low

Decision Behavior

assessable

in-assessable

Readiness to Take Risk

high

low

Value Adding (Industry)

high

low

Value Adding (Lifecycle)

high

low

Image of Financial Partner

good

less good

Term of Partnership

short

long

Impact by Financial Partner

high

low Passive Business Angel

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Lifecycle Technology-Based Start-Up: e.g. Space

© G E NES

Profit

Later-Stage Growth/Expansion

Maturity/Bridge

Stagnation

Early-Stage Seed

Start-Up

1st Round

Foundation

R&D

t

Product Development

Market Entry

Market Penetration

Market Diffusion

Debt Mezzanine Equity (Stock Markets)

Debt

VENTURE

Equity Mezzanine Debt VENTURE

100%

66%

50%

33%

Equity? Equity Project Budget ? (Semi-Equity) VENTURE Optimal Equity-Ratio Joerg Kreisel International Consultant

2001J.Kreisel- GENES

© G E NES

Financials • The Financials Are Forecasting (Over the Planning Period) – – – –

The Financial Needs of a Business How It will Be Financed How Profitable & Stable It Will Develop & Allow Financial Engineering

• The Financials Consist of the Following Elements (e.g. in the Business Plan): – – – –

Profit & Loss Account/Income Statement (Costs/Profitability/Effectiveness) Balance Sheet (Status/Assets/Financing) Cash Flow Statement/Liquidity Plan Financial Plan • Financial Needs • Financial Sources/Structure

– (Shareholder Structure/Valuation over Time: Dilution Effects)

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

P&L, Balance Sheet & Liquidity Plan Balance Sheet

Profit & Loss Account Sales/Revenues - Costs of Goods Sold = Gross Margin/Gross Profit - Expenses/Costs Personnel Administration R&D Marketing & Sales, etc.

c pa Im

t

Depreciation = Operating Result (EBIT) +/-Financial Income/Expenses = EBT - Taxes Net Income (Loss)

Assets Fixed Assets • Intangible Assets • Tangible Assets • Financial Assets/Inv. Current Assets • Stocks/Inventories • Receivables/Debtors a.o. • Securities/Investments • Cash Prepaid Expenses

Impact + = =

Joerg Kreisel International Consultant

Equity & Liabilities Shareholder´s Equity • Subscribed/Share Capital • Capital Reserve • Revenue Reserve • Retained profits/ Acc. Losses b.f. • Net Income/Loss for the Year Accruals/Provisions Liabilities/Creditors Deferred Income

Beginning Period Cash Income (Period) Expenses (Period) Ending Period Cash “Liquidity”(MUST be >0!)

2001J.Kreisel- GENES

Liquidity Plan

Valuation “Valuation Is an Art Form and by no Means an Exact Science!” Selected Valuation Techniques (Unquoted Companies; otherwise Share Price)

Analytical Methods

Others

Asset-Based

Earnings-Based

(Balance Sheet)

(Profit & Loss Account)

Net Asset Value

Net Present Value (NPV)

“X”-Based

Strategic (Synergy, Market..) Rules of Thumb

Joerg Kreisel International Consultant

Discounted Cash-Flow

Analogy

Price/Earnings-Ratio (P/E)

“Stomach”

2001J.Kreisel- GENES

Valuation (cont´d) • Factors to Be Taken Into Account – – – – – – –

Valuation Is

Investors Return Needs Size of the Equity Stake & Value Adding Possibilities Reliability of Business Plan Forecast Exit Multiple Potential/IRR Exit Timescale Exit Route (IPO, Trade Sale, Buy-Back, Liquidation) ...

• But Also – – – – –

Quality of Management Team Proprietary Nature of Product or Service Market Share (Vulnerability) Technological Trends ...

• Based on Business Plan • Based on Income Statements/Balance Sheets Typically Used: • Future Earnings Figures Multiplied by a P/E-Ratio (Price/Earnings) • Helpful: P/E-Ratio of Comparable Quoted Stock ./. 25-33% Discount • Discounted Cash Flow Method • Alternative for Profitable Companies: Future Maintainable Earnings Stream to Be Expected for Next 3-4 Years to Generate a Payback-Ratio (Multiple)

(Financial Equity Investors)

The Net Present Value Method Is Not the Holy Grail When Co-Financing is Needed!

Legal Issues (Handling/Protection of IPRs, etc.) Not to Be Underestimated! Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Return Issues • What is a Return (on Investment?): Output(t)-Input(t) – Input: Equity/Debt, etc. – Output: Dividends/Interest Payments/Capital Gains

• Return Measures – Return on Investment (ROI) = (Internal Rate of Return IRR) – Be Careful When Computing (Monthly, Annual, etc.)

• Perspectives – The Companie´s View – The Investor´s View

• All Forecasts Are Only As Good As the Assumptions Used Return Expectations Rise According to the Risks Involved Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Finance Drivers Business Nature & Financing Needs Environment / Climate

The Business Plan Management Market Product Return/Exit

Who´s Interests Are Driving the Financing? Financier´s Company´s Management´s Shareholder´s Technology? Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Example:Financing Strategy for “WINS” Year

-5

-4

-3

-2

-1

1

2

4-10

Total Need: 1 Billion EURO

Debt

Financing Financing

3

High Yield High Yield Bonds Bonds

Total Debt: 545 Million EURO Total Equity: 525 Million Euro

Debt Debt

Initial Public

Debt

Virtual Company

Offering (IPO)

Founders

Venture Capitalist

Strategic Investor

Financial Investor 1

Financial Investor 2

Start-up Phase Satellite Production. and Manufacturing

WINS WINSDevelopment DevelopmentPhases Phases

Ground Segment Procurement Launch

Joerg Kreisel International Consultant

2001J.Kreisel- GENES

Base Unit Procurement

Contact

Joerg Kreisel International Consultant •Space Com m ercialization, Business & Finance •Coaching of Co m mercial Projects •Fund Raising Support & Investor Relations •Venture Capital •Education & Training •International Connectivity •Co m m unication •General Advice

E-mail:[email protected] (Joerg Kreisel- Partner @ G E NES G mbh Venture Services) Joerg Kreisel International Consultant

2001J.Kreisel- GENES