1. © Finance Tree ltd, 2012 Introduction to Finance for start-ups 3 October 2012 Jonathan Gold Confidentiality Statement: Please note that this document or presentation is and remains the property of Finance Tree. We will enforce our copyright to all material. Reproduction or use of this material is only permitted with prior written consent of Finance Tree ltd.

2. © Finance Tree ltd, 2012 £7.5m

3. © Finance Tree ltd, 2012 Track record 2005 NStar Corporate Finance established 2006 Finance and Business launched 2008 (April) Management Buyout and creation of Finance Tree 2009 (April) created Rivers Capital Partners 2010 Managers of the £7.5m North East Angel Fund 2012 47 investments in 32 businesses £4.3m invested plus £2m additional www.riverscap.com

4. © Finance Tree ltd, 2012 4 Sources of Capital 1.Banks 2.FFF…. & Founders cash 3.Business Angels 4.Venture Capital 5.IPO/ Aim/ Stock Markets 6.Crowdfunding 7.Peer to Peer lending uk.zupa.com Colours of money !

5. © Finance Tree ltd, 2012 Crowd Funding Its relatively new… Advantages / Disadvantages www.crowcube.com www.growthfunders.com 2 Examples…not a recommendation !

6. © Finance Tree ltd, 2012 Money costs money … Accountants CORPORATE FINANCE SPECIALISTS Legal advisors Non-exec directors Brokers, banks…

7. © Finance Tree ltd, 2012 Venture Capital / Private Equity… “Private Equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies”. Source: British Venture Capital Association (BVCA) 2005 NB: Almost all are… FSA regulated collective investment schemes…

8. © Finance Tree ltd, 2012 Sources of capital of capital

9. © Finance Tree ltd, 2012 Venture capital is often a crucial element in… Getting a new business going Start-up Funding a step-change in the business Rapid organic growth or M&A Effecting a change of management or control Buy-in / buy-out / public-to-private Funding long-term development pre-revenue Typically high technology – eg: biotechnology, electronics

10. © Finance Tree ltd, 2012 Finance for Business North East Funds £25m £15m £7.5m £20m

11. © Finance Tree ltd, 2012 The investment model Time … since investment Investment in… Generating £ cash… Sale of company… or “exit “ Development & early sales (losses…) …10x return in 5 yrs

12. © Finance Tree ltd, 2012 Statistics of VC portfolios… 10 Investments 4 Fail 4 Living dead 2 Stars

13. © Finance Tree ltd, 2012 Why bother? VC add real value to your business Recruitment of the senior team and suitable NXDs Extending your contact base of customers/partners Assisting the business to enter new markets Providing support on complex deals (eg: acquisitions) Acting as a friendly outsider in strategy debates Securing additional funding & negotiation of exits

14. © Finance Tree ltd, 2012 So is there a downside? Lose some control – –there will be another owner of your business VC will normally want a seat on your Board Full transparency in terms of information & business Typically look to agree a growth and exit strategy up front.

15. © Finance Tree ltd, 2012 Applying…process

16. © Finance Tree ltd, 2012 Value & IRR Ultimately its what an investor will pay ! Investment required Time to a given return Return the investor needs RISK Valuation Pre-investment Post-investment % ownership to give return

17. © Finance Tree ltd, 2012 17 IRR (Internal Rate of Return) YEARS Multiple

18. © Finance Tree ltd, 2012 Indicative timeline…end game BLUE internal RED externally driven

19. © Finance Tree ltd, 2012 19 Part I. The Investors Perspective

20. © Finance Tree ltd, 2012 Lessons from Venture capital… What are investors looking for

21. © Finance Tree ltd, 2012 21 The Management Team

22. © Finance Tree ltd, 2012 22 Innovative Defensible Products

23. © Finance Tree ltd, 2012 23 Market size

24. © Finance Tree ltd, 2012 24 Scalable Business Models

25. © Finance Tree ltd, 2012 25 Value drivers… …it all comes down to these…

26. © Finance Tree ltd, 2012 Last but not least…EXITS… PLANNED from day one Fund Manager will want a well defined EXIT Investment Return to the fund from growth of company… Common exits Further investment round (someone else buys out fund) Listing on a stock exchange (IPO) Trade sale, sold to another corporation.

27. © Finance Tree ltd, 2012 The investment process 27

28. © Finance Tree ltd, 2012 28 Investment Process 8-12 weeks Initial enquiry Basic questions (eligibility, type of business, stage, investment need) Business plan submitted Review and initial due diligence Rivers Investment Meeting Investment Committee Offer letter Due diligence Agreements Completion Post deal support and monitoring until exit

29. © Finance Tree ltd, 2012 Contact to Exit 29 Enquiry Eligibility Business plan submitted Meetings…Review Investment Committee Due diligence Offer Letter (term sheet) Legals Completion Post deal….. monitoring….exit

30. © Finance Tree ltd, 2012 Business plan No right answer No set format No right length Communicate Concise Clear assumptions Back up evidence Team Financials Risk 30

31. © Finance Tree ltd, 2012 31 Business Plan: It is Simple! But so many people don’t cover the basics Idea What is it? Applications explored Key Markets Users/ Benefits Environment / competition Strategy What is your goal By When? What type of business are you? How do you make money (sales) ? Revenue model Delivery / production Team and systems Risks / risks managed Finance Cash flow forecast (cumulative) Breakeven Investment needed Investment return 1.Exec Summary 2.Business Model 3.Mission 4.Ownership 5.Governance 6.Management 7.Risks 8.Key Personnel 9.Resources 10.QA 11.Marketing 12.Products 13.Financial Model 14.Investment Offering

32. © Finance Tree ltd, 2012 32 Please Include Proposition People Potential Path to market Proven Funding needed - enough to grow Financial return Forecasts and exit Company Address and your Contact Details! How much £££?

33. © Finance Tree ltd, 2012 Assessment Carried out on… You Your plan Your references …….others you don’t know By the Fund manager, external advisors, experts 33

34. © Finance Tree ltd, 2012 Due diligence… going behind the plan Be prepared you will have to answer questions on everything about the business and your team: Directors (disclosures) Share agreements Other investors Finances Contracts (staff and customers) Orders, claims Patents, other IP…. …. And more 34

35. © Finance Tree ltd, 2012 Deal or no Deal 35

36. © Finance Tree ltd, 2012 Too often forgotten Need to inform and stimulate… too many myths Need for advice… experience matters here Legal agreements… be aware, most are not Deal Costs… factor in and limit 36

37. © Finance Tree ltd, 2012 37 Offer Simple offer letter…not term sheet Due diligence… forms are simple BUT…Be prepared Value implied by offer Time limited…normally 7-10 working days Exclusive for around 10 weeks

38. © Finance Tree ltd, 2012 Financial Instruments Loan Equity Convertible Kickers…. Uplift Mezzanine 38

39. © Finance Tree ltd, 2012 Types of shares Ordinary “A” Ordinary Prefs Different right and incentives / restrictions apply 39

40. © Finance Tree ltd, 2012 40 Fees Costs money to raise money 10% capital raised More on small deals Ours Fees 2.9% arrangement No annual monitoring Non-exec directors

41. © Finance Tree ltd, 2012 Indicative timeline…end game BLUE internal RED externally driven

42. © Finance Tree ltd, 2012 42 Why Bother? A good VC should add real value to your business over and above the money providing help with: Recruitment of the senior team and suitable non-exec Directors Extending your contact base of customers/partners Assisting the business to enter new markets Providing support on complex deals (e.g. acquisitions) Acting as a friendly outsider in strategy debates Securing additional funding and negotiation of exits

43. © Finance Tree ltd, 2012 43 So is there a Downside? Lose some control – there will be another owner of your business VC will normally want a seat on your Board Will want full transparency in terms of information about the business Typically look to agree a growth and exit strategy up front

44. © Finance Tree ltd, 2012 44 Things to Remember about VCs Investors in FUND are their ultimate ‘client’ Funds normally operate within a fixed timeframe – this is why an exit so critical Investment will almost always involve ownership VC managers only make money if their portfolio businesses are successful Objectives defined by annual rate of return over a hurdle rate set by the investors

45. © Finance Tree ltd, 2012 45 Part III. Post-Investment

46. © Finance Tree ltd, 2012 The EXIT 46

47. © Finance Tree ltd, 2012 The only ways out Trade sale Buy-back IPO or other stock market listing Sale on to other investors. And the only other “Exit” is….? 47

48. © Finance Tree ltd, 2012 EXITS… At some point the Fund Manager agrees to EXIT the investment… …and (hopefully) return any profit to the fund from the growth of the company or its value… Common exits are: Further investment round (someone else buys out fund) List on a stock exchange Trade sale, sold to another corporation.

49. © Finance Tree ltd, 2012 Investment in UK Technology companies… 2009 (BVCA performance Survey) 49 £394m in technology-related businesses (2008: £619m) Of this, three areas received the most amounts Communications – £51m (2008… £81m) Computer software – £46m (2008... £310m) Medical / Pharma – £36m (2008… £73m) Of the total amount invested Early stage – 33% (2008… 43%) Expansion –41% (2008… 31%) MBO/I – 20%(2008… 3%)

50. © Finance Tree ltd, 2012 AIM… new listings Month UKInternationalTotal January 0811112 February 08 April 2010 May 2010 641641 300300 9 4 (£74m) 1 (£5.8m) Source: LSE NB: listings in April 2010.. 2 in mining 1 in industrial metal

51. © Finance Tree ltd, 2012 Thank you…

52. © Finance Tree ltd, 2012 52 Jonathan Gold Director j.gold@riverscap.com 0191 230 6370 Pictures by J.Gold Copyright 2011 www.goldsplace.com www.twitter.com/financetree We have moved ! … to: 2 Collingwood Street Newcastle NE1 1JF 0191 230 6370 www.riverscap.com