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 Challenge 2 Challenge 3

„Creativity“ „Professionalism“ „Implementation“
Core or Exit?

„0“ Idea Business Plan Commercial Business

•Status •Real World Issues •Market & Business Case •Startup Activities
•Activity •Creativity •Experience & Know-how •Management / “People“
•People •Assets •Sexy Story & USP •Partnership
•Know-How •Finance (internal) •Finance (internal & external)
•Capacity •Support •Organization & Structure
•People •People •Advice
Effort (EUR) ~50-200k ~200-2.000k ~2.000-20.000k
Go / No-Go Go / No-Go Go
Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
 New Business Creation Process
“from Complexity to Feasibility” © J. Kreisel/GENES

Gadget
(Technology)
Markets
Strategy/Policy
(Economy)

Already at this Stage

Financing Is Crucial
Business
Idea Alternatives Plan

GOALS ?

Growing Complexity Growing Feasibility

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
 • Seed/Start-Up
Finance in Brief - Dimensions © G E NES
•
•
Growth
MBO/MBI
• Diversification
Reasons for Financing • R&D Finance
• Project Finance
•
•
Supporting the “Due-Diligence” Process
Business Plan
When? • Joint Ventures/ Internal Ventures
• Subsidiaries
• Private Placement Memorandum • Mergers & Acquisitions
• Public Placement Document • Consolidation/Turn-Around
• Bank/Investor Relations • etc.
• Venture Managers/Intermediaries
• Equity
Instruments Types of Finance • Quasi-Equity
• Debts & Loans
Internal
• Entrepreneurs/Founders
How? What? – Long Term Loans
– Short Term Credit Lines
• Internal Financing Commercial • Mezzanine Finance
• Private Sources • Bridge Finance
• Employees Space • Leasing
External
• Banks
Business •
•
Factoring
Subsidies
• Public Participation Companies • Other Supporting Programs
• Venture Capitalists • etc.
• Stock Markets • Fixed Assets
• Industrial/Strategic Investors – Intangible Assets
• Public Bodies Sources of Finance Financial Needs – Tangible Assets
– Financial Assets
• Employee Participation Models
• Underwriters Where From? What For? • Current Assets
– Stocks/Inventories
• Investment Banks – Receivables
• M&A-Consultants – Liquidity
• Projects
Joerg Kreisel • Losses
International Consultant 2001J.Kreisel- GENES • 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
– Is Typically Provided by Banks • Provides Cash
• for Investments,
– Requires Interest Payments & Repayments (Scheduled)
Stocks, Receivables,
– Requires Collateral (Needs to be Secured) & Healthy Equity Ratio Project Finance ...
– Interest Payments Are Not Performance Related • Requires the Ability
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 Private Equity

Main Market Parallel Markets Venture Capital Later-Stage Equity

•Independent •Independent
•Corporate •Corporate
•Captive •Captive
•Business Angels •-
Pre-IPO
•Mezzanine •Mezzanine

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
Sources of Finance - Young/Growth Business © J.Kreisel - GENES

Internal External
• Entrepreneurs/Founders • Banks
– “Sweat Equity” • Public Participation Companies
– Contributions in Cash
– Contributions in Kind
• PE & Venture Capitalists
– Shareholder Loans • Stock Markets
• Internal Financing • Industrial/Strategic Investors
– from Cash Flow
• Public Bodies
– (by Asset Stripping)
• Employee Participation Models
• Private Sources
• Underwriters
– Family
• Investment Banks
– Friends
• M&A-Consultants
– “Business Angels” (passive)
• “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 t

Product Market Market Market

R&D
Development Entry Penetration Diffusion
Equity? Equity Equity Debt Debt
Project Budget ? (Semi-Equity) Mezzanine Mezzanine
Debt Equity
VENTURE VENTURE VENTURE (Stock Markets)
Optimal
Equity-Ratio 100% 66% 50% 33% © G E NES

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
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 Assets Equity & Liabilities
Sales/Revenues Fixed Assets Shareholder´s Equity
- Costs of Goods Sold • Intangible Assets • Subscribed/Share Capital
= Gross Margin/Gross Profit • Tangible Assets • Capital Reserve
- Expenses/Costs • Financial Assets/Inv. • Revenue Reserve
Personnel
Administration t Current Assets • Retained profits/
c
R&D pa • Stocks/Inventories Acc. Losses b.f.
Marketing & Sales, etc. Im
• Receivables/Debtors a.o. • Net Income/Loss for the
Depreciation
• Securities/Investments Year
= Operating Result (EBIT)
• Cash Accruals/Provisions
+/-Financial Income/Expenses
Prepaid Expenses Liabilities/Creditors
= EBT
- Taxes Deferred Income
Net Income (Loss) Impact Beginning Period Cash
+ Income (Period)
- Expenses (Period)
Liquidity Plan
= Ending Period Cash
= “Liquidity”(MUST be >0!)
Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
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 “X”-Based
(Balance Sheet) (Profit & Loss Account)

Net Asset Value Net Present Value (NPV) Strategic (Synergy, Market..)

Rules of Thumb

Discounted Cash-Flow Analogy

Price/Earnings-Ratio (P/E) “Stomach”

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
Valuation (cont´d)
• Factors to Be Taken Into Account Valuation Is
– Investors Return Needs • Based on Business Plan
– Size of the Equity Stake & Value Adding Possibilities • Based on Income Statements/Balance
– Reliability of Business Plan Forecast Sheets
– Exit Multiple Potential/IRR Typically Used:
– Exit Timescale • Future Earnings Figures Multiplied by a
– Exit Route (IPO, Trade Sale, Buy-Back, Liquidation) P/E-Ratio (Price/Earnings)
– ... • Helpful: P/E-Ratio of Comparable Quoted
Stock ./. 25-33% Discount
• Discounted Cash Flow Method
• But Also
• Alternative for Profitable Companies:
– Quality of Management Team Future Maintainable Earnings Stream to
– Proprietary Nature of Product or Service Be Expected for Next 3-4 Years to
– Market Share (Vulnerability) Generate a Payback-Ratio (Multiple)
– Technological Trends (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 The Business Plan
& Management
Financing Needs Market
Product
Environment / Climate 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 3 4-10

Debt Total Need:

Financing
Financing 1 Billion EURO

Total Debt:
High Yield High Yield
Bonds
545 Million EURO
Bonds

Total Equity:
Debt
525 Million Euro

Debt
Debt Initial Public
Virtual Company
Founders Offering (IPO)
Venture Strategic Financial Financial
Capitalist Investor Investor 1 Investor 2

Start-up Phase
Satellite Production. and Manufacturing

Ground Segment Procurement

WINS
WINSDevelopment
DevelopmentPhases
Phases
Base Unit Procurement

Launch

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES
 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:joerg.kreisel@t-online.de
(Joerg Kreisel- Partner @ G E NES G mbh Venture Services)

Joerg Kreisel
International Consultant 2001J.Kreisel- GENES