Tech Startups - An Investor Perspective by Philip Ammerman

Tech Startups: An Investor Perspective" Kaunas: 6 October 2015

ÂŠ Navigator Consulting Partners LLP, 2015

Navigator Consulting Group Navigator is an international consultancy with offices and consultants in London, Limassol, Hamburg and Athens. Founded in 1995, we specialise in strategic corporate development with a focus on emerging or transition economies. Our services are divided into six core areas: Strategic Business Development Investment Advisory Services Marketing Strategy and Analysis Human Resources Development Internet Advisory Services Business Incubation www.navigator-consulting.com © Navigator Consulting Partners LLP, 2015

Our Entrepreneurship Charter commits us to supporting 10 start-ups, spin-offs or entrepreneurs from 2010-2020. To date, we have invested in four start-ups and provided support to one solo entrepreneur. Investment criteria: •  Ventures that make a transformative impact on a business sector or segment •  Focus on service-based industries or applications, or ones in which services count for a high share of the value-adding proposition of the investment •  Leveraging Web 2.0 and social media as a core part of the investment, particularly in the development of productivity applications such as professional networking, e-learning, emarketing, e-CRM, online databases and similar aspects •  International business potential •  Ethical business segments and sponsors

Start-ups are Sexy In 2014: European start-ups received $3.5bn in growth rounds. US venture capital funds have $ 156.5 bln under management Every EU country has initiatives in place to fund start-ups. London, Stockholm, Berlin, Paris and Barcelona are emerging as start-up hubs Invest in Lithuania is promoting foreign investment in the LT tech sector EU structural funds are available for tech start-ups, business clusters and other beneficiaries. The European Union is promoting start-ups via Horizon 2020, Fiware and other initiatives

ÂŠ Navigator Consulting Partners LLP, 2015

EY Venture Capital 2014 Report http://www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf

ÂŠ Navigator Consulting Partners LLP, 2015

US outranks Europe http://www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf

ÂŠ Navigator Consulting Partners LLP, 2015

50% of new businesses fail or close within 5 years http://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm

ÂŠ Navigator Consulting Partners LLP, 2015

At least 9 out of 10 start-ups fail https://www.cbinsights.com/blog/startup-failure-post-mortem/

Three main reasons: 1.  No market need (42%) 2.  Ran out of cash (29%) 3.  Not the right team (23)

So how to tell successes from failures?

ÂŠ Navigator Consulting Partners LLP, 2015

1. What’s the Market Need? There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. Donald Rumsfeld Our entrepreneurs usually don’t know exactly what the market need is, and neither do we. So we use a series of indicators to assess it. 1.  Market Size 2.  B2B versus B2C Market 3.  Customer Buying Structure 4.  Customer Buying Factors 5.  Freemium Structure 6.  Price Points 7.  Competitors 8.  What’s the real Competitive Advantage?

2. Who’s on the Team? L'enfer, c'est les autres Jean-Paul Sartre Any start-up depends on the team that runs it. We closed one entire start-up because of problems with the founder. So today we pay very close attention to the team members, their dynamics and their complementarity to our own goals and vision. We never make a team decision after 1-2 meetings, but after a longer process, including social tests. Key issues: 1.  Managers versus techies 2.  Can we communicate directly, without intermediaries? 3.  Ownership structure between team members 4.  Ability to complement with our own members (i.e. CFO, Treasurer) 5.  Flexibility / rigidity in terms of technology and approach 6.  Ability to replace key technical personnel 7.  Physical location and willingness to relocate 8.  Marital and family status 9.  Personal responsibility and background check 10.  Social test © Navigator Consulting Partners LLP, 2015

3. What’s the Cost? If you want to be a millionaire, start with a billion dollars and launch a new airline. Richard Branson It inevitably comes down to cost. How much does it cost to get to prototype and to revenue? What’s the money spent on? What are the risks? Key issues: 1.  Turnkey Overheads: Minimum operating costs to maintain the team in place 2.  Marketing & sales costs 3.  Cost per customer acquisition 4.  Lifetime customer cost and revenue 5.  Freemium conversion structure and pricing points 6.  Break even point 7.  Risk analysis 8.  Sensitivity analysis 9.  Total investment amount

4. How Fast to Market? Better three hours too soon than a minute too late. William Shakespeare Getting to market within a specific timeframe is key. So is planning future updates and releases. Many times, the perfect is the enemy of the good, but we like perfect just the same. Key issues: 1.  Months to prototype 2.  Months to market (revenue) 3.  Updates over first 24 months 4.  Alpha and beta testing procedures 5.  Frequency of business plan revisions and updates 6.  Flexibility of business model 7.  Complexity (and risk) of prototype 8.  First or second mover advantages

5. Partners, Technology and Exits A successful marriage requires falling in love many times, all with the same person. Mignon McLaughlin Very often, we co-invest to share the risk or to bring in key competencies. We also look to how we can exit from an investment (or a partnership), and how solid the technology is. Key issues: 1.  Does the venture fit the strategies of one of our strategic or financial partners? 2.  Do we share the same healthy scepticism of start-ups? 3.  Is the technology used solid or subject to obsolescence or change? 4.  Does the technology take into account emerging trends, e.g. m-commerce? 5.  What is the planned exit? 6.  If we want to exit earlier, how can we?

6. Technical Preparation Luck is a matter of preparation meeting opportunity. Seneca

Are you prepared in terms of closing a deal? Have you considered all eventualities? Is all the data available for review? Key issues: 1.  Business plan or variants 2.  Financial Model 3.  Due Diligence Materials 4.  Sensitivity and Risk Analysis 5.  Technical Prototype or Specifications 6.  Financial Data (if available) 7.  Management Team Profiles

Other Issues

Tax Optimisation Holding Structure Location Management Agreement/s Patents Shareholder Agreement/s Term Sheet/s

Elevator Pitch: the concept of an elevator pitch is over-rated. We screen 50-70 investment plans each year, and invest the time needed for a full analysis in ones which make the first cut. Finance: Many start-ups (particularly in a university environment) focus on soft management factors like “teambuilding” or social entrepreneurship. To really stand out, we want to see how a team will handle bread-and-butter issues like sales, cash flow management and key account management. Learning from Failure: This is a critical necessity. There is nothing wrong with failing, as long as the process leads to learning and improved behaviour.

Thank You!

Philip studied at Princeton University and Cornell University, School of Industrial and Labour Relations. He began his career with Kienbaum and Partner in New York and Dusseldorf in 1991, working on large-scale strategic organisational development projects. In September 1995, he co-founded Navigator with two partners. Since then, he has implemented over 150 projects in 30 countries. Since 1997, Navigator has advised companies and governments on migration to ecommerce, emarketing and e-services. Philip is co-founder and managing partner of ECN Business Intelligence (www.ecn-eu.com), an online business intelligence and cooperation portal for EUfunded consultancy opportunities.

ÂŠ Navigator Consulting Partners LLP, 2015

Navigator Consulting Group The Broadgate Tower, 11th Floor 20, Primrose Street London EC2A 2EW England Email: pga@navigator-consulting.com www.navigator-consulting.com