Panelists:
Brigitte Baumann, Brigitte Baumann, Founder efino and GoBeyond Investing; Educator
Oliver Huggenberger, Senior Investment Manager and Deputy Head of Start-up Finance at Zürcher Kantonalbank
Nils Granath, Investment Director, Swisscanto Private Equity, Member of Senior Management Zürcher Kantonalbank
Interviewer:
Peter Lorange, Chairman, Lorange Network
Questions:
Per F. Lorange, President, S. Ugelstad Invest
1) When a project evolves from an early stage and into a high growth stage what are the most important strategic considerations?
The value proposition for a venture must be clear. It may be useful to consider the initial efforts regarding this as going through a pilot stage:
Original customers; these may not be typical in the end
Pilot product/service prototype
Initial pricing
The business model, and it may take time to develop a good one
Experimentation is key; trial/error; be ready to modify aspects of the strategy, so as to improve.
Fight, but be ready to switch quickly if needed
Be realistic!
Many founders/entrepreneurs as well as many investors tend to be too optimistic. Most of the time, one raises too little.
Avoid linear thinking!
Adjust forecast that are being presented downwards, so as to cope with “the hockey stick phenomenon”.
A balance between stamina and endurance. Many companies get stuck in the middle.
Strong customer relationships are key.
As a prospective investor, go on a roadtrip with the founders.
The founders are often the “best” promoters for a project. Does the value proposition make sense?
Know your customers.
Funding – perhaps analogous to gasoline for cars:
Where are we going?
Where are the milestones?
Where is the funding to come from? (“where are the gas stations?”)
Drive economically, controlling speed – to save gas. (be careful regarding the spending of funds).
2) How significant is a high growth rate, perhaps particularly in terms of being an indicator of a project now being a candidate to be sold?
Develop a competent sales force. Good selling drives your growth rate. Upsell with existing customers and grow with new ones.
Be prepared to spend what it takes to get good sales-people – typically expensive.
B2B is often relatively less expensive than B2C.
Find sales partners.
Identify the driving KPIs.
Scale as well as growth is key! There are differences between scaling and growing.
Scalability is essential in a good business model. Focus on innovation to create this.
Example: retain one’s customer base and expand offerings to this. Push for customer satisfaction.
Less expensive to do this than to develop entirely new customers. Control costs of such distribution.
If possible, focus on customers that might also be multi-functionals, such as, say, Nestlé.
First sell to Nestlé, Switzerland, then to US, then to China, etc.
Often, it might make sense to focus on ventures that have already gone through the very early stage, and ideally already have some customers, i.e. a revenue stream from sales.
3) How do you go about establishing a realistic valuation for a project? A realistic value is often hard to establish.
Discounted cash flow is often used by early stage companies to determine valuations, but it is not the best one for companies still developing/testing their economic model and who have little revenues.
Valuation is only one aspect, and needs to be looked at along with other terms (value-added, etc.)
Start with an idea – negotiate – find a price in the middle, ok to all parties.
Think about exit already at this early stage. What IRR might one realistically expect?
Forecast numbers and strength of team and technology.
Regarding numbers: how long shall it take with negative cash flow before break/even?
Hockey stick issue regarding forecasted numbers – look at the big plan - adjust the forecasts down (Graneth: by 50%)
Raising funds is typically hard, an “acid test” regarding viability:
Do not raise funds before you are ready!
Many entrepreneurs have inflated opinions regarding their own values!
Timing is critical, and ownership matters! Look at what control you are retaining or giving up.
Do not go too high.
Harder to raise funds later then.
Often too many restrictions in shareholder agreement if too high price – investors insist.
Understand that a relatively low, but realistic valuation to start with might end up bringing you more gain economy in the end, at exit.
Exits are key, and is the “time” for final “reward”:
Not too many exits in Switzerland.
Be realistic regarding multiple at exit; a multiple of 3 to 5 may be ok.
4) When considering the CEO of a particular venture, how important might it be that he/she shows discipline, say when it comes to controlling costs as well as burn-rate (break-even)?
President’s profile when it comes to renumeration is key.
Sufficient, so that CEO can perform well.
But not excessive.
The President should act as if he/she is dealing with his/her money, manage costs and keep control of burn rate.
Excessive compensation might lead a venture into the valley of death. Co-investors might be resisting to come on board then.
Be cash conscious throughout the venture’s organization, with moderate salaries throughout.
Stock options often represents a better way than cash.
Executives in large public companies may often have a different view regarding compensation than what might be appropriate for start-ups.
Be careful when hiring executives from public companies.
Be frugal for some things, but prepared to spend on others (IP, salesforce, good staff, etc.)
5) What might be major factors that might discourage investors, so that a venture might find itself “stuck” in death valley? (Salaries, fees, consulting agreements, restrictive shareholder agreements, …)
All should be positive: entrepreneurs and investors.
Find investors that in essence think as entrepreneurs.
A shareholder agreement must stimulate all to work together. Compliance is also critical.
Look for a great team in the venture’s organization.
Transparency is key:
“Honest”, full communication and clarity.
An investor must understand what he/she is getting into: “no surprises”.
Are all the business realities highlighted?
Entrepreneur must be certain he/she is ready to bring in investors, and if so, that their profiles match company direction/journey.
Legislation is also setting more and more limitations:
Increasingly there are “no-gos”, such as to stay away from technologies leading to cyber espionage and/or weaponry.
Questions and comments
A) Are there different mindsets when it comes to ventures in the US (growth; the top line) versus Europe (bottom line; more conservative/stable)?
It is perhaps not meaningful to make such sweeping generalizations.
Instead, try to find out what might be “right” for each given business.
Understand what is “under the hood”.
B) What seems to be typical return in Swiss ventures?
10 – 12% per annum.
ZKB has been involved in more than 240 start-ups, with more than 150 (and most of the value) still in its portfolio. On average, all exits have been at least at break-even.
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