Entrepreneur Clinic – How To Finance

Monique: You’re listening to entrepreneur clinic on campus FM with me Monique Chambers and my guest this week JP Barthet from Go Beyond. We are discussing how to finance your idea.
So how do you finance your idea?

JP Barthet: Well there are many ways you can finance your idea primarily you start with your own money usually or that of would you call the three F’s with your friends, fools and family.

The people you should be able to convince before anybody else if you can’t convince them, then there’s very unlikely you’re going to convince anybody else.

Monique: But isn’t that a risky strategy to involve your friends and family to give you money with potential risk to break down relations in case your idea doesn’t work?

JP Barthet: Oh definitely.
[Laughs] Monique: [Laughs]So what are the alternatives then?

JP Barthet: Usually you start small, you’re not going to go out and ask for big sums of money from them, unless you’ve got a very rich uncle who’s ready to help. What you do after that is you start looking for seed funds in the forms of awards, prizes, EU funding, incubators that provide free services. So you start to build up your financing through that form of flow.

Monique: Okay, so seed funds is literally the money you need to just start. JP Barthet: Definitely.
Monique: Okay, so what types of funding so the seed funding the

JP Barthet: Seed funding encompasses everything that will take you that’s a true the first stages of your startup. So you’ve got self funding which is your money or your friend’s.

Monique: Bootstrapping I think is another terminology?
JP Barthet: Bootstrapping is more making sure you work on the leanest costs possible so you

actually don’t need as much funding as one would normally have in living a more of a lavish life. Monique: Instant coffee in a jar instead of Nespresso. [Laughs]

JP Barthet: Yeah without the water. Then you’ve got awards which are given like you have here to take off we had the seed fund awards together with MCA as well; there’s the money given by the government to take off as well.

Monique: Yes that’s another award today’s you apply with your project and you get shortlisted etc etc

JP Barthet: Exactly and what’s important to keep in mind is that for every startup the best thing to do is to have a financing strategy. So you’re thinking not just about what you need now, but eventually
hat you might need in the future. So you’re not going to go to a bank at the beginning because the bank is going to look at you and say; you’ve got nothing that I can hold on to, should you fail. So the bank’s going to come later.

Monique: So for how far should you plan, for two years, three years?
JP Barthet: It depends. It could be two years could be four years depends on your business,

depends on your on your plan, depends on how quick you get to generating revenue.

Monique: And in this plan, just as a sort of a side note you must put in a salary for yourself, otherwise they won’t take you seriously or you have to show this some way that you are actually being able to fund yourself to show your business.

JP Barthet: Again, it depends when you’re at the very early stages so if you’re looking at the first maybe one and a half years it isn’t uncommon that you have people running on no salary at all, especially the CEO or the person who brought the idea yet obviously most cost to come in where you need to start paying more resources like developers, designers, engineers who actually have to get work done for you, but in your case, as the entrepreneur and as the person with the idea, likelihood is you’re gonna be on a no to little salary, as little as possible just to make it happen.

Monique: I think it happens in most businesses on a daily basis in fact not just the startups. [Laughs] So again, after you’ve got the bootstrapping, your friends and family, what else comes afterwards?

JP Barthet: Yeah, then after the awards, again, you’ve got awards you’ve got funding coming through free services for example, there’s an audit firms and I’m not sure I can’t mention names and there’s another firm here in Malta that provides free services as part of funding.

Monique: I see okay, yes.
JP Barthet: So you’re not getting money there but you can apply for specific services that you

may need up to a certain amount so it’s coming more in kind rather than [Monique interrupts]

Monique: Rather than these like a million euro funds, the million dollar funds and those things that come out of it.

JP Barthet: After that, you start looking at the real investors coming in, who’s participating in your funding and your fundraising. And here’s where you see business angels coming in, like us.

Monique: So a business angel is?

JP Barthet: A business angel is typically a person, there are many different variants of business angels. But the typical description is a person who has a substantial amount of money enough to allocate a portion to high risk because obviously startups are high risk, but who’s not just looking at it as an investment as a passive investment who’s looking at as an active investment to get involved to a certain level to help mentor the startup so usually it’s successful entrepreneurs who’ve been there done that so the companies now have a lot of money want to be back into game but not back in the game by building their own company.

Monique: So they are kind of more friendly uncle with funds.

JP Barthet: Precisely. So they learned expertise, they learned know how, they have experience besides the money. Obviously they’re looking for the eventual exits and in the form of a company being sold at a later stage. So whatever money they put in, they can get out with returns.

Monique: With some profits. Okay. And so business angel, is that where it stops?

JP Barthet: No business angels come alongside venture capital, which are the bigger institutional investors.

Monique: So they have similar thing, venture capitalists are like a bunch of business angels?

JP Barthet: It could be a bunch of business angels, it could be institutions, it could be when you say a bunch of business angels could be for example, a startup fund-which is a fun set up specifically to invest in startups but here you’re talking of bigger volumes so business angel would typically invest anywhere from 25 k 200,000 pair investment to start; a venture capitalist is looking at the range of half a million up.

Monique: And obviously then their cut is anticipated to be higher?

JP Barthet: Well they are still going to be looking for the same returns so they’re looking for the same potential of return as a business angel would, what they do is the way they go about managing their investment is just completely different. The business angel is more of an individual level, it’s more personal. The venture capitalist will come in, hands on, usually when things are going sour.

Monique: So when they can see you actually need some help, and they step in to protect their investments.

JP Barthet: Exactly.
Monique: Okay, so do we have business angels and venture capitalists here in Malta?

JP Barthet: Yes, we have. The venture capitalists actually they’re here in Malta but mostly they set up to benefit from the fiscal advantages of being set up in Malta. Like I said, venture capitalists are usually looking for big investment tickets to put in, Malta doesn’t offer that just yet. Business angels here in Malta again, it’s very green area for investments here in Malta. Not green, nothing as environmental green as an early stages, it’s actually a kind of a startup area in itself. There are a number of people here in Malta that get it, they understand it, they know what

it means but as a whole, business angels here in Malta as in Maltese, business angels invest in Maltese startups.

Monique: And is there something that there’s an education process around that you’re trying to encourage more people, because obviously there’s quite a lot of wealthy ones in Malta, and a lot of successful businesses that perhaps could invest in spin outs or young startups that could continue the future success of the Maltese economy.

JP Barthet: Yes, definitely. That’s one of the ways is not the primary way we think Malta needs to go forward, which is in terms of education. And here we’re talking about education of entrepreneurs is actually the education for investors to learn the ins and outs of creating a portfolio of startups which is although high risk, taking the right way could turn it into a surplus.

Monique: So is there something that you Go Beyond i helping to do in the community?

JP Barthet: We are helping not only here locally, but also internationally. It’s actually one of the main things that makes Go Beyond stand out amongst its peers, amongst its competitors, is that actually Go Beyond was originally built upon training.

Monique: I see.

JP Barthet: One of the main features about Go Beyond is that we actually do provide the training to help business angels become better business angels, to help people who would like to become business angels actually train and learn how to become business angels and for more well versed business angels to become experts.

Monique: So to sort of take a step back from the training when you’re a startup and you want to apply for funding, obviously you need sums of money required and you would know which type of funder to go for type of funds to go after; what do they need to have ready with you ready to be able to apply for certain funds or to approach that?

JP Barthet: Well that depends on which stage you’re applying for funding so if you’re at the early stages, you’re going to need much less than you need in the later stages when you’re talking to institutional investors like venture capitalist, etc, because the due diligence they’re going to make because obviously much heavier, much deeper than if you’re trying to convince your uncle to do the investment or your friends. So again, depends where you are, you’re going to be definitely well prepared if you’re talking to business angels, for example, business angels want to

see cross border potential, they want to make sure that they’re looking at a business that can grow exponentially because that’s what they’re after. Because of the higher risk nature of the business, and they definitely want to see that you’ve got the right team in place and the person who is dedicated towards making it happen.

Monique: And so what are some sort of things you should definitely do before applying for funding and what are some things you should definitely not do?

JP Barthet: Definitely do is make sure you understand the audience that you’re pitching to. Monique: Okay. So targeting. [Barthet interrupts]

JP Barthet: Targeting the right people, studying your audience, if you’re going into apply to a government grants you don’t want to go in lightheartedly as if you’re pitching to your friends. On the other hand, if you’re going to your friends, you don’t want to go in so heavy handed as if you’re pitching to a venture capital fund. So you definitely need to have a clear picture of what your idea is about, nothing lengthy. You need to have a concise presentation of your numbers. Again, no big business plan in the beginning, it’s pointless spending thousands of euros on a big business plan when you’re just seeking to raise 10 to 20,000 euros.

Monique: Something like a page per year or something like that?

JP Barthet: No, no. You just need to have a good summary. I mean, we’ve invested in opportunities where we had just one page thing at all or we had half a page thing but at the end of the day, the numbers that are on the screen could then be explained and substantiated with the proper discussion because if you take us for example, we give an entrepreneur not more than 10 minutes to present everything from A to Z, the whole idea.

Monique: So there’s introduction, there is idea, their plan going forward, financing requirements, the whole thing etc.

JP Barthet: Everything. And that’s why you need to be really concise, you need to be really on the ball with your figures, you need to be on the ball with what you want the money for, so that’s definitely a thing you have to be prepared for, you have to know exactly what you’re spending your money for. It’s not just saying look I’m seeking to raise 50,000 and when you’re asked about okay what you’re going to use it for I might use it for this or I might use it for marketing or

whatever. Giving a very clear explanation of what, of how much you want, why you want it, how you plan to use it, by when, and is actually showing that you know your business.

Monique: And putting in accurate sums.

JP Barthet: They don’t have to be accurate, rounded figures are what they are. I mean it’s pointless putting a five year projection on a presentation if you still in the very early stages because things have change.

Monique: Okay so what are the definite NO NOs?
JP Barthet: Well first and foremost never ask for more than you need, never ask for less than

you need.

Monique: Okay. [Laughs]

JP Barthet: Make sure you get you get the right balance, you need to make sure you’re asking exactly what you want, so that’s definite. You definitely need to make sure your presentation is clear, your presentation comes along as confident not cocky. Nobody likes a cocky presenter. On the other hand, nobody likes a timid presenter that to the extent that he can’t get she can’t get the message true.

Monique: What happens if you might be the founder and you might be a borderline genius. But actually getting up and standing and presenting to somebody and asking for money might be the thing you just can’t do what would happen in that scenario?

JP Barthet: In that case, you need to make sure you have the right partner who you can do that. Monique: Right.

JP Barthet: You see, I’ve been there. I’ve actually seen presentations where a scientist made the presentation and it didn’t go as well as the next time around when sort of, he stood up, he actually helped the commercial person who stood up and made the presentation was a complete different story. So again, this is why it’s important to have a team. So if you don’t have a team, then that’s a definite NO NO.

Monique: Okay, what other NO NOs are there?

JP Barthet: You definitely need to make sure that you’re, like I said earlier, are completely aware of what you’re applying for, how you’re applying for it. Your documents that you present need to be exactly what you’re being asked for, don’t submit applications lightheartedly just in the hope of getting it, chase it. Don’t just apply and just leave again chase it I mean, you want to show that you’re eager about your money and don’t just say okay, I need 50,000 and then you have no contingency plan. So what happens if you don’t get that 50,000 you’re going to pack everything up. You have to show if you’re absolutely serious about your business, and very, very well as much as much as business angels or venture capitalists for that matter are ready to throw money at an idea, they’re not ready to throw money away. So they want to know that they’re giving money to the idea and it’s high risk, not because the person is high risk because he’s a Maverick or she hasn’t done her homework right. It’s because it’s high risk is because of the nature of the business as startup.

Monique: So what’s the typical return an investor would be looking at or does that depend on each individual business or is there a baseline?

JP Barthet: There is a baseline and there’s a pattern and studies have shown that if you do build a portfolio because if you don’t build a portfolio if you’re investing in one or two opportunities it’s a lottery.
So if they can reach me or they can go both completely bankrupt which I’ve seen happen with some friends of mine where they have had experience in investing but they’ve only done one investment or two due to some felt really badly about angel investing others will say is the best thing then they want to go and do it again. Obviously they’re expecting the same results.

With the Go Beyond what we say is and we’ve had this in our report which we issued last year is actually that you need to build a portfolio, you need to spread it across anywhere between eight to twelve companies. And more importantly, you need to keep money aside for follow on rounds. Follow on rounds are when your entrepreneurs are going to come back and ask you for more money because there’s growth. So earlier we said you only asked for what you need. You don’t ask for more. And the tendency is not to give too much money to an entrepreneur because they’ll choke. So if you give an entrepreneur a million when he only needs 200,000 he’s gonna say I was going to spend the other 800,000 .

Monique: Without Experience.

JP Barthet: Exactly or not in the right way, not on the right things. There’s a growth, there’s a pattern. So you need to arrive from A to B in order to get to C D E F, you can’t just jump. There are situations where obviously you can go fast. So a follow on round is when you’ve invested in a

start up, the startup has actually arrived to its milestone. Or maybe it’s just a bit short or money went over and then I’m going to come back and say, Okay, now for the next stage, we need to grow or we’re going to either grow in a different country or because we’re developing this stage of the prototype, etc, we need to productize it, we need to design, so we’re coming back for more money, again, with specific use explaining exactly why they need this new amount of money, what they’ve done with the previous amount. So you want to be there as the growth happens.

Monique: And also I’m assuming that a good level of relationship because it’s not just about the money you want to work with somebody from both sides of the fence as an entrepreneur or as an investor that somebody you can see have potential in and also somebody that you like something that you can trust to work hard.

JP Barthet: Chemistry is key. Unless you’re investing in startups to a passive funds were have absolutely no say it’s just happening for you, the likelihood is you’re going to invest in a startup where you can get on with that entrepreneur. Likewise as an entrepreneur, it’s very important that you take on investors that you can work with, because it’s not just about the money because then relations can get very sour very quick.

Monique: Especially when money is involved.

JP Barthet: Definitely. So with follow on rounds, as we’re talking about portfolio, it’s very important to keep money for follow up round. So you keep on putting money in the companies that are growing which are most likely to exit and you do not put money in the companies that are not doing so well. It’s a known fact that roughly 40% of the companies you invest in will fail.

Monique: 40% ?
JP Barthet: Yes. 40%
Monique: And you can’t pull out your funding, once you funded you funded.

JP Barthet: Unless you can find someone to buy your shares. I mean this is you’re buying shares into a company. So it’s basically not a float company on the stock exchange so you just need to find someone else to buy your share and the 40% of the companies will fail and another 40% will at best give you your money back.

Monique: So you’re really looking at 80% and 20% actually will make you

JP Barthet: And 20% will give you substantial returns to make good for the 40% you lost plus returns.

Monique: So it is absolutely worth being an angel investor or a venture capitalist.

JP Barthet: Yeah I mean from my end we’re looking at the situation where if you look at all our investor community which is made up of over 300 angel investors at the moment, the average return across the community is double digit.

Monique: Okay. So better than a bank

JP Barthet: Yes. It’s not totally realized return, it’s made up of both realized return meaning they’ve earned the cash back because the companies actually exited or sold. So they got their returns back on the shares and what we call unrealized return which is basically the valuation of the company has gone up or gone sour, one way or the other.

But when you do the math, the portfolios on average are double digits and interesting double digits okay not very high but you’re looking at anywhere between 18 to 25% annualized return.

Monique: That’s a much much better return than you get from traditional methods and I think it is more exciting actually.

JP Barthet: Definitely more exciting much more fun, that’s for sure.

If you’ve just joined us you’re listening to entrepreneurs clinic on campus FM with me Monique Chambers my guest this week JP Barthet from Go Beyond. We’re discussing how to finance your idea.

Monique: So we are talking about go beyond actually delivering investor training so actually how to invest in businesses?

JP Barthet: At Go Beyond we have a whole training package made up of 12 to 13 modules that take you through the whole experience of investing in startups. So you’re looking it from developing an investment strategy in this case, because you’re the investor you’re not the entrepreneur. So you need to have an investment strategy.

Monique: What would that consist of?

JP Barthet: An investment strategy is where you are planning in advance how you’re going to invest across different types of businesses. As I was explaining earlier, how you’re going to build your portfolio actually to build a portfolio, so you’re not just talking about taking the one or two chance here today it’s actually taking a structured and the strategic approach at investing in the companies you tend to understand something about; but at the same time spreading out in order to balance a portfolio. You would typically be looking at investing in eight to twelve companies as we said earlier and going on and following those companies that are successful as close to the exit as possible having enough money to be able to put in the final rounds because that’s where the money is going to actually comes in.

Monique: And obviously being able to then invest in the next big thing that’s coming up the pipeline.

JP Barthet: Yes. From there and then we offer training modules such as how to do a proper company valuation because that’s important

Monique: So that isn’t something that’s already done for you when you go into use the services of Venture Capital?

JP Barthet: So if you’re the business angels and you’re looking at an opportunity ,your entrepreneur is going to come to you and say okay I’m going to need 50,000 euros and if you give me 50,000 euros all have a part of that I’m going to give you for example just do some figures 10% of the company. So that means if you’re giving him 50,000 and you’re taking 10% of the company that means he’s valuing the company at that stage at half million. So you want to do the post money valuation which is basically after you’ve given the money so you want to make sure that that valuation makes sense he’s not just hit it off because it’s put his finger up in the wind okay my company’s worth half a million today.

Monique: So it’s not the assumption it really is factually based and you can go through an investigating train how to do that ?

JP Barthet: Yes obviously the later stage company is the easier it is to do a company valuation because most likely their assets there might be IP as this pay 10s and I know that so the later stage, the easier it is to do the company valuation. With the earlier stage startups it’s a bit more difficult. And in fact we do offer different methodologies of doing a company valuation in order to be able to come to a more of an average figure than anything else. Then we teach people how

to look at financials properly because not everybody knows how to look at financials just because you made money doesn’t necessarily mean you are a finance person. We also teach people how to handle exits; the exit is when the company actually does successfully sell off either to a trader, competitor or as a public offering on the stock exchange of that sort. So you want to be able to as an investor understand the exit strategy properly and there are other different modules in between that fill the whole pattern of cycle, the whole journey of investing in startups.

Monique: So how did you actually do this training because I’m imagining these people with all this money aren’t sort of sitting on their yachts all day, how do you get them to participate?

JP Barthet: Go Beyond operates internationally. We have a back office here in Malta and as we said earlier we are trying to assist with the local scenario and help it grow. But on an international scale we deliver our training in two ways; so we’ve got our webinars; where we deliver our training online, where people register, they buy a membership and then they register for that training event and those are delivered basically twice a month. We have modules going on.

And then we have two physical training events that happen twice a year which are more intense. They are full day training which is based on specific topics plus we also look at doing portfolio analysis of that sort which then allows investors to be more hands on with their actual portfolios not just fictitious.

Monique: Do you have any of those workshops actually coming up? Are there live events? JP Barthet: Yes we do have if I’m not mistaken. They’re in quarter two and quarter four this

year.
Monique: Perfect. And to find out about those events where would we go

JP Barthet: You go to our website which is www.go-beyond.biz or you can contact us here in Malta on 2340832.

Monique: And you’re based at the same office as take off and savvy at the University of Malta? JP Barthet: Yeah.

Monique: That’s perfect. So thank you for listening to this week’s show. I’ve been talking to JP Barthet of Go Beyond here on campus FM’s Entrepreneurs Clinic Next week I’ll be talking about mentors how to use one and how to be one.