Flomerics's Financing Case

Flomerics group Limited by Share Ltd is a company that develops "computational fluid dynamics (CFD)" software, and its products are used in the design process of electronic products.

In early 1989, the company acquired MTI 300 thousand of venture capital.

The second round of financing was carried out in the middle of the way, and was listed at AIM in London at the end of 1995. The market value was as high as 3 million 300 thousand pounds, which brought 30% internal rate of return (IRR) to MTI.

The following is the whole process of venture capital.

Background introduction: the two founders of Flomerics, David Tatchell and Harvey Rosten (hereinafter referred to as David and Harvey) have worked together in 70s to study the commercialization potential of CFD industrial technology.

In the design of electronic products, we must accurately grasp the cooling requirements of the electronic system. Otherwise, the products will be damaged during the working process because they can not be dissipated in time.

For a long time, the cooling requirements of the products can only be measured in the prototype product development stage by professional CFD engineers through complex software.

But this is not only very time-consuming, but also expensive.

With the escalation of competition in the electronics industry in 80s, the issue of heat is becoming more and more important.

In view of this, David and Harvey jointly established Flomerics company to develop CFD software simulating heat exchange before the prototype product development stage.

At the very beginning, the company adopted the form of partnership.

Later, in order to achieve the ultimate product development and enable the company to thrive, the two founders considered introducing venture capital as the best way.

David and Harvey began to seek the first venture capital financing.

In the investment proposal, they estimate that the company needs at least 250 thousand pounds.

They contacted a number of venture capitalists, one of which was MTI management company.

After some investigation, they chose MTI.

In February 1989, MTI decided to invest 300 thousand in Flomerics.

In this way, MTI gained a share of Flomerics 62.5%, while the two creators had the remaining 37.5% share of the company.

MTI believes that the Flomerics project will be commercialized and profitable.

Ernie Richardson, the project leader of MTI, has done a lot of work for Flomerics, including the adoption of the financial reporting system in new companies and the provision of management support to the company.

The first version of Flomerics, Flotherm 1.2, was launched in September 1989. Its target customers are electronic engineers, mainly in the field of remote communication and computer, but it can also be used in defense and Avionics industries, electronic consumer products and pportation industries.

Flomerics's second product, Flovent, was also released in early 1990.

Its target market is the heating, ventilating and air conditioning (HVAC) market, which is used for the analysis of the air circulation process.

All of the early products of Flomerics are preparing for the next stage of developing accurate measurement products.

Flotherm was first promoted in the UK market, but then it was discovered that only when it entered the US market could it achieve significant sales growth.

Thus, with the help of MTI, Flomerics established a branch in the United States in 1990.

Over the next few years, about 50% of Flomerics's sales came from the United States.

In order to continue product development, Flomerics decided to seek cash financing again and issued warrants at the end of 1992.

MTI invested another 250 thousand pounds in that regard, while Flomerics employees subscribed for 170 thousand pounds.

In this way, MTI's share of the company has been reduced to 58%.

This funding has greatly enhanced Flomerics's strength in the US and strengthened its influence in the Far East.

Soon, Flotherm was successfully adopted by most of the major e-commerce providers in the United States and Europe.

Flomerics also began to win large profits.

A 1992 survey showed that the potential market demand of Flomerics's calorie analysis software amounted to 50 million to 100 million dollars a year, and this market was mainly created by Flomerics's products.

In 1993, Flomerics opened second branches in the United States in order to create greater profits.

Meanwhile, branches in Europe, Germany and France have also been established.

For other major markets, Flomerics is expanded through local distributors.

The withdrawal and return of the investment: the MTI began to seek the opportunity to withdraw investment as the fixed period of operation of the 10 years approached for the MTI.

If possible, Flomerics's management wants to keep the company independent and autonomous.

Because the capital is too small, the company can not be listed on the London Stock Exchange.

As a result, the management of MTI and Flomerics decided to let the company be listed on the London Stock Exchange's second board market AIM.

In this way, MTI can withdraw its investment in AIM, and Flomerics can also get sufficient development funds while maintaining its independence. Both sides will achieve their goals at the same time.

Since MTI introduced the financial reporting system for Flomerics after the first round of investment, the operation of Flomerics has met the requirements of AIM. It can exempt the expensive financial report audit.

This MTI alone saved a lot of money for Flomerics.

Flomerics listed in December 6, 1995. Its market value is as high as 3 million 300 thousand pounds, and MTI's internal rate of return is as high as 30%.

At that time, MTI sold 25% of its holdings, and the remaining 75% also sold in another sale in 1996.

According to the above background, we can sum up several important points in Venture Capital: the importance of value added services of venture capitalists. The main body of the report and the previous cases have emphasized that the value added service of venture capitalists is very important for the smooth growth of venture enterprises.

In this case, the value added of MTI has two outstanding points: first, MTI introduced the financial reporting system for Flomerics after the first round of investment, which not only made Flomerics available on time in AIM, but also saved a huge amount of financial report audit expenses for Flomerics.

Generally speaking, entrepreneurs can not predict many future events, but venture capitalists are familiar with the long-term involvement in building new businesses.

The MTI in this case is ready for Flomerics to go public in the future from the beginning of investment.

With the help of MTI, Flomerics has set up a branch in the United States, which has brought about 50% of its sales revenue to the United States.

Hi-tech enterprises push their products to the world market is the objective requirement of today's world economic development.

But it is impossible for risk enterprises to become internationalized only by their own strength and resources, but venture capitalists can help venture enterprises to do this by virtue of their relationship network.

Two, the initial public offering is the most popular way to withdraw investment from both sides. The way for venture capitalists to withdraw their investments is mainly three: initial public offering, sale to third parties and buyback of enterprises.

Generally speaking, IPO is the most popular way of investment and financing.

Venture enterprises will gain the highest market value through public listing.

Moreover, for managers, enterprises can maintain their independence and can continue to get financing from open markets in the future.

However, due to the restriction of the relevant laws and regulations, the listed sponsors generally can not sell all the shares held by the company when they are listed.

Therefore, venture capitalists usually need to continue to participate in venture business until the stock is finally sold or allocated to investors.

In this case, the management of Flomerics wants to maintain the independence and autonomy of the company.

"Flomerics is listed on the AIM, even if" MTI "can withdraw its investment in AIM, Flomerics can also get sufficient development funds while maintaining its independence, and the purpose of both sides will be realized at the same time.

"The three and second board markets have opened up an important channel for venture capital withdrawal. The main target of venture capital investment is the newly built small and medium sized enterprises with broad prospects for development.

When the investment target reaches maturity, venture capital must be withdrawn.

As mentioned before, public listing is the most popular way to withdraw from both sides.

However, in order to protect the interests of investors in stock market, stock exchanges in various countries generally set strict censorship requirements for listed companies, such as capital size, company history, profit period and so on.

However, SMEs in venture capital can not meet these requirements.

To this end, countries have set up a second board market, specifically to provide services for these potential growth enterprises.

In this case, the capital size of Flomerics is too small to be listed on the London Stock Exchange.

However, the London Stock Exchange's second board market, AIM, provides an ideal market for Flomerics.