Download - Understand All of Your Funding Options
Funding Options for Early Stage Companies
November 14, 2013
Today’s Expert
• Jean Hammond; • Supporting Growth of education and learning cluster in Boston: LearnLaunch,
LearnLaunchX, • Active angel in lots of deals, first investor in Zip car:
Launchpad, Golden Seeds, & Hub Angels• Serial entrepreneur:
Axon Networks and Quarry Technologies • Eco-system supporter:
Board TCN, MIT Trust Center, Mass Challenge, TechStars, & ACA/ARI trainer
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Agenda
• Funding Sources– Risk adjusted investing
• Deal flow– Improving communication
• Experiences (Q&A)
• Backup other sources – Government, etc
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How Can We Build Value and Reduce Risk?
What type ofcompany should
we build ?
Stage-appropriategrowth-oriented
strategy
Flexible, High-Performance Team
- that can grow& change
IP &Differentiated
Product
Bookkeeping & AccurateAccounting
Legal StructureBoards
Governance
Partners: manufacturing,
development, distribution, etc.
Deep Market Understanding
& Marketing Execution
Profitable Business
Model
Outer ring: this is how you grow.
By growing,
you prove the market
exists,
REDUCE RISK, and
earn access to different
financial partners
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How Can We Build Value and Reduce Risk?
What type ofcompany should
we build ?
Stage-appropriategrowth-oriented
strategy
Flexible, High-Performance Team
- that can grow& change
IP &Differentiated
Product
Bookkeeping & AccurateAccounting
Legal StructureBoards
Governance
Partners: manufacturing,
development, distribution, etc.
Deep Market Understanding
& Marketing Execution
Profitable Business
Model
Outer ring: this is how you grow.
By growing,
you prove the market,
REDUCE RISK, and
earn access to different
financial partners
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Funding the Company
Before you can get funded, you have to know where to look
Before you know where to look, you need to understand
what you are
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What Type of Company Are You?
• In many cases the nature of the business decides the type of company …
• In others, changing how you bring the product to market can really affect the cost of scaling and the funding requirements• Example: license new battery technology to existing
players vs build a battery company with outsource manufacturing or build a manufacturer
• Every company’s financing path is unique
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All Financial Partners Are Specialists• Funding comes in distinct flavors; all financial partners are
specialists• To understand who to approach and when to get to them
takes really understanding what they specialize in. You need to match type of company to the type of funding partner
• Different types of funding partners specialize in different levels of risk, so apply different funding criteria
• Most basic rule: the more risk a funding partner takes, the more return (and control) they are going to require
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Entrepreneurship comes in many types
NORMAL GROWTHCOMPANY
HIGHGROWTHCOMPANY
EXTREMEHIGH GROWTH
COMPANY
SOCIAL VENTURECOMPANY
• Includes all service businesses
• Exploiting a local market need
• Team has ‘great jobs’
• Growth by adding resources one by one
• Exit will be based on value of cash flow (mature biz.)
• Growth profile ultra-scalable
• Team focus is exit• Revenue $40M+
with lots of room for growth (5 yr.)
• Based on $20M+ investment
• Exit targeted to IPO or by ‘large’ M&A event
• Goal is to fulfill a social need
• Has mission orientation
• Team needs to support mission
• Growth profile often one resource at a time
• Exit …much harder to find fit
• Company can grow fast (on-line) or has a scalable system
• Team often motivated by exit
• $7-10M revenue in 4-5 yrs & market size allows significant additional growth
• Capital efficient total investment$2-4M
• Exit by M&A
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Growth and Maturity Reduce Risk
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Size of Capital Raise:
High
Time
High Risk
Low Risk
CrystallizeIdeas
DemonstrateProduct
Early Scaling Growth
Sustained Growth
Market Entry
As you develop your company, you reduce risk for your financial
partners
Size of Capital Raise: Low
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Capital Sources: Size & Cost
Investment Size
Investment “Cost”
Traditional VC
Micro VC
Equipment Financing
Angel GroupsAngels
Equity CrowdfundingAngel List, Circle Up, etc
Corporate / StrategicVenture
Customers
Jobs Bill Portals
Vendors
Founder
Friends & Family
Crowdfunding: etc.
Grants
Venture Debt
BankLoans
PersonalLoans
Private Equity
B’Plan Competition
Accelerators
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Match Funding Sources
NORMAL GROWTHCOMPANY
HIGHGROWTHCOMPANY
EXTREMEHIGH GROWTH
COMPANY
SOCIAL VENTURECOMPANY
• Friends, family, founders
• Debt, Bank, and other
• (Future) Crowd funding (portal style)
Early on• Accelerators• Individual Angels• Micro Cap VCs• Seed from VCLater stages • Venture Funds• Strategic VCs• Angel
Syndication
• Friends family, founders
• Charity$$• Crowd funding
(Kickstarter, etc)
• Impact Angels• (Future)
Crowd funding (portal style)
• Angels• Angel Groups• Angel Group
Syndication• Angel List• Micro-cap Funds• (Future) Crowd
funding (portal style)
• Increasingly Strategic Corporate VCs
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Alternative Sources of Capital• Business Plan Competitions and Accelerators
• Many firms gain enough for some product completion steps
• Revenue – Best of all (Bootstrapping)• Revenue history opens more types of debts• Pre-payments from business partners• Self-interested support from supply chain
• Vendors, partners and customers• Including NRE to build joint product• Great source of quick capital for marketing or sales collaboration
• SBIR Grants• ~$2 Billion department specific funding• 2 or 3 ‘research’ calls from each department each year, must be used for
research … then you commercialize with other funding
• Other government funding, lots of “detailed” sources• Mass Life Science & Sustainable Energy –loans or convertible notes
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Debt Capital: Repayment• Debt Capital
– Funding based on a set schedule of principal and interest payments that provide a fixed return for the lender. Availability may be based on asset value or cash flow or personal guarantee
• Sources:– Personal Loans – Friends/Family– Bank Loans– SBA Loans– Expect debt classes from Jobs Bill crowd funding portals– Credit Cards
– Venture Debt usually linked to equity15
Equity Capital: Shared Upside (VC / Angels)
• Equity Capital requires an exit:– IPO & Private Equity – M&A (most)
• VCs invest other people’s money (from pension funds etc.)– Returns are measured on a per fund basis– Focus is on finding the best as fast as possible and adding
resources to aid success– ~$26.5B annually, ~ 3,700 new investments 2012
• Angels invest own money– Prefer capital efficient / early exit opportunities– ~$23B annually, ~ 67,000 new investments 2012– 24 New England, 10 greater Boston
• Angel groups ~10-15%, • Informal networks & one-time-investors ~15-20%, • Super angels ~25-30%, • Family offices ~35-45%
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Example VC & Angel Deal Metrics
Time to closing
Investment dollar range
Success rate – How narrow is the funnel?
Accept/require Credit Support / Guarantees
Total # of Similar Sources
Affected by general economic conditions?
Dry Powder / Secondary Capital Reserved?
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Close Up: Extreme High Growth vs High Growth
Capital Needs
Time
High Risk
Low Risk
Formal Venture Capital
M&A or IPO
CrystallizeIdeas
DemonstrateProduct
Early Scaling Growth
Sustained Growth
Angel Group (or Micro-cap) Syndication
Angels orAccelerators or Micro-cap
funds Angels orAccelerators or Micro-cap
funds Angels
Market Entry
M&A
Later VC Rounds
Extreme High
Growth High Growth
Friends, Family & Founders
Friends, Family & Founders
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Agenda
• Funding Sources– Risk adjusted investing
• Deal flow– Improving communication
• Experiences (Q&A)
• Backup other sources – Government, etc
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What Investors (and others) Need to Know
• 5 P’s of investment– Product – differentiated technology or service that serves market
need for a significant, large market product– Promotion –market entry strategy, with detailed plan– Profits – a business model that has margins and distributions costs
that are profitable– People – a team to meet the needs of the business – Plan – good idea of the steps (& priorities) needed to create a
repeatable business model
• Some key concepts to convey:– What our potential customers are saying to us: is this a nice to have or
must have– How we plan to run a series of market entry tests delivering
meaningful metrics– How the team matches the needs of the business– How we will scale against a repeatable business model
First Time Entrepreneurs
• Without a startup track record, funding can be a challenge– …. Later stage because of risk
• Moving from negative to positive
– Communicate relevant experience
– Hire a compelling management team
– Surround yourself with experts
– Show us some milestone accomplishments
• Don’t ask us to take a leap of faith – show us how you are going to be successful
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Compare what makes it and what doesn’t
Factors Companies getting angel investment
Companies that don’t
CEO Some experience or ‘coachable’ wants listen
CEO talks about him or her ‘expertise’ forever
Team Enthusiastic! pretty good match to required skills
One person, says no one will work without $$
Unique A neat idea, could be big Seems ‘me too’
Stage Lots done, working code, just needs mkt. entry $$
Idea and ppt., or a complex science project, or “old”
Market size, str.
Market is big and can be reached Market is huge orMarket extremely fragmented
Total investment
Cashflow breakeven known,Can use more $$
Needs $10-20M more after this round
Valuation Willing discuss a range of values & funding strategies
Is fixated on a very unrealistic high value
The odds are bad …
• What doesn’t work
• Deals that can’t develop an exit should bootstrap, get debt, etc
• Companies at too early of stage – risk set large
• Entrepreneurs expecting too high a valuations
• Asking for the wrong amount of money
• And .. The odds are bad … may have a “hard presentation slot”
• Find a champion (before you apply if possible) !!!!
What are the Deal Marketing Materials
• Business Summary -2-5 pages with financial summary
• 12-20 slide pitch deck with a backup side for every serious question
• 5-8 page market (size and structure) summary
• Integrated financial model
• 30 second elevator pitch
• 1-2 minute tell me more / meeting request pitch
(write a business plan for yourself)
Creating an Effective Presentation• Elevator pitch – who are you and what do you do and why?• Market opportunity
– What is the problem you are solving– How big is the market
• Product or service (intellectual property)• Target clients and business model• Go to market strategy• Competitive landscape and advantage
– Barriers to entry• The management team
– Hiring plan• Financial summary, including last year’s P & L and 3 year projections • Funding needs for this round & use of funds
– history of funding to date – pre-money valuation
Agenda
• Funding Sources– Risk adjusted investing
• Deal flow– Improving communication
• Experiences (Q&A)
• Backup other sources – Government, etc
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“Stage” & Equity Capital Sources
StageCrystallize Idea
and Early Demonstration
Demonstrate Product &
Market Interest
Market Entry and Early Growth
Early Scaling Growth
Repeatable Growth
Capital Source
Founders, Friends, Family,
Grants, Kickstarter, etc.
Accelerators, Individual
Angels, many others now “exploring”
Angel Groups, Angel Group Syndication, Micro-Cap
Funds
VCs, Angel Group
Syndication, Micro-Cap
Funds
VCs
Investment $25K - $100K $100K - $500K $500K - $1M $5M – as needed as needed
These 2 need sophisticated growth plans
This is the stage where advice can make you eligible for
outside funding later
Accelerators and a few individual
angels play here … unless it is a big idea
This is where Angel
Groups do most 1st
investments….
Funding Sources1. Funding partners are specialists
2. To understand who to approach and when to get to them takes really understanding what they specialize in. You need to match your company type to the right type of funding partner
3. Company stage is shorthand for types of risks that business faces – Risk awareness is the key to early successful
communication with funders
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Closing Thoughts…
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Leverage the Entrepreneurial Community in Boston!
- Greenhorn Connect- Etc.
Grants, etc
Funding Options for Early Stage Companies
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SBIR/STTR Program
SBIR + STTR = 3% - 3.6% of federal R&D Budget Best for research … need other commercial $$• Pros:
– It is a contract/grant – non dilutive• Cons:
– Long Solicitation Process– March-in Rights– Work with universities for expertise– Best to incorporate (but more acceptance of LLCs)– Accounting systems must be compliant with the
government– Very competitive in some agencies KATZ
NANNIS +SOLOMON, PCCERTIFIED PUBLIC ACCOUNTANTSBUSINESS ADVISORS
www.knscpa.com31
KATZNANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTSBUSINESS ADVISOR CONSULTANTS
DOD HHS NASADOEnergy NSF USDADOC EPA DOTED NISTDHSDOEducation
SBIR/STTR Participating AgenciesWeb site address at SBA for the agencies’ SBIR links:http://www.sbir.gov/federal_links.htm
Innovation Development Institute
www.inknowvation.com
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www.masslifesciences.com
• Small Business Matching Grant Program• Competitive Program - $500k Matching Funds
• Life Science Accelerator Program• Loan up to $750k 5 year 10% with warrant coverage
www.masscec.com
• Various projects centered around Clean Energy• $40,000 grants with Tech Transfer Center
• Dealings with ARPA-E program• Supplementary Funds
SBIR/STTR Participating Agencies (cont’d)
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Massachusetts Technology Transfer Center
www.mattcenter.org
Mission is to support technology transfer activities between research institutes and companies in Massachusetts.• Fund researchers at universities • Move their inventions to development• Development of the feasibility in specific industry applications
• Small and Medium Massachusetts manufacturers• Term loans and working capital loans• Contract and purchase order financing• Targeted technical assistance-50% paid by MGCC
SBIR/STTR Participating Agencies (cont’d)
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Web site for entrepreneurs is:http://www.sba.gov/starting_business/index.html
Web site for lending programs is:http://www.sba.gov/financing/index.html
7(a) Loan Program Disaster Recovery CDC / 504 ProgramMicro Loans
Small Business Investment Companies
Services Specific Territories
Management Consulting
Start-up Consulting
Business Plan Development
Financing Plan Development
Low Cost Training Programs
Procurement Technical Assistance Center
Mass Export Center
SBIR/STTR Participating Agencies (cont’d)
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www.mass-ventures.com
• Normally fills a gap in Angel or Venture Round, Seed / 1st
• Massachusetts-based companies
• $250,000 - $500,000
• State-funded VC
• START Program- Phase II Matching Grant Program
• Initially $6M as part of bond fund
• 10 at $100k; 5 at $200K; 2 at $500K in first year
• 2nd year of program – first 100K applications are over
SBIR/STTR Participating Agencies (cont’d)
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Additional ResourcesCommonwealth of Massachusetts
www.mass.gov/bizteam
Smaller Business Association of New Englandwww.sbane.org
Association of Corporate Growthwww.acgboston.org
City of Boston Resource Guidewww.cityofboston.gov/dnd/obd/BRG/A_intro.asp
States of NH, CT, RI,VT, ME Doing Business Guideswww.nh.gov/businesses/doing.htmlwww.ct.gov then go to “Doing Business”www.ri.gov/business/vermont.gov/doing_business/business.htmlwww.maine.gov/portal/business/small_bus.html
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What Do We Mean By “Risk”
Examples of things that make a company risky to a financial partner:
• Your company is early stage• You need more money, now or down the road• You are a new entrepreneur• You have unproven technology• You need to raise equity instead of asset backed debt with
obligation to repay• You are chasing a new unproven market• You have less IP or defensibility• Your business does not have high growth• You have a longer path to exit• You have fewer exit options
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