raising equity capital

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U.S. Department of Ene Pacific Northwest National Laborat 05/15 /22 1 Gary E. Spanner Manager, Office of Small Business Programs Pacific Northwest National Laboratory (509) 372-4296 [email protected] www.pnl.gov/edo April 17, 2002 IT Day, Pasco, WA

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Page 1: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 1

Gary E. Spanner

Manager, Office of Small Business ProgramsPacific Northwest National Laboratory(509) [email protected]/edoApril 17, 2002IT Day, Pasco, WA

Page 2: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 2

My History with Equity Capital

Honorary member of the Alliance of Angels – to help the AoA gain access to Tri-City technologies

Organizing committee for the Early Stage Investment Forum in Seattle

Organized two local investment forums for Puget Sound investors and several local training events

Page 3: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 3

Some Regional History of Equity Capital

WA & OR venture capital investments: 220 in 1999, 265 in 2000, 100 in 2001

Early Stage Investment Forum: 350 applications last two years, about 15 from Tri-Cities, 1 accepted that was later rejected

Alliance of Angels: Number of applicants unknown, 6 have presented to full membership, 1 received funding

Page 4: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 4

Some Regional History of Equity Capital (cont’d)

Alliance of Angels Forum in Tri-Cities (10/00): 4 presented to steering committee, 1 presented to full membership, no investments

Local surveys suggest that access to equity capital is a problem

Local equity investments in the last several years by outside investors: I know of about $40M, only one IT firm

Page 5: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 5

$$ Sources Direct Private Investors

• Friends & family• Individual “angel” investors• Groups of individuals (e.g., formal & family

funds)

Institutional• Venture capital firms/funds• Pension funds (private & public) &

endowments• Corporate • Financial institutions and insurance

companies• Foreign firms• SBICs

Page 6: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 6

$$ Sources (cont’d)

Governmental• Economic development funds

& agencies• Pension funds• State investment boards

Enterprise Capital Resources, Seattle, 1999

Page 7: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 7

$$ Sources (cont’d) Common perception that equity capital for

technology deals is not available locally Credit cards, second mortgages Several venture capital funds in Spokane Alliance of Angels: 170 private investors, accept

applications on web, hear four presentations per month at a luncheon meeting (allianceofangels.com)

Early Stage Investment Forum: annual event in March, 300 private and institutional investors, extensive coaching for presenters (www.esif.org)

Page 8: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 8

$$ Sources (cont’d)

Puget Sound Venture Club: ~ 25 members, monthly presentations, probably need a referral to get in

List of local and regional $ sources, including angels and VCs, at www.pnl.gov/edo/funding

You’re welcome to dig through my file for many others

Columbia Basin College BizWin Competition: $30K seed funding (http://www.bizwin.org/)

Page 9: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 9

What Investors Want Respect

Play a role in something new and exciting

Business model that they understand Management team with these

attributes:• Perseverance• Decency• Competency• Track record• Personal financial commitment• Burning desire to succeed

Page 10: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 10

What Investors Want (cont’d)

Potential for fast growth and lead market share

Appropriate involvement

August 2001 – Avogadro Partners, LLC

Page 11: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 11

The Mind of the Experienced Private Investor

Know the business (a solid hedge or “Why Warren Buffet avoids Internet deals”)

Do their own due diligence and invest with others who fill their expertise gaps

Deal only with people they like

Plan on participating in subsequent rounds

Page 12: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 12

The Mind of the Experienced Private Investor (cont’d)

Invest alongside a significant investor—one who has a track record of commitment and pockets deep enough to keep the company afloat

Becoming a successful private investor is definitely an apprenticeship process. They benefit from investing alongside experience.

Avoid unrealistically high valuations Understand the liquidity risk

August 2001 – Avogadro Partners, LLC

Page 13: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 13

Further into the Mind Invest in ‘hot’ industries (where VCs are

concentrating their investments) Prefer large gross margins—generally more

forgiveness for problems that an early-stage venture might encounter

Focus on assumptions underlying projections, as opposed to the projections themselves. The assumptions indicate the degree to which management has an understanding of all components of the business.

Control risk through the staged infusion of capital based on performanceAugust 2001 – Avogadro Partners, LLC

Page 14: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 14

Training Events for $$ Hunters

Entrepreneur’s Forum of the Great Northwest, April 17, 2002

WaFAST Pacific Northwest Regional Conference, May 1 & 2, 2002, Spokane: SBIR/STTR and Eye-of-the-Investor workshops

Spokane Economic Development Council Spring Rally, Coeur d’Alene, May 15, 2002, VCs discussing what they look for

Tri-Cities Venture Group, series of breakfast meetings

Page 15: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 15

Training Documents for $$ Hunters

Online version of Rainmaking in a Capital Drought – Everything You Need to Know About Raising Capital in This Dry Climate available soon on www.pnl.gov/edo

Flier, What Private Investors Look for in Early-Stage Technology-Based Businesses

Tri-Cities Tech Business Update announces training opportunities, many for $$ hunting

Page 16: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 16

Training Documents for $$ Hunters (cont’d)

Books:

Finding your Wings – How to Locate Private Investors to Fund your Venture, Benjamin & Margulis

Business Plans that Win $$, Rich & Gumpert

Page 17: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 17

The Business Plan What is your company about? What pain or problem is there in the market

place?• Why?• Who• How much?

How does your company soothe the pain or solve the problem?

What compelling benefits do you offer the customer?

Who is the management team and why can they bring the solution to the market? What have they accomplished so far?

Page 18: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 18

The Business Plan (cont’d) What is your strategy? How will you make money & when

(business model)? What’s your capitalization plan

• Money raised so far?• How much capital in what kind of offering

now? Use of proceeds (list milestones) Exit strategy Summary: Why invest?

August 2001 – Avogadro Partners, LLC

Page 19: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 19

Pertinent Experience Matters

When you need other people’s $$, you need experienced entrepreneurs on the executive team (i.e., people who have raised capital and taken products to market)

VCs consider an experienced management team a prerequisite to funding

Investors are betting on the jockey as well as the horse Investors consistently state that the management team

is the most important factor If you want experienced management, you better have

a stock option plan

Page 20: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 20

How to Obtain Experienced Management

Tech Job Connection now available at www.pnl.gov/edo/jobs

Several local firms having success with remote CEOs plugged into $$ and other vital networks (Integrated Environmental Technologies, MesoSystems, Advanced Imaging Technologies)

There is excess experienced management talent available on Interstate 5 nowadays

Page 21: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 21

My Observations and Advice

Early stage investors are looking for a 40% rate of return (5 times their investment in 3 years)

Nobody got rich owning Microsoft stock, only by selling it

For tech investors, wealth results from increasing stock prices

Sell the investment opportunity to investors, not the technology and not the market

Page 22: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 22

Investors Expect Share Prices to Increase

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Seed Round 1 Round 2 Round 3 Round 4

Time

Pric

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$)/

Sh

are

Page 23: Raising Equity Capital

U.S. Department of EnergyPacific Northwest National Laboratory

04/10/23 23

My Observations and Advice (cont’d) How ESIF opportunities compare to Tri-City opportunities:

greater scalability (leads to stock price increases) and more experienced management teams (serial entrepreneurs)

Tri-Cities is close enough to I-5 to attract investors Tri-Cities has a technology opportunity cachet Consider Small Business Innovation Research Program as

alternative to seed funding Do what it takes to show an experienced management team Investors expect the CEO to give the pitch, using electronic

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