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CFA v. 2.0

Alternatives to Venture Capitalfor financing technology commercialization

February 28, 2003

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CFA v. 2.0

Corporate Finance Advisors (CFA)

• Specialize in assisting companies using a combination layering of equity, debt, subordinated debt, and other alternative financing sources for rapidly growing businesses

• Specialize in assisting companies using a combination layering of equity, debt, subordinated debt, and other alternative financing sources for rapidly growing businesses

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CFA v. 2.0

My Background

Sam Thacker

• Over $350 million in financing arranged since 1994

• Focus on structuring mix of debt / equity

• Largest single deal $11 million

• Average deal $1.5 - $2 M

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CFA v. 2.0

Today’s Objective

• Introduce you to alternatives to classic venture capital and how they can be used

• Provide “real world” examples of how the various alternatives to VC have been used

• Challenge you to think differently about financing technology commercialization

• Introduce you to alternatives to classic venture capital and how they can be used

• Provide “real world” examples of how the various alternatives to VC have been used

• Challenge you to think differently about financing technology commercialization

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CFA v. 2.0

Historical Foundation (pre 1990s)

GovernmentIBM

3M

Etc.

NASA

AerospaceDefense

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CFA v. 2.0

Changes in Financing 1988-1996

1988 1992 19960

5

10

15

20

1988 1992 1996

Nationwide GrowthNon-Traditional Financing Programs

Traditional Lending

Non-TraditionalFinancing

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CFA v. 2.0

Grass Roots Financing

EquipmentLeasing

TraditionalLOC

SBA

Credit Card

AngelInvestor

Construction

Asset-Based

SBIC

?

Factoring

HomeEquity

Conventional

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CFA v. 2.0

Financing Pyramid

IPO

Institutional VC

Early seed stage (SBICs)

Larger-scale commercial loans

Band of Angels

Friends & Family

Big-time VC

Corp VC, Strategic Alliance

Private Placement (PPM) Reg. D

SBA / Microloan Comm Loans

Personal Funds

Angels (wealthy families), individuals

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CFA v. 2.0

Advent of Small Business Investment Companies (SBICs)

• Small Business Investment Companies (SBICs) have provided approximately $27 billion in long-term debt and equity growth capital to nearly 90,000 small U.S. companies since 1959.

• Small Business Investment Companies (SBICs) have provided approximately $27 billion in long-term debt and equity growth capital to nearly 90,000 small U.S. companies since 1959.

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CFA v. 2.0

SBIC Success Stories

• Intel Corporation

• Staples, Inc.

• Extreme Networks, Inc.

• Kronos, Inc.

                                                                                                                               

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CFA v. 2.0

Venture Capital FundInvestments 1995-2001

0

20

40

60

80

100

1995 1996 1997 1998 1999 2000 2001

$ Billions

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CFA v. 2.0

Nature of the Technology

• Enabling

• Disruptive

• Can a company be formed around the technology?

– Companies vs technologies

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CFA v. 2.0

Enabling Technology

• Easy to understand implications

• Fits current value chain

• Incumbents will easily finance

• Easy to understand implications

• Fits current value chain

• Incumbents will easily finance

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CFA v. 2.0

Disruptive Technology

• Will not be understood at first

• New markets need to be developed

• System ‘anti-bodies’ kick in

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CFA v. 2.0

Financing Companies vs. Financing Technology

• Companies are free standing

• Technology needs a home

• Companies are easier

• Power of Strong Management

• Companies are free standing

• Technology needs a home

• Companies are easier

• Power of Strong Management

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CFA v. 2.0

Investor / Lender expectations

• Value of Technology to “owners”

• Liquidity

• Risk vs. Reward

• WIIFM?

• Realistic expectations

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CFA v. 2.0

Banks in the Financing Mix

• Debt, rarely equity

• Three “Cs” of banking

– Character

– Capacity

– Collateral

• Cash Flow

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CFA v. 2.0

“Venture Capital” Banks

• Silicon Valley Bank, Imperial Bank, etc.

• Regularly provide debt / equity financing and take more risk than regular commercial bank.

• Have high degree of expertise in technology

• Silicon Valley Bank, Imperial Bank, etc.

• Regularly provide debt / equity financing and take more risk than regular commercial bank.

• Have high degree of expertise in technology

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CFA v. 2.0

Balance Sheet Financing and Technology Commercialization

• Match financing method to asset being financed

• Layer multiple types of methods to minimize equity dilution and mitigate risk

• Understand key ratios

• Match financing method to asset being financed

• Layer multiple types of methods to minimize equity dilution and mitigate risk

• Understand key ratios

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CFA v. 2.0

Current Asset Financing

• Purchase orders

• Inventory

• Accounts Receivable

• Contracts

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CFA v. 2.0

Financing Long-term Assets

• Equipment

• FF&E

• Real Estate

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CFA v. 2.0

Intellectual and Intangible property

• Patents

• Software

• Goodwill

• New GAAP rules

– SFAS 142

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CFA v. 2.0

Mezzanine Debt Financing

An investment of between $2 million and $20 million into a profitable company for a major expansion generally leading to an IPO in 3 to 18 months.

An investment of between $2 million and $20 million into a profitable company for a major expansion generally leading to an IPO in 3 to 18 months.

• Brick & Mortar Oriented

• Strong EBITA

• Strong track record of performance

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CFA v. 2.0

Corporate Venture Money

• Why use this type of money?– Few sources can have a profound impact on

your outcome.

– Less emphasis on strict investment criteria

– A large strategic doesn’t mind being ‘first in’ on an investment round.

– A large strategic looks very, very good on the cap table.

• Why use this type of money?– Few sources can have a profound impact on

your outcome.

– Less emphasis on strict investment criteria

– A large strategic doesn’t mind being ‘first in’ on an investment round.

– A large strategic looks very, very good on the cap table.

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CFA v. 2.0

Corporate Venture Money

• Example: $17B of Nortel’s recent writedown was from investments.

• Corporations have different needs

• Corporations are well versed in buy/make decisions.

– Equity ‘juices’ the deal

• Example: $17B of Nortel’s recent writedown was from investments.

• Corporations have different needs

• Corporations are well versed in buy/make decisions.

– Equity ‘juices’ the deal

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CFA v. 2.0

Corporate Venture Money

• What makes you valuable?

– Technology is clearly yours

– You are the expert

– STRONG strategic component

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CFA v. 2.0

Corporate Venture Money

• The power of strategic intent– Assume 5,000 wins

– 20000 engagements

– Gross Revenue of $500M

– Your product increases the wins by 10%.

– Average win: $100,000

– New wins: 5,500

– Incremental Revenue: $50M

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CFA v. 2.0

Corporate Venture Money

• Techniques for finding the right strategic

– Who bears the cost of failure?

– Who currently has the same customers as you?

– Who wants the same customers as you?

– Who has similar business/manufacturing processes

• Techniques for finding the right strategic

– Who bears the cost of failure?

– Who currently has the same customers as you?

– Who wants the same customers as you?

– Who has similar business/manufacturing processes

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CFA v. 2.0

Corporate Venture Money

• Top things to think about

– Strengths & Weaknesses

– How do you create incremental revenue?

• Find the strategic connection

– Elephant on a leash

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CFA v. 2.0

Government Backed Programs

• Generally have a background agenda

• Lift for specific:

– Industries

– Geographic areas

– Socio-economic

– Gaps in banking system

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CFA v. 2.0

Government Backed Programs (SBA)

• Small Business Administration (www.sba.gov)

• Does not loan money

• Allows lending institutions to consider higher risk loans

Houston : ~$330M (2001)

• Small Business Administration (www.sba.gov)

• Does not loan money

• Allows lending institutions to consider higher risk loans

Houston : ~$330M (2001)

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CFA v. 2.0

Government Backed Programs (SBA)

• Several SBA programs

– Programs target specific businesses/goals

• Guarantee up to 80% of 100K

• 75% of > 100K, max 750K

• Loans are made at the regional level

• Collateral is important

• Several SBA programs

– Programs target specific businesses/goals

• Guarantee up to 80% of 100K

• 75% of > 100K, max 750K

• Loans are made at the regional level

• Collateral is important

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CFA v. 2.0

Government Backed Programs (SBIC)

• Venture Investment Companies licensed by the SBA www.sba.gov/INV

• Private Capital + Government Lending

– $4.8B in 2001

• Profit Motivated (25 - 46% IRR)

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CFA v. 2.0

Government Backed Programs (SBIC)

• Fill the gap just under typical VC financing.

• Will be tough just like VC’s

• Have specific focus’s

• Provide expertise

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CFA v. 2.0

Government Backed Programs (Local EDC’s)

• Focus on job creation / tax base

• Regaining popularity

• Community feels able to influence own destiny

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Government Backed Programs (State Focus)

• Driven to attract certain sub-segments like biotechnology & medicine

• Start off where local EDCs end, often cooperatively

• Often involves academia / research

• Driven to attract certain sub-segments like biotechnology & medicine

• Start off where local EDCs end, often cooperatively

• Often involves academia / research

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CFA v. 2.0

Philanthropic Investments

• Benefit society / mankind

• Examples – drug discovery, biotechnology, medical, and learning technology

• Find an insider to help you find sources

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CFA v. 2.0

Angels and Angel Groups

• Tend to be either vertically or geographically focused

• Small funds for early stage

• Collective due diligence

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CFA v. 2.0

Academic – Corporate “Partnership”

• “In kind” contribution may substitute for $$$

• Understand academic institution’s need

• “Share” / collaborate IP creation

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CFA v. 2.0

Incubators and Accelerators

• Many rethinking focus

• Understand strengths& weaknesses

• Have realisticexpectations

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CFA v. 2.0

Public vs. Private Company

• Current trend in becoming public via “reverse merger”

• Do your homework, learn strengths / weaknesses

• What reverse mergers do and don’t do

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CFA v. 2.0

Conclusion

• Think creatively when considering financing sources for your project

• When possible, layer financing methods to protect shareholder value while balancing speed to market

• Be persistent and look at all options