October 2, 2018

Boston Entrepreneurs Network:Bootstrapping and Fundraising Basics

Tibor TothManaging Director of Investmentsttoth@masscec.com

• Over 20 years of experience in VC & PE and as an entrepreneur

➢ Invested over $250M across dozens of companies in transactions totaling over $1B

▪ Including 25 new investments & over 50 rounds of financing since 2013 @

MassCEC

➢ Technology and manufacturing; clean energy focus since 2010

• Current board role at 6 MassCEC portfolio companies

• Adjunct Professor, M&A, Brandeis International Business School

• Commercial Reviewer, National Science Foundation

• Education:

About Me

MassCEC Funding Programs for Startups

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Research & Prototyping Commercialization & Growth

Catalyst Program

Up to $65K Grant

<14 Grants / Year

Equity Investments

~$500K Equity Investment

1-3 Deals / Year

Venture Debt

$100K - $1M Debt Investment

InnovateMass

Up to $250K Grant

<10 Awards / Year

DeployMass

Project-dependent

Workforce Development Programs

AmplifyMass

Project Cost Share

Up to $500K Grant

AccelerateMass

$150K Convertible Note

<5 Awards / Year

Investment Grant

Demonstration & Acceleration

Company Stage

Massachusetts Cleantech Startup Ecosystem

Accelerators

Incubators

Research CentersUniversities

Angels + early stage VCs

Later-stage VCs + Strategics

MassCEC Portfolio Companies

6

• How much capital do you need?

o How do you determine need (use of proceeds, runway,

milestones)?

o Financial sensitivity

• When should you raise capital?

• Where can AND should you get it from?

• What do you have to watch out for?

• What are capital providers looking for?

Fundraising Considerations

7

Marketo Problem

o Size

o Drivers

o Competition

Solution

o Technology/IP

o Value proposition

Team

o Current

o Future

• How are you going make money/profits and be sustainable?

• How are you going to scale this into a big business?

The Business PlanWhat exactly is it that you do?

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Operations

o Revenues

o Partners

Grants

o Government

o Foundation / Nonprofit

Investment

o Equity

o Debt

Who cares (or should/will care) about your problem and solution?

Sources of Financing

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• Revenues

➢ Products

➢ Services

➢ One-time, recurring, repeat

• Partners

➢ Vendors / suppliers / contract manufacturers

➢ (Prospective) customers

➢ Channel partners

➢ Strategic partners – JDA / JV / NRE / Investment

Operations

10

• Government

➢ Federal (DOE, DOD, NSF, SBIRs, etc.)

➢ State (DOER, NYSERDA, MassCEC, MassVentures, CT

Innovations, California Energy Commission, etc.)

➢ Municipal

• Accelerators / Competitions

➢MassChallenge, Cleantech Open

➢Universities (MIT Clean Energy Prize)

• Foundation / Nonprofit

• Don’t get distracted!

Grants

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• Funds the development of groundbreaking, high-impact, high-risk

technology, transforming scientific discovery into products and

services with commercial and societal potential

• Evaluation criteria

➢ Intellectual (technical) merit

➢Broader (societal) impacts

➢Commercial impact (potential)

➢For Phase II awards, success with Phase I grant project

• For US-based and owned, for-profit small businesses

National Science Foundation (NSF) SBIR

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• Phase I

➢Up to $225,000, non-dilutive grant to last 6 – 12 months

➢Proof-of-concept/feasibility

• Phase II

➢Up to $750,000, non-dilutive 2-year grant

➢Helps commercialize high-risk technology innovations

➢Must have previously received a Phase I grant

• Phase II B

➢Up to $500,000, 50% matching grant on revenues or investment

National Science Foundation (NSF) SBIR

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• Equity (ownership, voting rights, upside value, dilutive)

➢ Convertible Notes

➢ Common Stock

➢ Preferred Stock

• Debt (obligation to repay, interest expense, collateral)

➢ Venture Debt

➢ Asset-Based Loans

➢ Cash Flow Loans

➢ Project Financing

Investment

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• Founders

• Friends & family

• Angels

• Venture capital funds

• Growth equity funds

• Strategic/corporate partners/investors

• Other investors (impact investors, government, family offices)

• Other funders – grants, competitions (governments, foundations,

universities, accelerators)

Types of Investors

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• Investment round (seed, Series A, Series B+, bridge, etc.)

• Company stage (concept, proof of concept, pilot, commercial, etc.)

• Amount funded

• Lead or follow

• Market focus

• Technology focus

• Experience / fit

• Motivation / strategy

Investor Considerations

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• Market size

• Magnitude of problem (mission critical)

• Predictability of revenues and earnings (recurring/repeat; validated

market, pipeline, and costs)

• Scalability of solution and team

• Growth rate / velocity

• Sustainable competitive advantage

• Innovative and defensible IP

• Team track record and capability

Drivers of Company Value

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Validation

o Technical

o Commercial

o Third party

Milestones

o Tangible achievements

o Derisking/ unlocking

Expectationso Reasonable

o Achievable

o Never overpromise!

Risk Management

18

Research

o Web / Market

o Word of mouth

Motivation

o Goals (ST & LT)

o Mission critical

needs

Processo Decision

makers / champions

o Timing

o Budget

Know your competition too!!

Know Your Customer

Thank you!

Questions??

Appendix

21

Types of Investors

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• Small dollars

• High risk stage

• Unsophisticated investors

• Lower bar / faster for approval

Friends & Family

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• Seed to Series A stages

• Concept to commercialization

• $10K to $1MM+

• Individuals or groups/networks

• Generally follow, but larger groups can lead

• Seasoned entrepreneurs

• CEVG, Launchpad, TiE Angels, Walnut Ventures, Golden Seeds, etc.

Angels

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• Series A, B, C+ (some seed)

• Post-revenue (some pilot/demonstration stage)

• $2 - $15MM

• Lead / co-lead

• Focused by markets and/or technologies

• Highly returns focused

• Interest and experience can vary widely by partner within firms

• Rigorous due diligence process – significant time to close

Venture Capital

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• Series B, C+

• Commercial scale-up ($5MM+ revenues)

• $5 - $50MM

• Lead / co-lead

• Focused by markets and/or technologies

• Highly returns focused, but lower expectations than early stage with

reduced risk

• Interest and experience can vary widely by partner within firms

Growth Equity

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• Seed to Series C+

• Pilot / demonstration to commercial scale-up

• $250K - $15MM

• Lead or follow

• Must demonstrate strategic fit with current or future business

imperative

• Financial return required but secondary focus

• May be combined with commercial partnership

• May request special rights (IP, license, exclusivity)

Strategic/Corporate Investors

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• Impact investors (Investors Circle)

• Family offices (CREO, BMGI)

• Quasi-governmental (MassCEC)

• Foreign governmental (China, Middle East)

• Philanthropic investors (PRIME)

• Programs/accelerators (TechStars, Y-Combinator)

Others

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Types of Investment

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• Pre-money valuation (price per share)

• Offering size

• Type of security (convertible preferred stock)

• Liquidation preference

• Dividends (0 – 8% accruing)

• Voting rights, Board rights, pre-emptive rights

• Protective provisions

• NVCA Template Documents

EquityKey Investment Terms

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• Offering size

• Type of security (convertible notes)

• Maturity date (6 – 24 months)

• Automatic conversion into “qualified equity financing”

• Value in a liquidity event (1 – 3x liquidation preference or conversion)

• Interest rate accrual (5 – 8%)

• Conversion discount (20 – 30%)

• Conversion cap ($1 - $10 million; sometimes none)

• Warrants (0 – 25% of offering amount)

Convertible NotesKey Investment Terms

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• Loan size

• Type of security (senior or subordinated loan)

• Maturity date (1 – 5 years) and principal repayment schedule

• Interest rate (5 - 15%)

• Warrants (0 – 10% of loan size)

• Collateral (security interest in assets, shareholder guaranty)

• Financial covenants

DebtKey Investment Terms