Funding Options for Early-Stage Companies
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Transcript of Funding Options for Early-Stage Companies
Funding Options for Early Stage Companies
April 30, 2013
Today’s Panel
• The Angel: Jean Hammond; Launchpad, Golden Seeds, Hub Angels, & LearnLaunch, Board TCN, jean@jph-‐associates.com
• The Venture Capitalist: Tim Wright, Partner, Grand Banks <[email protected]>
• The Banker -‐Dan Allred , Silicon Valley Bank, Board TCN, [email protected]
• Grants & Programs Expert – Larry Nannis; Katz Nannis + Solomon P.C. (KNS) CerXfied Public Accountants and SBANE [email protected]
• The Entrepreneur: Raj Aggarwal, CEO LocalyXcs, [email protected]
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Agenda
• Quick Overview Funding Sources – Jean
• Focus in on Government Support – Larry
• View from the VC -‐Tim
• View from the Bank – Dan • How it Really Works -‐ Raj
• Q and A
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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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Entrepreneurship comes in many types
NORMAL GROWTH COMPANY
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• 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 5 yrs & market size allows significant additional growth
• Capital efficient total investment$2-4M
• Exit by M&A 6
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 baiery technology to exisXng players vs build a baiery 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 disXnct 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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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 obligaXon 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 opXons
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Growth and Maturity Reduce Risk
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Size of Capital Raise:
High
Time
High Risk
Low Risk
Crystallize Ideas
Demonstrate Product
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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How Can We Build Value and Reduce Risk?
What type of company should
we build ?
Stage-appropriate growth-oriented
strategy
Flexible, High- Performance Team
- that can grow & change
IP & Differentiated
Product
Bookkeeping & Accurate Accounting
Legal Structure Boards
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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Capital Sources: Size & Cost
Investment Size
Investment “Cost”
Traditional VC
Micro VC
Equipment Financing
Angel Groups Angels
Angel List, etc
Corporate / Strategic Venture
Customers
Jobs Bill Portal
Vendors
Founder Friends & Family
Crowdfunding: etc.
Grants
Venture Debt
Bank Loans
Personal Loans
Private Equity
B’Plan Competition
Accelerators
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Match Funding Sources
NORMAL GROWTH COMPANY
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• Friends, family, founders
• Debt, Bank, and other
• (Future) Crowd funding (portal style)
Early on • Accelerators • Individual Angels • Micro Cap VCs • Seed from VC Later 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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AlternaXve Sources of Capital • Business Plan CompeXXons and Accelerators
• Many firms gain enough for some product compleXon steps
• Revenue – Best of all (Bootstrapping) • Revenue history opens more types of debts • Pre-‐payments, etc.
• Vendors, partners and customers • Including NRE to build joint product • Great source of quick capital for markeXng or sales collaboraXon
• 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 converXble 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 equity 15
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 opportuniXes – ~$23B annually, ~ 67,000 new investments 2012 – 24 New England, 10 greater Boston
• Angel groups ~10-‐15%, • Informal networks & one-‐Xme-‐investors ~15-‐20%, • Super angels ~25-‐30%, • Family offices ~35-‐45% 16
Close Up: Extreme High Growth vs High Growth
Capital Needs
Time
High Risk
Low Risk
Formal Venture Capital
M&A or IPO
Crystallize Ideas
Demonstrate Product
Early Scaling Growth
Sustained Growth
Angel Group (or Micro-cap) Syndication
Angels or Accelerators or Micro-cap
funds Angels or Accelerators or
Micro-cap funds Business
Angels
Market Entry
M&A
Later VC Rounds
Extreme High
Growth High Growth
Friends, Family & Founders
Friends, Family & Founders
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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 diluXve • Cons:
– Long SolicitaXon Process – March-‐in Rights – Work with universiXes for experXse – Best to incorporate (but more acceptance of LLCs) – AccounXng systems must be compliant with the government
– Very compeXXve in some agencies KATZ NANNIS + SOLOMON, PC CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISORS
www.knscpa.com 19
KATZ NANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISOR CONSULTANTS
DOD HHS NASA DOEnergy NSF USDA DOC EPA DOT ED NIST DHS DOEducaHon
SBIR/STTR ParXcipaXng Agencies Web 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 ParXcipaXng 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 ParXcipaXng 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 Program Micro 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 ParXcipaXng 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 ParXcipaXng Agencies (cont’d)
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AddiXonal Resources Commonwealth of Massachusetts
www.mass.gov/bizteam
Smaller Business Association of New England www.sbane.org
Association of Corporate Growth www.acgboston.org
City of Boston Resource Guide www.cityofboston.gov/dnd/obd/BRG/A_intro.asp
States of NH, CT, RI,VT, ME Doing Business Guides www.nh.gov/businesses/doing.html www.ct.gov then go to “Doing Business” www.ri.gov/business/ vermont.gov/doing_business/business.html www.maine.gov/portal/business/small_bus.html
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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 condiXons?
• Dry Powder / Secondary Capital Reserved?
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Return on Equity Return on Debt Income High Return
NON PROFIT ORGANIZATION
Capital Source View
Debt- Pay it back Fixed Amounts
Equity – Ownership stake % of Future Value
Charity $$
Impact / Tax Write off
NORMAL GROWTH COMPANY
HIGH GROWTH
(COMPANY)
EXTREME HIGH GROWTH (COMPANY)
Risk / Return
SOCIAL VENTURE COMPANY
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If You Cannot Reduce Risk, You’ll Pay More For Your Capital
• Examples of ways riskier companies airact risk capital: – offer more shares (beier price)
– have collateral (pledges, guaranXes) – offer beier conversion terms (price) – offer more control (board seats, voXng agreements)
– go a~er an extreme high growth market: • massive potenXal
• possibly faster path to exit • possibly more exit opXons
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