Funding Considerations for Startups

Funding Considerations

Presented by Marie WesselhoftPresident and Co-Founder of MSDx

© 2011 Arizona Center for Innovation 2

Marie Wesselhoft, President and Co-Founder MSDx

Marie has over thirty years of business experience with a successful track record in Healthcare. Marie held positions such as VP/General Manager, VP Marketing, Area VP of Sales, Product Manager, throughout her twenty year career at Cardinal/Baxter/American Hospital Supply Company. In her role as General Manager of the Scientific Products, an $850 million business, her responsibilities included management of a national sales and marketing team comprised of more than 140 people. Throughout her career she has had opportunities to launch $100 million diagnostic product lines, negotiate partnership agreements, manage key accounts, as well as facilitate the integration of teams for acquisitions and divestitures. During her years at Humana Hospital she was both a Laboratory Director and Medical Technologist. She also has experience with several healthcare start-up companies in her work at the Arizona Center for Innovation. She graduated from the University of Wisconsin with a BS in Medical Technology and completed an MBA at the University of Chicago.

About the Presenter


Funding Varies by Type of Business

Solar CompanyGrant

RestaurantDebt

Software CompanyEquity


Funding Varies by Risk

New Drug New IT Solution


Team Formation

Product

Sales & Marketing

Funding

Pathway to Funding


GrantsFounder

Angel

VC’s

Debt

Funding Needs Vary Over Time


The Financing Pyramid

Source: Bob Fick, Small Business Development Center

Investigation Feasibility Development Introduction Growth

Pre Seed Seed Early Stage

IPO

Mid Stage Late Stage

© 2005 Goldsmith


Preparing to Seek Financing

• Business Plan• Financial Forecast• Elevator Speech• Presentation• Amount Required and Purpose• Valuation• Exit Strategy

© 2011 MSDx, Inc. All rights reserved.


The $1.0 Million Dollar Box

© 2011 Arizona Center for Innovation 12For Research Use Only- Not for Diagnostic Purposes


The MSDx Opportunity

Personalized Medicine Solution- Panel of Blood Testing Products used in Monitoring Therapy Effectiveness

Laboratory Testing Market- $46 Billion world wide, growing at 7%

Proven Business Model- Recurring revenue model. Releasing a research kit in 2011 and an FDA product in 2013.

Innovative Technology- Window into the Brain- Applications in MS and other Neurological Disease


Founders, Family, Friends$600,000

2 Grants$430,000

2007 2008 2009 2010 2011

Angels$200,000

MSDx Funding


Do’s

Don’ts

Funding- Our Lessons Learned


Founder, Family and Friends

• No one funds your job• Think before you leave your day job.• Think about it long and hard!• Credit card• Your assets are on the line• Establish a process to handle cash and time• Represents ownership percentage• Share in proceeds from company sale• No obligation to repay?• Very risky


• Credit cards• Obligation to repay• Interest bearing• Leasing equipment• Priority claim on assets vs. owners

Early Debt


Grants

SBIR/STTR• Allocated from Federal Agency Budgets• Over $2 billion available• Matching research• Phases I and II; “Phase III”• Excellent pathway to VC or partner• Grant or contract; not debt or equity• Little concern about IP issues• http://www.grants.gov/

Tip: Cast a broad net when researching grants. You may find new opportunities through your industry or affiliations; for minority-owned businesses; etc. Grants often bring added value and help

validate your progress and are a critical part of your funding strategy.

http://www.grants.gov/

http://www.grants.gov/


$ 204,000QTDP Grant

$226,495AZ Innovation Grant

MSDx Receives Two Grants

Track Record- Currently 2 of 8


MSDx Goal-Grants for 30% of Cash

OurDo’s &

Don’ts

http://www.ninds.nih.gov/index.htm

http://www.nsf.gov/index.jsp


Angel Investors

For consideration:• Repay obligation• Represents ownership percentage• Voting/nonvoting• Share in dividends/distributions, if any• Claim on assets secondary to creditors• Share in proceeds from company sale• Often received in stages• Individual high net worth investors• Angel groups• Match your market• Exit timing and risk profile must fit


Angel Investors

Who is an angel investor?• SEC accredited investor• >$1 million in net worth or $200K income• Generally invest $25-250K in a deal• Generally make several angel investments• Roles: Lead investor, investor/advisor, passive investor

Typical angel investment:• $250-1M in total (multiple investors)• Valuation: $1-3M• Angel equity: 20-40%• Expected ROI – 60% annual or 10x

Source: Angel Capital Association


Angel Investors

Angel organization statistics:• Number of orgs 1999 = <100, 2006 >250• ACA memberships = 127 from 43 states• ACA attendees 2002 = 35, 2007 = 330• Average number of investments = 7.4• Total $ invested per org = $1.8M• Average $241,000 per round• Average per angel investor = $31,000

Investment Brackets:• $0-250K – Pre-seed – P, F, F & F• $250-1.5M – Seed/start-up – Angels• $4-10M+ - Early/later stage – VCs• Investment Gap $1.5-4M



MSDx Angel Investors…..


National and Local Angel Groups


Investment Environment

• <1 in 20 Start-ups obtain angel financing• <1 in 500 Start-ups are VC financed• <1 in 5,000 new companies go public• <1 in 25 angel deals see VC money• <1 in 250 angel-funded companies go public


• Am I willing to give up some ownership and control?• Will my company generate significant revenues and earnings in 3-7 years?• Do I have a strong management team?• Have I made a personal investment in the company?• Do I have a clear picture of the market and a realistic plan for meeting my

sales goals?• Will my company produce a superior return for investors?• Am I willing to accept board of director decisions?• Do I have a 3-7 year exit plan?

Does My Company Qualify for Angel Investment?


Why Investors Turn Down Deals

• Quality of management• Size of opportunity• Rate of market growth• Product quality• Competition• Barriers to entry• Stage of development


Considerations

The money:• How much is needed?• What is the financial strategy?• How will you structure the deal and set valuation?• What is the exit strategy and expected ROI?• Does the entrepreneur understand financial concepts?

Valuation:• No formula – it is a “black art”• Must be estimated• Comparative, discounted cash flow• Back into it using required ROI• Subject to a number of factors• Typically $1-3M … OR LESS!


Considerations

Back into it:• Investment - $1M• Profit in year 5 (exit) - $2M• Industry P/E – 15x• Valuation in year 5 - $30M• Required investor’s ROI – 60% or 10x• Required investor’s valuation - $10M• % of Company required – 33%• Today’s post money valuation - $3M

Valuation• Management team: 0-30%• Size of opportunity: 0-25%• Product or service: 0-10%• Sales channels: 0-10%• Stage of business: 0-10%• Size of this round: 0-5%• Need for more financing: 0-5%


Considerations

Due diligence process:• Don’t start unless it appears there is a deal• Business plan review (vision etc.)• Management presentation and discussion; site visit(s)• References• Competitive, IP, financial analysis• The terms sheet and deal

Typical deal terms:• Common or preferred stock, sub debt with warrants• 1st position for liquidation, dividends, conversion• 1st rights for registration, participation, anti-dilution• Voting, board member or observer• Performance – milestones, tranches, ratios, executive compensation


MSDx Term Sheet Highlights

– Pre-Money Value – Series A2 round– Warrants– Liquidation Preference– Redemption Rights– Anti Dilution– Board (5)


Angel vs. Venture Capital

Angel Venture Capital

Number of investors 400,000 900

Number of deals 50,000 2,500

Total annual investment (2006) $20 billion $26 billion

Investment size $.5 million $7-8 million

Stage of investment company Startup Later

Amount of capital required to prove the business model

Under $3 to 5 million Over $3 to 5 million

Years before being able to exit 2 to 5 years 10 to 12 years

Most likely value of the company at the time of the optimum exit

Under $50 million Over $100 million

Willingness to relinquish control of important financial decisions

Not always required Almost always required



Venture Capital Considerations

• Specialize by Industry Sector, Geography, and Stage of Development• Primarily Focus on Later Stage Companies• May Take 4-6 Months to Complete

• For the Select Few• Rapid Revenue Growth• Market Dominance• Barriers to Entry• Demand Significant Returns• Workable Investment Window• Professionals


Investment Requires Exits

• Investing only works if the investors can get their money back – even if it takes a while

• The traditional venture capital model no longer works, restricted by types of exits a VC may need

• Still quite a good time for entrepreneurs and angel investors

Interesting resources on VC reporting:• PricewaterhouseCoopers MoneyTree™ report:

www.pwcmoneytree.com/MTPublic/ns/index.jsp• National Venture Capital Association: www.nvca.org/

https://www.pwcmoneytree.com/MTPublic/ns/index.jsp

http://www.nvca.org/

http://www.nvca.org/

Acquisition

31 Acquisitions in 18 Mos.Deals at 3-4x RevenueCandidates: Alere, AthenaBuying Sales & Filling GapsDiagnostics & Pharma Buyers

Expand to Other Neurological Diseases

Two Paths for Exit

Alzheimer’s

Parkinson’s


Lessons Learned1. You are never done2. It is about them not you3. It take 100% longer than you think4. Investments are in companies not products5. Nothing is as scary as payroll without cash6. Multiple Sources7. Always do the right thing8. The best capital is revenue


Summary

Grants

Founder

Angel

VC’s

Debt

• The innovation continuum describes the chain of processes that are involved when bringing a product from concept to market.

• As the product moves along the continuum and the new venture develops, different types of funding may be needed. Each will present unique opportunities that should be considered when creating a funding strategy.


Great Resources

Handy online tools for exit and other considerations: www.Early-Exits.com www.AngelBlog.net www.BasilPeters.com

http://www.early-exits.com/

http://www.angelblog.net/

http://www.basilpeters.com/

http://www.guykawasaki.com/books/reality_amazon_redirect.html