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Women helping women in entrepreneurship:

Funding Sources  

July 24, 2013 MassChallenge

Participants: Sheryl Schultz Angel Investor, Tech Marketer and Mentor,

Golden Seeds, Launchpad, TCN Board

Beth Marcus CEO of Playrific, Serial Entrepreneur,

Mentor

Heatherjean MacNeil Program Director, The Center for Women’s

Entrepreneurial Leadership, Babson College 2

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 4

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 battery technology to existing players vs

build a battery company with outsource manufacturing or build a manufacturer

•  Every company’s financing path is unique

•  Funding comes in distinct flavors; all financial partners are specialists 5

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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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

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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 find the best & adding resources to aid success –  ~$26.5B annually, ~ 3,700 new investments 2012

•  Angels invest own money –  Prefer capital efficient / early exit opportunities –  ~$23B annually, ~ 67,000 new investments 2012 –  24 New England, 10 greater Boston

•  Angel groups ~10-15%, •  Informal networks & one-time-investors ~15-20%, •  Super angels ~25-30%, •  Family offices ~35-45% 8

Alternative Sources of Capital •  Business Plan Competitions and Accelerators

•  Many firms gain enough for some product completion 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 marketing or sales collaboration

•  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 convertible notes

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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 & Contests

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Are  you  Ready  for  Funding?  • Stage of development

• Concept (probably friends and family, maybe an individual angel)

• Prototype (some angel group interest) •  First revenues (lots of angel group interest)

• Team in place or identified

• Clear understanding of your capital requirements

•  In depth understanding of your financials

• Executive summary and investor pitch ready

• References and diligence materials lined up

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What Investors Need to Know 5 P’s of investment •  Product – both differentiated technology or service and the market

need and size •  Promotion – market entry plan and cost of marketing •  Profits – a business model that has margins and distributions

costs that are profitable •  People – a team to meet the needs of the business •  Plan – good idea of the steps needed to create a repeatable

business model Key concepts to convey: •  What our potential customers are saying to us

•  How we plan to run a series of market entry tests

•  How the team matches the needs of the business

•  How we will scale against a repeatable business model

First  Time  Entrepreneurs  •  Without a startup track record, funding can be a

challenge –  …. Later stage because of risk

•  Moving from negative to positive

–  Communicate relevant experience

–  Hire a compelling management team

–  Surround yourself with experts

–  Show us some milestone accomplishments

•  Don’t ask us to take a leap of faith – show us how you are going to be successful

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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 obligation 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 options

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Compare what makes it and what doesn’t Factors Companies getting angel

investment Companies that don’t

CEO Some experience or ‘coachable’ wants listen

CEO talks about him or her ‘expertise’ forever

Team Enthusiastic! pretty good match to required skills

One person, says no one will work without $$

Unique A neat idea, could be big Seems ‘me too’

Stage Lots done, working code, just needs mkt. entry $$

Idea and ppt., or a complex science project, or “old”

Market size, str.

Market is big and can be reached

Market is huge or Market extremely fragmented

Total investment

Cashflow breakeven known, Can use more $$

Needs $10-20M more after this round

Valuation Willing discuss a range of values & funding strategies

Is fixated on a very unrealistic high value

There is no Justice … • What doesn’t work

•  Deals that can’t develop an exit should bootstrap, get debt, etc •  Companies at too early of stage – risk set large •  Entrepreneurs expecting too high a valuations •  Asking for the wrong amount of money

• And .. The odds are bad … may have a “hard presentation slot”

• Find a champion (before you apply if possible) !!!!

What are the Deal Marketing Materials

• Business Summary -2-5 pages with financial summary • 12-20 slide pitch deck with a backup side for every

serious question • 5-8 page market (size and structure) summary •  Integrated financial model

• 30 second elevator pitch • 1-2 minute tell me more / meeting request pitch (write a business plan for yourself)

Crea:ng  an  Effec:ve  Presenta:on  •  Elevator pitch – who are you and what do you do and why? •  Market opportunity

–  What is the problem you are solving –  How big is the market

•  Product or service (intellectual property) •  Target clients and business model •  Go to market strategy •  Competitive landscape and advantage

–  Barriers to entry •  The management team

–  Hiring plan

•  Financial summary, including last year’s P & L and 3 year projections •  Funding needs for this round & use of funds

–  history of funding to date –  pre-money valuation

Closing Thoughts…

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Leverage the Entrepreneurial Community in Boston!

- Greenhorn Connect - The Capital Network - SheEOs - Etc.

- FIND A CHAMPION!!!!!!!!