Upload
freddy56
View
277
Download
1
Tags:
Embed Size (px)
Citation preview
Venture CapitalConsiderations for University
Tech Transfer OfficesPresented by:
Gene Schleppenbach and Mark Catan
Miles & Stockbridge P.C.
and
Mark Frantz
RedShift Ventures, Inc.
Understand the Sources of Funding
Many different sources of financing
Venture capital
Angels – professional and friends & family
Federal government (various grant programs – SBIR and STTR)
State and local government – economic development programs
Strategic investors (established companies in the industry)
Important to understand the investment objectives of each
Who has the $$ and at What Stage?• Stages of Venture Capital
Know when and under what circumstances venture capital is a realistic possibility.
Seed ($100K-$1 million) -- typically used for product (alpha and earlier) and BPlan development
Early Stage -- Series A ($1 - $5 million) -- product needs to be developed (beta or beyond), solid BPlan, core management team, and some significant interest from a player in the target industry
Expansion Capital ($5 - $15 million) -- need to have the product fully developed, proof of market (meaningful sale to a player in the market), solid management team and B Plan
Venture Economics
Most venture funds have a 10-12 year target life cycle, which shapes its receptivity to new investment opportunities
Early stage venture funds strive to find 1-2 investment “homeruns” on each deal, given the high betas on outcomes – which is different from investment objectives of Angels and corporate investors/licensees
Most funds look to earn at least gross annual returns in excess of thirty percent (30%) over their term (approximately 22.5% annual net return)
Most funds are almost fully committed within three - five years
The evaluation analysis is keyed off of expected investment return (multiples on amount invested in the range of at least 5x to 20x)
Valuation Considerations
The valuation that a company receives includes many considerations:
What’s been accomplished to date The long-term potential of the business The amount of money in this round, which is typically determined
based on the funding needed to achieve targeted milestones The anticipated “pre-money” valuation of the company at the next
round – assuming increased valuation based upon application of proceeds invested in current round of financing
The number of subsequent rounds required until liquidity event (IPO or sale, including the likely amount of each round)
Because each deal is hopefully unique, comparables are of limited utility
What do VCs Look For?
A compelling product or service (preferably paradigm shifting) in a new, high-growth market
A clear path to commercialization – go to market strategy
Product at beta stage or beyond, with initial customer testing or, better, customer purchase
Compelling unmet need that product or service meets
Significant advantage to market or barriers to entry – a strong IP position (both freedom to operate and power to exclude) is very helpful and a big differentiator
Financing Pre-VC
Self finance as much as possible -- not even friends and family, much less professional angels, will invest if you do
not have a well conceive idea and plan
Fiends/Family/Casual Angels – make sure they
understand the risk, properly document and don’t overValue
Professional Angels – harder to find professional angels;
they understand they are a bridge to early stage VC, so
need to conclude VC fundable. Rarely take common.
Financing Pre-VC (cont’d)
Federal Sources Government sponsored VCs (In-Q-Tel;
OnPoint) – similar to strategic partners
SBIR/STTR • Phase I ($100K; 6 months; basic R&D/feasibility)
• Phase II (up to $750K (sometimes higher at NIH for drug dev.); 12-18 months (3 years for drug dev);
proof of concept/prototype) • Phase III (commercialization; previously no
money and not much help; changing landscape)
Financing Pre-VC (cont’d)
State/Local – many states have seed-level financingthrough economic development programs
Strategic/Corporate Investors -- looking for technology that fits into their strategic plan
Do Your Own Diligence on VCs
Differing stages of investment focus Different industry focuses Geographic considerations Management style -- active or passive management Competing companies in their portfolio? Personalities compatible? Strong syndicate to help with follow-on rounds? Help with distribution channels/sales and executive
recruitment?
Avoid Start-Up Pitfalls
Do Not Create Hurdles to Investment
Appropriately document equity commitments to co-founders or promoters involved in company formation and/or financing
Avoid unconventional corporate or capital structures or insure convertible to standard structures
Build management team with appropriate critical skill sets – understand/acknowledge areas where there are holes and evolving needs as the company grows
Avoid over/under valuing at seed round; convertible debt can help Bottom line…get good people in and around the business and keep
bad/not good enough people away from the business – don’t accept half solutions
IP Essential Basics
Investor due diligence will reward diligence and best practices WRT Title to IP (all required assignments in-hand); Patenting and defensive publishing directed to product ecosystem; Freedom to operate including access to essential technology and materiel,
particularly in view of rights of prior sponsors; Practical knowledge of prior art and where the most important patent
opportunities exist (the white space); An IP strategy: Processes for using IP effectively; IP clauses and other contractual restrictions on principal personnel; Access to and ability to transfer non-IP intangible assets such as know-how,
consulting agreements, relationships, special knowledge and business processes.
Effective IP position reduces risk. Particularly important in view of fact that Universities will not permit strong representations and warranties or indemnification.
Patent early. Patent often.
Basic idea
1 Year Grace Period (Paris Convention)
Basic idea
First data
Basic idea
First data
Seconddata
Basic idea
First data
Seconddata
Refinementof basic
Basic idea
First data
Seconddata
Refinementof basic
Relatedtechnology
File File File File File
IP: Tendency to focus on research
Product
Newtechnology
Researchers love HARD problems
… and ignore the easy ones
But in the patent world, the only thing thatmatters is whether there is infringement
Product Ecosystem
Purchasechain
Explain valueproposition
Purchase
Install
Use
ProductManufactureRaw materials Distribute Disposal
Supply chain
Adjunctservices
Training
Safety
Regulatoryhurdles
Environmental
Communicate
Recurringrevenue
Repair
Protect or block others using defensive publication
Commercialspawn
Real worldconstraints
Subsidies,taxes
Alliedproducts
It isn’t just an issue of how strong your patent position is.It’s also a question of freedom to operate
It’s the value proposition (stupid)
Other ways to get there
Technology we developed
Valueproposition
Other ways to get there
We preferredin vivo tissue generation
over in vitro ...
Non-tracking solarwas on our design
critical path
Our (lame)
patent
Protecting the technology
It’s the value proposition (stupid)
Other ways to get there
Technology we developed
Valueproposition
Other ways to get there
Team player
Broad patent
Protecting the value proposition
Values patents haveŸ Residual capital value for investor if business failsŸ Collateral for loans (Asset Based Lending)Ÿ Out-licensable propertyŸ Currency for exchange in a dispute such as in-infringementŸ Currency for exchange for in-licenseŸ Portfolio value (aggregate to achieve market exclusivity)Ÿ Don’t need to be enforced directly Deterrent effect (Détente, even) Sell enforcement right to big entity
Calculation on IP should not just be what topatent but also what to invent!
Companies routinely invent for strategicpatents. Patents are a business tool.
Venture Terms
The Term Sheet – Obviously a key hurdle What does it take to get there? Diligence – on the technology, the potential market,
the team, the business plan, projections, etc. Partnership meetings/presentations Building a syndicate
Investment Terms Valuation/Price per Share/Percentage of the
Company Type of Security
• Preferred Stock• Why Delaware?
Anti-dilution Liquidation Preference Dividends Conversion
Investment Terms Preemptive Rights - Pay to Play Voting Rights
• amends to charter or bylaws
• liquidation, dissolution
• increase in authorized existing preferred
• creating any new class of preferred on parity with or senior to existing preferred
• merger, consolidation, reorganization, sale of all or substantially all of assets
• redemptions
• declaring or paying dividends
Investment Terms
Redemption
Registration Rights
- demand, piggy-back, short-form
Stockholders’ Voting Agreement
Investment Terms Investor Rights Agreement
• Stockholder Restrictions/Obligations• restriction on transfer of common• right of first refusal/co-sale • drag rights
• Affirmative Covenants/Protective Provisions• Information Rights – financials (budget, quarterly, annual);
material filings (e.g., with regulatory agencies); law suits; notices of defaults, etc.
• Board – seats; observer rights; compensation/reimbursement/D&O; committees (comp/audit/exec.)
• Employees – IP Assignment, non-compete and non-disclosure agreements; standard terms of options (unless Preferred Director approval)
Investment Terms
• Negative Covenants/Protective Provisions• Expenditures/commitments re same• Indebtedness• Loans• Hiring/firing key executives or key employees• Compensation levels• Changing business• Changing locations
Gene Schleppenbach Mark Catan Mark A. Frantz
Principal Principal General Partner
Miles Stockbridge, PC Miles Stockbridge, PC RedShift Ventures
1751 Pinnacle Drive 1751 Pinnacle Drive 2425 Wilson Boulevard
Suite 500 Suite 500 Suite 402
McLean, Virginia 22102-3833 McLean, Virginia 22102-3833 Arlington, VA 22201-3326
Direct Number: 703.610.8623 Direct Number: 703.610.8675 Phone: (703) 904-9800
Main Number: 703.903.9000 Main Number: 703.903.9000
Fax Number: 703.610.8686 Fax Number: 703.610.8686 Fax: (703) 904-0571