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Funding Options for Early-Stage Companies

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Funding Options at Harvard iLab Are you thinking about what you need to fund your company? Where do you start? Funding is not one size fits all. Every company has to approach their pathway to funding with a unique approach. Join our fundraising experts for an in depth discussion of what options you have for funding and how to decide which paths are right for you and your company. Topics covered will include investment criteria, time to closing, investment range, success rates, control features, compliance requirements and the overall costs of capital from each such source. www.thecapitalnetwork.org

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Page 1: Funding Options for Early-Stage Companies
Page 2: Funding Options for Early-Stage Companies

Upcoming Programs

@TCNupdate  #tcnLIVE  #MCengage  

Page 3: Funding Options for Early-Stage Companies

Funding Options for Early Stage Companies

July 2, 2013

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Today’s  Presenter  

•  Jean  Hammond;    

•  Suppor@ng  Growth  of  educa@on  and  learning  cluster  in  Boston:  LearnLaunch,  LearnLaunchX,    

•  Ac@ve  angel  in  lots  of  deals,  first  investor  in  Zip  car:      Launchpad,  Golden  Seeds,  &  Hub  Angels  

•  Serial  entrepreneur:  Axon  Networks  and  Quarry  Technologies    

•  Eco-­‐system  supporter:  Board  TCN,  MIT  Trust  Center,  Mass  Challenge,  TechStars,  &  ACA/ARI  trainer  

jean@jph-­‐associates.com  

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Agenda  

•  Funding Sources –  Risk adjusted investing

•  Business Stage –  Improving communication

•  Experiences (Q&A)

•  Backup other sources –  Government, etc

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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

exists,

REDUCE RISK, and

earn access to different

financial partners

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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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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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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  baeery  technology  to  exis@ng  players  vs  build  a  baeery  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  dis@nct  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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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 4-5 yrs & market size allows significant additional growth

•  Capital efficient total investment$2-4M

•  Exit by M&A 11  

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Growth  and  Maturity  Reduce  Risk  

12  

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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Capital  Sources:  Size  &  Cost  

Investment Size

Investment “Cost”

Traditional VC

Micro VC

Equipment Financing

Angel Groups Angels

Equity Crowdfunding Angel List, Circle Up, etc

Corporate / Strategic Venture

Customers

Jobs Bill Portals

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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Alterna@ve  Sources  of  Capital  •  Business  Plan  Compe@@ons  and  Accelerators  

•  Many  firms  gain  enough  for  some  product  comple@on  steps    

•  Revenue  –  Best  of  all    (Bootstrapping)  •  Revenue  history  opens  more  types  of  debts  •  Pre-­‐payments  from  business  partners  •  Self-­‐interested  support  from  supply  chain    

•  Vendors,  partners  and  customers  •  Including  NRE  to  build  joint  product  •  Great  source  of  quick  capital  for  marke@ng  or  sales  collabora@on  

•  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  conver@ble  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  16  

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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  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  opportuni@es  –  ~$23B  annually,  ~  67,000  new  investments  2012  –  24  New  England,  10  greater  Boston  

•  Angel  groups  ~10-­‐15%,    •  Informal  networks  &  one-­‐@me-­‐investors  ~15-­‐20%,    •  Super  angels  ~25-­‐30%,    •  Family  offices  ~35-­‐45%   17  

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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  condi@ons?    

•  Dry  Powder  /  Secondary  Capital  Reserved?  

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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

Angels

Market Entry

M&A

Later VC Rounds

Extreme High

Growth High Growth

Friends, Family & Founders

Friends, Family & Founders

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Agenda  

•  Funding Sources –  Risk adjusted investing

•  Business Stage –  Improving communication

•  Experiences (Q&A)

•  Backup other sources –  Government, etc

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“Stage”  &  Equity  Capital  Sources  

21  

Stage  Crystallize  Idea  

and  Early  DemonstraHon  

Demonstrate  Product  &  Market  Interest  

Market  Entry  and  Early  Growth  

Early  Scaling  Growth  

Repeatable  Growth  

Capital  Source  

Founders,  Friends,  Family,  

Grants,  Kickstarter,  etc.  

Accelerators,  Individual  

Angels,  many  others  now  “exploring”  

Angel  Groups,  Angel  Group  Syndica@on,  Micro-­‐Cap  Funds  

VCs,  Angel  Group  

Syndica@on,  Micro-­‐Cap  Funds  

VCs  

Investment   $25K  -­‐  $100K   $100K  -­‐  $500K   $500K  -­‐  $1M  $5M  –  as  needed  

as  needed  

These  2  need  sophis@cated  growth  plans    

This  is  the  stage  where  advice  can  make  you  eligible  for  outside  

funding  later  

Accelerators  and  a  few  individual  angels  play  

here  …  unless  it  is  a  big  idea  

This  is  where  Angel  

Groups  do  most  1st  

investments….    

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What  Investors  (and  others)  Need  to  Know    

•  5  P’s  of  investment  –  Product  –  differen@ated  technology  or  service  that  serves  market  need  

for  a  significant,  large  market  product  –  PromoHon  –market  entry  strategy,  with  detailed  plan  –  Profits  –  a  business  model  that  has  margins  and  distribu@ons  costs  

that  are  profitable  –  People  –  a  team  to  meet  the  needs  of  the  business    –  Plan  –  good  idea  of  the  steps  (&  prioi@es)  needed  to  create  a  

repeatable  business  model  

•  Some  key  concepts  to  convey:  –  What  our  poten-al  customers  are  saying  to  us:  is  this  a  nice  to  have  or  

must  have  –  How  we  plan  to  run  a  series  of  market  entry  tests  delivering  

meaningful  metrics  –  How  the  team  matches  the  needs  of  the  business  –  How  we  will  scale  against  a  repeatable  business  model  

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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  obliga@on  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  op@ons  

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Crystal:  Idea  to  Business  Plan  

•  Goal of Stage: Think out the issues –  No one wants to read a plan … but organizing your thinking in a structured

way will help you get things done at the right time

•  The Team –  Why do you folks have unique knowledge to understand this market opening

•  The Key Stage Specific Information –  Product: How big is the market, the product nice to have or is there a need

•  How will we learn the answers

–  What do we know about this industry •  What is the margin structure and how buying is done, how competitive,

etc.

–  At the highest level … how long to reach a shippable product and how much money does that take

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Crystal:  Idea  to  Business  Plan  

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#2  Is  it  a  big  market,  with  a  big  need  …  when  will  the  product  be  done?  

#4      What  are  total  expenses  

#3  Can  this  industry  be  penetrated  and  have  we  

talked  to  poten@al  customers  

#1      How  much  experience  ?  

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Demonstrate:  Product  &  Market  Entry  Plan  

•  Goal of Stage: Think out the issues to drive market –  Show the product works, show your path to market is working

•  Traditionally called Beta test

–  You want lots use so you can find patterns especially in how to find and match with customers

•  The Team –  Path to market is the … key –  Time to fill out team to reach the market … marketing and

selling skills •  The Key Stage Specific Information

–  Customers  want  it,  …  can  we  fell  customers  leaning  in  …  goal  at  end  of  stage  is  equivalent  of  pipeline  

–  Product  Fit…    understand  use  of  product  –  Promo@on  –  start  market  trails  …  develop  a  detail  list  of  ideal  metrics  and  

then  start  filling  in  the  grid  

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Demonstrate:  Product  &  Market  Entry  Plan  

27  

#3  Build  metrics  to  show  sales  and  marke@ng  cost?  

#2  Fill  in  team  ..  Start  to  build  external  team  

#1      Understand  customer  ….lots  of  

market  trials    

#4  Market  dynamics  

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Market  Entry  &  Early  Growth  Stage  Early  Repeatable  Business  Model  

•  Goal of Stage: Think out the issues to drive scale –  Show market metrics are scalable –  Goal of the stage: what resources will drive growth … exact metrics for

the immediate plan … big ideas for the “add-on” products and markets –  Execution

•  The Team –  Can this team scale

•  The Key Stage Specific Information –  Refine metrics and build “what-if” plans –  Details plans for varying market conditions based on scaling knowledge –  Work with industry partners –  Find other market gaps

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Market  Entry  &  Early  Growth  Stage  Early  Repeatable  Business  Model  

29  

#3  How  to  hit  the  rest  of  the  market  

#2  Can  this  team  scale  

#4      Asses  profitability  of  business  and  effect  on  

capital  needs  

#1  Understand  growth  metrics  

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Factors  defining  a  Business  

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Factors Crystal Stage Demo Stage Growth Product / Service and Market

#2 #4 #3

Promotion and Market Strategy

#3 #1 #1

Profits and Business Model

#3 #4

People #1 #2 #2 Plan #4

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Funding  Sources  

1.  Funding  partners  are  specialists  

2.  To  understand  who  to  approach  and  when  to  get  to  them  takes  really  understanding  what  they  specialize  in.    You  need  to  match  your  company  type  to  the  right  type  of  funding  partner  

3.  Company  stage  is  shorthand  for  types  of  risks  that  business  faces    – Risk  awareness  is  the  key  to  early  successful  communica@on  with  funders  

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Closing  Thoughts…  

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Leverage the Entrepreneurial Community in Boston!

- Greenhorn Connect - The Capital Network - Etc.

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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  dilu@ve  •  Cons:  

–  Long  Solicita@on  Process  – March-­‐in  Rights    – Work  with  universi@es  for  exper@se  –  Best  to  incorporate  (but  more  acceptance  of  LLCs)  –  Accoun@ng  systems  must  be  compliant  with  the  government  

–  Very  compe@@ve  in  some  agencies  KATZ NANNIS + SOLOMON, PC CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISORS

www.knscpa.com 34  

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KATZ  NANNIS  +  

SOLOMON,  PC  

CERTIFIED  PUBLIC  ACCOUNTANTS  BUSINESS  ADVISOR    CONSULTANTS  

[email protected]  

DOD    HHS    NASA  DOEnergy  NSF    USDA  DOC    EPA    DOT  ED    NIST      DHS  DOEducaHon        

SBIR/STTR  Par@cipa@ng  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  Par@cipa@ng  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  Par@cipa@ng  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  Par@cipa@ng  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  Par@cipa@ng  Agencies  (cont’d)  

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Addi@onal  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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Page 41: Funding Options for Early-Stage Companies

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Page 42: Funding Options for Early-Stage Companies

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  condi@ons?    

•  Dry  Powder  /  Secondary  Capital  Reserved?  

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Page 43: Funding Options for Early-Stage Companies

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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Page 44: Funding Options for Early-Stage Companies

If  You  Cannot  Reduce  Risk,    You’ll  Pay  More  For  Your  Capital  

•  Examples  of  ways  riskier  companies  aeract  risk  capital:  –  offer  more  shares  (beeer  price)  

–  have  collateral  (pledges,  guaran@es)  –  offer  beeer  conversion  terms  (price)  –  offer  more  control  (board  seats,  vo@ng  agreements)  

–  go  a}er  an  extreme  high  growth  market:  •  massive  poten@al  

•  possibly  faster  path  to  exit  •  possibly  more  exit  op@ons  

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