Funding Options for Early-Stage Companies

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Funding OpAons for Early Stage Companies

June 27, 2013

Today’s Experts

•  The Angel – Sheryl Schultz, Golden Seeds •  The VC – Kent BenneT, Bessemer Venture Partners

•  The Crowd – Dan Sullivan, Crowdly •  The Grants – Dr. Ruth Shuman, NaAonal Science FoundaAon

•  The Bank – Dan Allred, Silicon Valley Bank •  Moderator: David Jegen, Devonshire Investors


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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Companies come in many forms

NORMAL GROWTH COMPANY

HIGH GROWTH COMPANY

EXTREME HIGH GROWTH COMPANY

SOCIAL VENTURE COMPANY

•  Includes all service businesses

•  ExploiAng 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 orientaAon

•  Team needs to support mission

•  Growth profile ohen one resource at a Ame

•  Exit …much harder to find fit

•  Company can grow fast (on-‐line) or has a scalable system

•  Team ohen moAvated by exit

•  $7-‐10M revenue in 5 yrs & market size allows significant addiAonal growth

•  Capital efficient total investment$2-‐4M

•  Exit by M&A

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HOW YOU DO IT

•  IP licensing • Manufacturing • R&D focused • Product vs. services

Understand how different investors see your risks

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Market • Market size, unproven market demand?

Product • Technical feasibility, time to build, IP?

Management • Domain knowledge, past successes?

Bus. model • Established, recurring rev, sticky?

Competition • Some, but not too much?

Exit opportunities

• Growth potential, active buyers, profitability?

Financial partners are specialists, but the most basic rule is: the more risk a funding partner takes, the more return (and control) they are going to require

Types of risk Ways you can mitigate

• Stage appropriate growth strategy

• Flexible, high performing team

• Deep market understanding

• Profitable business model

•  IP and product differentiation

• Right partners in key areas (e.g., manufacturing, sales)

• Legal and corporate governance

• Solid bookkeeping and accounting

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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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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Bootstrap


The World of Angel Capital •  Angels invest own money

–  Prefer capital efficient / early exit opportuniAes (5-‐7years) – target of $10 -‐ $15M in revenue within five years

–  Products, not services – food and fashion have generally been difficult to fund through angel groups.

–  Capital Requirements: $100k to $10M

•  Angel Ecosystem –  2012 ~$23B annually, ~ 67,000 new investments –  26 angel groups in New England (for full list, go to angelcapitalassociaAon.org) – we syndicate with one another!

–  Important to find the right fit •  Do your homework – target angels that fit your profile •  Engage early and informally

•  FIND A CHAMPION! 12


Are You Ready for Angel Funding?

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• 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 idenAfied

• Clear understanding of your capital requirements, and in-‐depth understanding of your financials

•  DifferenAated technology or service and a substanAal market opportunity

•  Ideally – 1 to 2 paying customers, but product in beta is ohen enough.


Equity Capital: Shared Upside -‐ VC •  VCs invest other people’s money (pension funds, etc.)

–  Returns are measured on a per fund basis – 3X return target with some funds doing much beTer

–  Small number of deals drive returns for the enAre fund –  Big quesAon: is there a chance we could return HALF OF OUR FUND with this investment?

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EARTH: some substance that defends you and your margins (IP, network effects, brand, deep tech)

WIND: a HUGE or dynamic market that will reward you for changing just a fraction of it

FIRE: a crazy obsessed founder or group of founders who want to win more than anything

WATER: a model that will scale cost efficiently (at least once it gets going)

What VCs Want


Debt vs. Equity

Debt

•  Lower risk: first money to be paid back

•  RelaAvely inexpensive •  First lien on company assets

•  NegaAve covenants

Equity

•  Higher risk: lives & dies with the company

•  Very expensive •  Unsecured (typically) •  BOD governance


Primary uses of debt

•  Financing assets – Working capital

– Fixed assets •  Financing growth

– Growth capital – “Venture debt”

•  Special situaAons – Bridge loans – Financing “near” assets


Right capital for the right purpose Venture Debt Fixed Assets Working

Capital Cash-‐flow Financing

Purpose Augment VC, invest in value drivers.

Finance fixed assets.

Finance A/R & inventory.

Leverage cash-‐flow for growth.

Structure 6-‐12 month I/O then 3 year payback.

AmorAze over life of asset.

Revolving line w/ formula borrowing.

Term loan, mulAple of EBITDA.

Primary Repayment Source

Future equity. ExisAng and future cash.

Cash flow within W/C cycle.

Cash-‐flow from operaAons.

Secondary Repayment Source

Enterprise value.

LiquidaAon value of fixed assets

LiquidaAon value of W/C assets

LiquidaAon value of all assets.

Pricing 8-‐10% interest & 3-‐6% warrants.

7-‐8% interest & warrant (or higher rate).

5-‐7% interest w/ covenants.

Depends on leverage.





SBIR/STTR Program Fundamentals

•  Provides early-‐stage funding for R&D on high-‐risk technologies with high potenAal for economic/societal benefits

•  Targets early-‐stage development of technology on a commercial path

•  Seeks to fund transformaAonal, game-‐changing technology •  Looks for significant market opportunity

•  Awards based on both technical and commercial merit •  Values academic collaboraAon/translaAon

•  Strong focus on commercializaAon

•  Encourages Aes to private sector

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SBIR/STTR Program •  Pros:

–  Provides “pre-‐seed” funding to demonstrate proof-‐of-‐concept

–  Non-‐diluAve investment; not a loan/equity-‐free

–  Provides validaAon, recogniAon, visibility

– May be leveraged to aTract investment/partnerships

–  Small business retains IP

–  Encourages partnerships

•  Cons: –  6 month solicitaAon process – March-‐in rights –  AccounAng systems must be compliant with the government

–  Very compeAAve in some agencies

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•  Department of Agriculture

•  Department of Commerce –  NaAonal Oceanic and Atmospheric AdministraAon

–  NaAonal InsAtute of Standards and Technology

•  Department of Defense •  Department of EducaAon

•  Department of Energy •  Department of Health and

Human Services

•  Department of Homeland Security

•  Department of TransportaAon

•  Environmental ProtecAon Agency

•  NaAonal AeronauAcs and Space AdministraAon

•  NaAonal Science FoundaAon

SBIR/STTR ParAcipaAng Agencies

23 SBA Web Site: hTp://www.sbir.gov/applicants#eight

SBIR (2.7%) + STTR (.4%) = >$2.5 B


Company data from FY 2012 Phase I awardees:

–  86% of Phase I awardees have 10 or fewer employees

–  90% of Phase I awardee companies were incorporated since 2007

–  73% of Phase I awardees have never received a Phase II award from any agency

University Ves to Phase II projects*: ‒  37% involve faculty

members ‒  27% involve graduate

students ‒  25% rent/use university

faciliAes ‒  17% issue a subcontract

to a university

SBIR/STTR NSF Awardee Demographics

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Phase I Proposals received: >2,100; funding rate 16% Phase II Proposals received: >300; funding rate 39%

* NaAonal Academies Study, 2007


AddiAonal 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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Economy & Finance

Funding Options for Early-Stage Companies