Funding Options for Early-Stage Companies

Funding Options for Early Stage Companies

April 30, 2013

Today’s Panel

•  The Angel: Jean Hammond; Launchpad, Golden Seeds, Hub Angels, & LearnLaunch, Board TCN, jean@jph-‐associates.com

•  The Venture Capitalist: Tim Wright, Partner, Grand Banks <[email protected]>

•  The Banker -‐Dan Allred , Silicon Valley Bank, Board TCN, [email protected]

•  Grants & Programs Expert – Larry Nannis; Katz Nannis + Solomon P.C. (KNS) CerXfied Public Accountants and SBANE [email protected]

•  The Entrepreneur: Raj Aggarwal, CEO LocalyXcs, [email protected]

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Agenda

•  Quick Overview Funding Sources – Jean

•  Focus in on Government Support – Larry

•  View from the VC -‐Tim

•  View from the Bank – Dan •  How it Really Works -‐ Raj

•  Q and A

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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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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 6

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 baiery technology to exisXng players vs build a baiery 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 disXnct 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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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 obligaXon 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 opXons

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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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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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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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Match Funding Sources


HIGH GROWTH COMPANY

EXTREME HIGH GROWTH 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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AlternaXve Sources of Capital •  Business Plan CompeXXons and Accelerators

•  Many firms gain enough for some product compleXon 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 markeXng or sales collaboraXon

•  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 converXble 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 15

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

•  Angel groups ~10-‐15%, •  Informal networks & one-‐Xme-‐investors ~15-‐20%, •  Super angels ~25-‐30%, •  Family offices ~35-‐45% 16

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 Business

Angels

Market Entry

M&A

Later VC Rounds

Extreme High

Growth High Growth

Friends, Family & Founders

Friends, Family & Founders

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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 diluXve •  Cons:

–  Long SolicitaXon Process – March-‐in Rights – Work with universiXes for experXse –  Best to incorporate (but more acceptance of LLCs) –  AccounXng systems must be compliant with the government

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

www.knscpa.com 19

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 ParXcipaXng 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 ParXcipaXng 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


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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


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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


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AddiXonal 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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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 condiXons?

•  Dry Powder / Secondary Capital Reserved?

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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


HIGH GROWTH

(COMPANY)

EXTREME HIGH GROWTH (COMPANY)

Risk / Return


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

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

–  have collateral (pledges, guaranXes) –  offer beier conversion terms (price) –  offer more control (board seats, voXng agreements)

–  go a~er an extreme high growth market: •  massive potenXal

•  possibly faster path to exit •  possibly more exit opXons

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Documents

Funding Options for Early-Stage Companies