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Understand All of Your Funding Options

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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. Jean Hammond – LearnLaunchX, LearnLaunch.org, Hub Angels, Launchpad Venture Group, Golden Seeds Robert Bishop - Goodwin Procter In partnership with: Founders Workbench

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Page 1: Understand All of Your Funding Options
Page 2: Understand All of Your Funding Options

Funding Options for Early Stage Companies

November 14, 2013

Page 3: Understand All of Your Funding Options

Today’s Expert

• Jean Hammond; • Supporting Growth of education and learning cluster in Boston: LearnLaunch,

LearnLaunchX, • Active 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

[email protected]

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Agenda

• Funding Sources– Risk adjusted investing

• Deal flow– Improving communication

• Experiences (Q&A)

• Backup other sources – Government, etc

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How Can We Build Value and Reduce Risk?

What type ofcompany should

we build ?

Stage-appropriategrowth-oriented

strategy

Flexible, High-Performance Team

- that can grow& change

IP &Differentiated

Product

Bookkeeping & AccurateAccounting

Legal StructureBoards

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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Page 6: Understand All of Your Funding Options

How Can We Build Value and Reduce Risk?

What type ofcompany should

we build ?

Stage-appropriategrowth-oriented

strategy

Flexible, High-Performance Team

- that can grow& change

IP &Differentiated

Product

Bookkeeping & AccurateAccounting

Legal StructureBoards

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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Page 7: Understand All of Your Funding Options

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 battery technology to existing

players vs build a battery 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 distinct 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 GROWTHCOMPANY

HIGHGROWTHCOMPANY

EXTREMEHIGH GROWTH

COMPANY

SOCIAL VENTURECOMPANY

• 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

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Growth and Maturity Reduce Risk

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Size of Capital Raise:

High

Time

High Risk

Low Risk

CrystallizeIdeas

DemonstrateProduct

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 GroupsAngels

Equity CrowdfundingAngel List, Circle Up, etc

Corporate / StrategicVenture

Customers

Jobs Bill Portals

Vendors

Founder

Friends & Family

Crowdfunding: etc.

Grants

Venture Debt

BankLoans

PersonalLoans

Private Equity

B’Plan Competition

Accelerators

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Match Funding Sources

NORMAL GROWTHCOMPANY

HIGHGROWTHCOMPANY

EXTREMEHIGH GROWTH

COMPANY

SOCIAL VENTURECOMPANY

• Friends, family, founders

• Debt, Bank, and other

• (Future) Crowd funding (portal style)

Early on• Accelerators• Individual Angels• Micro Cap VCs• Seed from VCLater 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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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 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 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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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 equity15

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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 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%

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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 conditions?

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

CrystallizeIdeas

DemonstrateProduct

Early Scaling Growth

Sustained Growth

Angel Group (or Micro-cap) Syndication

Angels orAccelerators or Micro-cap

funds Angels orAccelerators 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

• Deal flow– Improving communication

• Experiences (Q&A)

• Backup other sources – Government, etc

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What Investors (and others) Need to Know

• 5 P’s of investment– Product – differentiated technology or service that serves market

need for a significant, large market product– Promotion –market entry strategy, with detailed plan– 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 (& priorities) needed to create a

repeatable business model

• Some key concepts to convey:– What our potential 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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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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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 orMarket 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

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The odds are bad …

• 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) !!!!

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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)

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Creating an Effective Presentation• 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

Page 26: Understand All of Your Funding Options

Agenda

• Funding Sources– Risk adjusted investing

• Deal flow– Improving communication

• Experiences (Q&A)

• Backup other sources – Government, etc

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“Stage” & Equity Capital Sources

StageCrystallize Idea

and Early Demonstration

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 Syndication, Micro-Cap

Funds

VCs, Angel Group

Syndication, Micro-Cap

Funds

VCs

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

These 2 need sophisticated 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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Funding Sources1. 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

communication with funders

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Closing Thoughts…

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Leverage the Entrepreneurial Community in Boston!

- Greenhorn Connect- 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 dilutive• Cons:

– Long Solicitation Process– March-in Rights– Work with universities for expertise– Best to incorporate (but more acceptance of LLCs)– Accounting systems must be compliant with the

government– Very competitive in some agencies KATZ

NANNIS +SOLOMON, PCCERTIFIED PUBLIC ACCOUNTANTSBUSINESS ADVISORS

www.knscpa.com31

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KATZNANNIS +

SOLOMON, PC

CERTIFIED PUBLIC ACCOUNTANTSBUSINESS ADVISOR CONSULTANTS

[email protected]

DOD HHS NASADOEnergy NSF USDADOC EPA DOTED NISTDHSDOEducation

SBIR/STTR Participating AgenciesWeb 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 Participating 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 Participating 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 ProgramMicro 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 Participating 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 Participating Agencies (cont’d)

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Additional ResourcesCommonwealth of Massachusetts

www.mass.gov/bizteam

Smaller Business Association of New Englandwww.sbane.org

Association of Corporate Growthwww.acgboston.org

City of Boston Resource Guidewww.cityofboston.gov/dnd/obd/BRG/A_intro.asp

States of NH, CT, RI,VT, ME Doing Business Guideswww.nh.gov/businesses/doing.htmlwww.ct.gov then go to “Doing Business”www.ri.gov/business/vermont.gov/doing_business/business.htmlwww.maine.gov/portal/business/small_bus.html

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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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