The Art in Startups: Getting Funded · The “Art” in Startups: Getting Funded Download slides...
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October 16-22, 2011
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Upcoming ACS Webinars™ www.acswebinars.org
Thursday, October 27, 2011
Making Money Out of Chemistry: The Science in
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Ross Morres, Program Manager, Bureau of Engraving and Printing
Thursday, November 3, 2011
Boost and Lose Your Memory With Chemistry Dr. Todd Sacktor, SUNY Downstate Medical Center
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The “Art” in Startups: Getting Funded
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ACS WEBINARS™ October 20, 2011
Dr. Stephen Flaim
Flaim Partners Consulting Joseph Steig
VentureWell at NCIIA
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October 20,2011 www.techcoastangels.com
An Introduction to
Stephen F. Flaim, Ph.D.
President, Tech Coast Angels, San Diego
Vice Chair, Tech Coast Angels
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October 20,2011 www.techcoastangels.com
Who are Angel Investors ?
TCA
Accredited investors who invest their own capital
They come from diverse operating backgrounds
• C-Level Managers, • Entrepreneurs, • Senior Executives & Other Professionals
They mentor and coach entrepreneurs • Serve as directors • Provide industry contacts & advice • Assist with team building, strategic planning
and subsequent fundraising
They can devote time and add substantial value
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October 20,2011 www.techcoastangels.com
What Do Angels Bring to a Start-Up ?
Guidance & Team Building • Mentoring and Coaching • Active on Board of Directors • Advisory Board Participation
Business Contacts • Additional Management • Customers • Vendors • Strategic Partners • Service Providers • Follow-on Financing
Funding • Direct • Venture Capital Affiliates
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October 20,2011 www.techcoastangels.com
• Help entrepreneurs
• Stay engaged – using skills and
experiences to help build a business
• Giving back to community or university
• An active form of investing –
not just watching markets
• Make money - Return on Investment is the metric
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What Motivates Angels?
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October 20,2011 www.techcoastangels.com Sources: Center for Venture Research (pre 03 data) and Kauffman Foundation/ACEF (04-09 data)
0
50
100
150
200
250
300
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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October 20,2011 www.techcoastangels.com
Why Angels join groups
• Syndication - dividing the work eases the load
• Variety of vertical experience available
• Standardized processes and term sheets
• Deal flow encouraged, entrepreneur-friendly
• Pick and choose the deals you like
• Great camaraderie among the like-minded
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October 20,2011 www.techcoastangels.com
An Organization of Angel Organizations
www.angelcapitalassociation.org
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October 20,2011 www.techcoastangels.com
% of All Start-Up Firms > 90% < 10% < 1%
< $10 M
$10 M to $50 M
$50+ M
5-Y
r R
eve
nu
e P
roje
ctio
n
< 20%
20% to 50%
> 50%
An
nu
al G
row
th R
ate
Internal Bootstrapping &
Angels Angels & VCs
Primary Sources of Funding
Angel Investing, Osnabrugge & Brown
Spectrum of Start-Up Investments
Lifestyle Firms Entrepreneurial Firms
Middle Market Firms
High-Potential Firms
ANGELS’
INTEREST
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October 20,2011 www.techcoastangels.com
Investment Per Round (Millions)
Nu
mb
er o
f In
vest
ors
$5.0 $7.5 $10 $2.5
Power of Angel Investing, Payne
Angels
VCs Gap
Investor Focus
• Scarce capital – very few deals • Wealthy, solo, private investors • Strategic partners – corporate investors • Boutique VCs • Alliances between Angels and VCs
Seed Track Funding
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October 20,2011 www.techcoastangels.com
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SO: Understand the Capital Food Chain
or Don’t look where the money’s not
Investment Round
Num
ber
of
Invest
ments
$5 million $10 million
Angels
VCs
GAP
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October 20,2011 www.techcoastangels.com
Angel & VC Markets Are Large, Complementary
$20.1 B
61,900 Deals
Mostly Early Stage
2010 Angel
Investments UNH Center for Venture
Research
Mostly Late Stage
3,277 Deals
$21.8 B
2010 VC
Investments PWC Money Tree
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October 20,2011 www.techcoastangels.com
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Total Investments (2010)
Angels VCs
Dollars $20.1B $21.8B
($1.7B seed/startup)
# Investments 61,900 3,277
(363 seed/startup)
# Investors 260,000 794
Per round $325k
avg $5-30M
($4.7M “seed”)
Investors per round 6-20 2-3
Sources: UNH CVR, PWC MoneyTree, NVCA
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October 20,2011 www.techcoastangels.com
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The Key Difference?
• VCs: invest other peoples’ money
–Investment imperative
• Angels: invest their own money
–Investment inertia
October 20,2011 www.techcoastangels.com
• Friends, family & fools
• Angels
• Venture Capital
• Not accredited Unsophisticated Investing in a friend Passive 1-2 lifetime investments ($100 to $5,000 each) • Accredited Expertise and personal money Active Investing in entrepreneur Portfolio of angel deals
• Limited partnership Institutional money General Partners active Invest in company Large portfolio
Typical round: $10,000
Each investor: $ 2,000
Source: estimate
Typical round: approx $500,000
Each investor: $ 25 - 40,000 Source: Center for Venture Research
Typical round: $7,000,000
Each investor: $3,000,000 Source: PWC MoneyTree
Funding Scope for Startup Companies
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October 20,2011 www.techcoastangels.com
Funding Startup Entrepreneurs
(typical year)
• Startup companies
• Funded by FF&F
• Funded by Angels
• Funded by VCs
500,000
200,000 (est.)
35 - 50,000
< 500
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October 20,2011 www.techcoastangels.com
WHAT DO ANGEL INVESTORS EXPECT?
ROI = 30% - 40%
Revenue
Experienced management team
Ongoing relationship with management
1 2
3 4 5
Investment Horizon 3 - 7 years
6 7
23
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October 20,2011 www.techcoastangels.com
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VC & Angel Investments
$0
$20
$40
$60
$80
$100
$120
$B
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
VC
Angel
Source: PWC MoneyTree, UNH Center for Venture Research
October 20,2011 www.techcoastangels.com
Current VC Investment Climate
• Few exit opportunities
• Inability to raise new funds from LPs
• Less available capital for new deals
• Some refocusing on Clean Tech/Energy
• Fundamentals more important than ever
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October 20,2011 www.techcoastangels.com
Leading To: “Early Exits”
• VCs investing at later stages need to wait for large returns
• Startup costs for many companies are significantly lower
• Therefore, angels look for companies that can be acquired quickly without needing follow-on VC money
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October 20,2011 www.techcoastangels.com
Tech Coast Angels Overview
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October 20,2011 www.techcoastangels.com
What is the Tech Coast Angels ?
A Nonprofit Mutual Benefit Corporation governed by a Board of Directors.
TCA members collaborate on due diligence, but make individual investment decisions.
TCA is not a fund TCA does not make investments TCA does not participate in any funding decisions TCA does not receive any share of returns from its members’ investments
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October 20,2011 www.techcoastangels.com
A Snapshot of TCA
• CA Non-Profit Founded in 1997
• The largest angel group in the US –investing primarily in Southern California
Los Angeles (92 members)
Inland Empire (16 members)
Santa Barbara/ Westlake (22 members)
• Members are encouraged to – collaborate within and across networks. – attend any TCA meeting or activity. – participate in any member-led
investment – provide mentoring and guidance as well
as capital San Diego (60 members)
Orange County (70 members)
• Over 250 members organized in five networks
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October 20,2011 www.techcoastangels.com
Who are the INDIVIDUALS in Tech Coast Angels?
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• Are accredited investors (within SEC rules)
• Have track records managing and building successful companies as entrepreneurs or operating executives (70%)
• Are experienced in angel investing, leading due diligence, structuring investments, and coaching entrepreneurs.
• Form an extensive peer network of domain and industry expertise and contacts for subsequent funding, talent and technology
• Dedicate significant time and effort to TCA activities
• Agree as individuals to invest in at least two TCA member-led investments per year; many have 10 or more deals.
October 20,2011 www.techcoastangels.com
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• Evaluate 500 deals yearly (fund 25-30/yr)
• Have invested >$110M to date
– 170 Early Stage Companies in CA
– Typically $250K – $1M (avg. is $463K)
• These companies raised an additional $1.2B from VC’s & other investors
• TCA has done > 25% of all the early-stage tech deals in Southern California
Since TCA was founded in 1997
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October 20,2011 www.techcoastangels.com
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Relationships & Expertise
• Affiliations with a majority of SoCal-based
venture capital firms for future raises
• Extensive sponsor support – provide access
• Members provide hands-on mentoring and guidance in addition to capital • Wide range of industry experience and
expertise
• Extensive community participation
October 20,2011 www.techcoastangels.com
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TCA Investment Areas
• High tech/software/IT
• Telecommunications/Internet
• Life Sciences • BioTech
• Medical Devices
• Consumer Products
• Clean Tech
• Media
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October 20,2011 www.techcoastangels.com
www.techcoastangels.com
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October 20,2011 www.techcoastangels.com
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TCA Summary
• Funded 25~30/yr from 500 applications
• All applications considered – no fees
• Syndicate with regional angel groups
• Work with VC affiliates and other VCs
• We likely have members with experience in your market and technology
• Historically our $1 Series A leads to $10 follow-on investment
• High value-add
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Venture Capital 101
Joseph Steig
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and
Where’s the money? Not in venture capital!
• This presentation is an overview of venture capital
• BUT if you want to know where the money really is … you can jump to the end of the presentation!
Intro
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What is venture capital?
• A type of private equity typically provided to early-stage, high-growth potential companies
• VCs generate a return through an eventual liquidity event such as an IPO or sale of the company
• Venture capital investments are usually made as cash in exchange for shares in the company
• VCs also add value by serving as board members but don’t charge extra for this
What is …
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Venture
Capital Firm
(General
Partner)
Limited Partners
(individuals, corporations, pension funds, fund of funds
etc.)
Venture Capital Fund
(e.g. Long River Ventures II)
Portfolio
Company
(Investment)
Portfolio
Company
(Investment)
Portfolio
Company
(Investment)
Fund management in
exchange for fees and
20% profits
Invest in the Fund in exchange for
80% profits after return of principal
Structure
Structure of a typical venture capital firm
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Analyst Associate Senior
Associate Principal Partner
Venture Partners and
Entrepreneurs in Residence
VC hierarchy
The players …
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Seed Start-up Sustained Growth Early Growth
Pre-Revenue Revenue/Profitable
Founder’s Savings
Friends/Family
Angels
Venture Capital
Evolution of capital
Where does venture capital “fit”?
Research
Company gets
incorporated
Government & Foundation Grants
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Seed Start-up Sustained Growth Early Growth
Pre-Revenue Revenue/Profitable
Bootstrap Angel/Seed Series A Series B Series C+
$50K - $1.5M $0 - $100K+ $2M - $7M $5 - $15M $5 - $50M+
Stages
Example round stages and sizes
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A VC is itself a small business
• VCs have to raise $$$
• They then have to find “customers” (YOU!)
• They have to close those customers (make the investment)
• They have to invest time and energy into those customers (aka portfolio companies)
• And then they “harvest” by exiting through sale or IPO of YOUR company
• Exits are rarely if ever through cash flow
What VCs do
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What a VC looks for in a potential investment
• People
• Ideally, a team with track record
• Market
• Market needs to be large ($1 billion +/-)
• Addressable by the team and technology
• Product
• Clear path to marketable product
• VCs don’t take much technology risk!
• And a workable transaction
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Market size, exit multiples keys to startup math
• If a VC ends up with 20% of your company and has paid $5 million
• Therefore, in this example they would want to get $50 million out for their 10x return target
–Therefore, company has to sell for $250 million
• If sale is on 10x revenue multiple, revenue would have been $25 million
• Therefore, if market size is $1 billion, company would have to have 2.5% of the market
Startup math
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A 100:1 ratio of deals to funded deals
Venture deal flow capital math
70 don’t get a meeting
30 get a first look
10 get serious consideration
1 gets funded
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Of the funded deals …
Venture portfolio math
~30% ~30% ~30% ~10%
Several will die Several will be
“walking dead”
Several will do ok
(~3x)
ONE
hits
big
(10x)
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The VC process is pretty much standardized …
• YOU start with an executive summary and a PPT “deck”
• YOU research VC firms and get referrals
• Meetings come from referrals not cold calls
• THEY hopefully take a meeting.
• Due diligence. More meetings. Term sheet. Even more due diligence.
• Then paperwork and LAWYERS
• Then, hopefully, investment
Process
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VC terms are typically preferred stock
• Key is to understand the difference between CONTROL and OWNERSHIP
• VC’s rarely take majority ownership
• BUT they will have certain control via the form of stock they purchase
• Typically preferred stock, which gives them a preference upon liquidation (basically, first money out) and also spells out certain control provisions
• Typically invest in Delaware C Corps
• Much more rarely other states or LLCs
Terms
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Example capitalization structure at Series B
Founder
CEO (may not be founder)
Series A Representative
Series A Representative
Series B Representative
Independent 1
Independent 2
Ownership Board of Directors
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VCs DO invest at the seed or early stage
• Some VCs do invest at the seed stage
• But some VCs are ONLY later stage (Series A, Series B or later)
• Seed investing is often collaborative with entrepreneurs or because of reputation of co-investors who have validated your company for the VC
• Some will even invest via convertible debt
• Convertible debt is debt that “wants to be” equity but will convert at a later point, at a discount
• VCs never invest in Common Stock; Angels sometimes do
Earlier stage terms
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Good VCs can be pivotal to your company
• All VCs should be value-added investors
• Help with new hires
• Help identify first customers
• Help with next round money
• BUT this help could also mean firing YOU in the best interest of the company!
• VCs have their own business to run
• Hopefully their interests are aligned with yours
–but not always!
After the investment …
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VCs like software deals a LOT!
• ROI is about time value of money, capital efficiency
• Software can be invented and reinvented quickly
• The product costs almost $0 to replicate
–This makes it a magical industry for investors!
• Chemical businesses have complications!
• Research may not be fast, sales cycles may be slow, acquirers may be old-fashioned, and then there’s health and safety and other liabilities!
–BUT chemistry is the foundation science so hang in there! You’re doing more than the latest GROUPON!
Some challenges for chemists …
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$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2011e2010200920082007200620052004200320022001200019991998199719961995
$
B
I
L
L
I
O
N
S
Other
Software
Industrial/Energy
Biotech
Semiconductors
Total U.S. VC investment per year
VC investments
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BUBBLE!
Data from PWC Moneytree
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Where else can you find money?
• Only a TINY fraction of startups get VC$
• Estimates are that 10x get only angel$
– And 10x THAT get neither angel$ nor VC$
• Other forms of equity
• Grant funding
• SBIR Grants
• National Collegiate Inventors and Innovators Alliance (www.nciia.org)
• REVENUE!!!
• Customers are the best source of funding!
Where else?
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A few of example deals
Deals
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A few resources to learn more about VC
• askthevc.com
• Recently published the book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist”. It’s great.
• crunchbase.com
• avc.com
• Blog by the mensch of venture capital
• angelcapitalassociation.org
• Includes list of most formally organized angel groups
• startupcompanylawyer.com
• Includes Wilson Sonsini’s term sheet generator tool
VC resources
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Supporting the science, engineering ecosystem
• National Collegiate Inventors and Innovators Alliance
• 501c3 not-for-profit providing catalyst grant funding and educational programs to university student innovators and faculty through the U.S. for 15 years
– Focus on scalable, technology-based ventures that deliver social value
» Next deadline for university student grant funding proposals is December 2, 2011 www.nciia.org
About the NCIIA
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About us …
Leadership
Dr. Judy Giordan is a nationally recognized R&D
executive serving in senior technical leadership roles at
firms such as Pepsi-Cola Company, Henkel Corp, and IFF.
She is a founding board member and advisor to
companies in multiple industries and holds a PhD in
Chemistry from the University of Maryland.
Joseph Steig is a CFO and advisor to seed and early
stage companies in a wide range of industries, from
aquaculture to computer chip design to composite
materials. He is Venture Development Manager at NCIIA
and also CFO of Long River Ventures.
MORE at www.ecosvc.com
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The “Art” in Startups: Getting Funded
Download slides within a week:
http://acswebinars.org/steig-flaim
Contact ACS Webinars™at [email protected]
ACS WEBINARS™ October 20, 2011
Dr. Stephen Flaim
Flaim Partners Consulting Joseph Steig
VentureWell at NCIIA
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Chemistry—Our Health, Our Future!
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October 16-22, 2011
Celebrate National Chemistry Week! www.acs.org/ncw
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Upcoming ACS Webinars™ www.acswebinars.org
Thursday, October 27, 2011
Making Money Out of Chemistry: The Science in
Paper Money Dr. Steve Carlo, Technical Manager, Bureau of Engraving and Printing
Ross Morres, Program Manager, Bureau of Engraving and Printing
Thursday, November 3, 2011
Boost and Lose Your Memory With Chemistry Dr. Todd Sacktor, SUNY Downstate Medical Center
64 Contact ACS Webinars™at [email protected]
Do you use ACS Webinars in the classroom?
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Email us ([email protected]) or go to
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American Chemical Society.
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