Upcoming Programs
@TCNupdate #tcnLIVE #MCengage
Funding Options for Early Stage Companies
July 2, 2013
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
4
Agenda
• Funding Sources – Risk adjusted investing
• Business Stage – Improving communication
• Experiences (Q&A)
• Backup other sources – Government, etc
5
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
6
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
7
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
8
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
9
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
10
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
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
12
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
13
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
14
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
15
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
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
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?
18
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
19
Agenda
• Funding Sources – Risk adjusted investing
• Business Stage – Improving communication
• Experiences (Q&A)
• Backup other sources – Government, etc
20
“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….
22
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
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
23
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
24
Crystal: Idea to Business Plan
25
#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 ?
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
26
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
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
28
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
Factors defining a Business
30
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
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
31
Closing Thoughts…
32
Leverage the Entrepreneurial Community in Boston!
- Greenhorn Connect - The Capital Network - Etc.
Grants, etc Funding Options for Early Stage Companies
33
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
KATZ NANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISOR CONSULTANTS
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
35
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)
36
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)
37
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)
38
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)
39
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
40
41
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?
42
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
43
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
44
Top Related