Alternative Sources Of Funding For Creative Technology Business

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  • 1. Alternative Sources of Funding for Creative Technology Businesses
  • 2. The Creative Entrepreneurship Track is made possible through the generous support of Morgan Lewis.
  • 3. Jeffrey P. Bodle, Moderator Partner, Morgan, Lewis & Bockius LLP Rob Weber Managing Director, Antiphony Thaddeus Squire Artistic Executive Director, Peregrine Arts Alan Kraus Sr. Director, Investment Group at Ben Franklin Technology Partners Kevin Dow Deputy Commerce Director Neighborhood and Business Services, City of Philadelphia
  • 4. Rob Weber Managing Director Antiphony
  • 5. Compiled from 2008 and 2009 Data
  • 6. The Venture Capital Environment Is it safe to go back in the water?
  • 7. US VC Investments What goes up… * 2009 data includes Q1 & Q2 data. Source: PWC MoneyTree™ Survey, 2009
  • 8. Philadelphia VC Investments Mirror the US with more deals per dollars * 2009 data includes Q1 & Q2 data. Source: PricewaterhouseCoopers/Thomson Venture Economics/ National Venture Capital Association MoneyTree™ Survey, 2009
  • 9. US VC Investments Moderation moving forward… * 2009 data includes Q1 & Q2 data.
  • 10. US VC Investments Where’d it go in 1998?
  • 11. US VC Investments In 2008, Energy overtakes Biotech
  • 12. It’s a great time to be an investor (with cash) Entrepreneurs have to do more with less, or pay the price in equity. Source: Thomson VentureXpert, 2008 NOTE: No data available for Q1-2, 2009
  • 13. VC’s abandoning then returning (in cycles) to Seed Stage investments Source: Thomson VentureXpert, September 30, 2009 (YTD)
  • 14. The Funding Gap Investors continues to move later stage Equity Capital for Entrepreneurs Stage Pre-Seed Seed/Start-Up Early Later Source Founders Angel/Angel Alliances Venture Funds $25K $100K $2, 000K $5, 000K Demand Supply Funding Secondary Gap Funding Gap Source: Jeffrey E. Sohl, Center for Venture Research, 2003
  • 15. Why? NOT because they don’t do early stage deals NOT because of poor ROI BUT BECAUSE They have too much money to invest and Need to move to harvest quicker AND NOW Entrepreneurs are doing more with less Investors coming back to realize the bigger (riskier) returns are in earlier stage companies
  • 16. Angels & Venture Capital 100× more angels invested 68% of the funds in 14× more ventures than VC’s (in 2008) Angels Activity (2008)1 Venture Capital Activity2 260,500 active angels 2,276 active funds Invested approximately $19.2 Invested approximately billion in 55,480 ventures $28.08billion in 3,929 deals Additional comments Additional comments Avg $7.15MM/deal Average per deal $346K Lower valuations and cautious investing Not abandoning seed/start-up investments;, but moving later stage 1 Center for Venture Research, 2009 2 Thomson VentureXpert, More larger, formal alliances and later stage investments
  • 17. Sector Analysis Sector Angel1 VC2 Software 13% 18% Health/Med Dev 16% 14% Biotech 11% 17% Industrial/Energy 8% 10% Retail 12% 1% Media 7% 6% Retail and Media mainly due to a continued interest in social networking ventures 1 Center for Venture Research, 2008 2 Price Waterhouse Coopers/MoneyTree, 2009
  • 18. The Truth About Angels Invest close to home Cashed-out entrepreneurs Value-added Patient Capital (?) Invest as part of group/syndicate Regional Networks Angels and companies seeking angel funding more diverse 16.5% women angels; 15.75% woman-owned ventures sought funding (9.5% conversion) Number of women seeking investment is low; conversion is comparable. 3.6% minority angels; 3.7% minority-owned ventures sought funding (11.3% conversion) Source: Center for Venture Research, Q1-2 2007
  • 19. Angels still investing first, but… 63% ( ) new, first sequence investments 45% ( ) Seed/Start-up, 40% ( ) Post-seed/Start-up, with more, 14% ( ), moving to Expansion Stage. Increase in Post Seed/Start-up results from aggregation of angels (groups, clubs, funds) The Funding Gap grows a bit smaller… Source: Center for Venture Research, Q1-2 2007
  • 20. Evolution of Angels Individual Angels Angel Groups/Clubs Angel Funds Typically Same as Individual Same as Angel entrepreneurs who Angels, plus: Groups, plus have cashed out Process to recruit, Formal fund, usually Contribute: “scrub” and present set up as LLCs Patient capital opportunities to Angels Invest as a fund, Knowledge although Angels direct and the investment experience strategy Mentoring
  • 21. More and more, ALL high-tech investors are looking for… Visionary leader & capable team “We can hire execution” Market leadership Emerging growth markets with sizable potential Fundamental, compelling technology advantage Defensible competitive position Capital-efficient business plan Moderate capital requirements Clear return on investment leverage Easily financed post-seed Risks mitigated in incubation stage
  • 22. Thank you! Rob Weber Antiphony Partners, LLC rweber@antiphony.com Twitter: robweber Facebook: robweber1 Linkedin: robweber
  • 23. US dominates, but Venture Capital is becoming a global phenomenon http://www.deloitte.com/dtt/article/0,1002,cid=213801,00.html
  • 24. While technology innovation and entrepreneurship have largely been a U.S. phenomenon, other countries are quietly excelling in areas that are critical to the future of venture capital investment. We are operating in a global economy and venture capitalists will follow the best technologies. Those countries that can marry the innovation and entrepreneurial work ethic as the U.S. has done will become formidable economic competitors in the 21st century. Mark Heesen, president of the NVCA
  • 25. Global VC Survey Background 400 responses from VC general partners Assets under management from <US$100MM to >US$1BB Multiple responses from same firm allowed Source: Deloitte NVCA Global Venture Capital Survey 2008
  • 26. Countries ranked with the best technologies by industry sector TCom Semicon SW Biophar MedDev AltEnergy US 1 1 1 1 1 1 UK 7 7 3 2 3 4 Japan 2 3 7 9 5 3 Germany 10 8 5 4 2 2 Israel 3 6 4 8 4 10 China 9 4 6 9 8 6 France 8 9 9 5 7 8 Canada 8 7 9 5 India 2 6 S. Korea 4 5 Switzerland 3 6 Sweden 6 9 Source: Deloitte NVCA Global Venture Capital Survey 2008 NOTE: Most are developed countries
  • 27. Staying Current: Resources http://www.thomson.com/financial/peconsult/fi_peconsult.jsp www.venturexpert.com http://wsbe.unh.edu/analysis-reports-0 NEWS, ANALYSIS AND PUBLICATIONS Pratt's Guide to Private Equity Sources Venture capitalists and entrepreneurs have turned to Pratt's Guide for comprehensive, accurate profiles and insightful editorial to help them raise capital, find the right venture capital firm, and keep up-to-date. Learn more Private Equity Week Get the insider’s look at deal activity in the private equity market with Private Equity Week’s newsletter and website. Learn more PE Week Wire PE Week Wire is a daily dose of e-mailed news and commentary on the venture capital and private equity markets. To receive it each morning, register for PE Week Wire here. Learn more Venture Capital Journal Trusted by industry leaders for intelligent decision making for over 30 years, Venture Capital Journal gives you the real story behind the headlines. Learn more
  • 28. What is a VC Fund?
  • 29. How Venture Capital Works Fund Operations Harvest Event Fund Setup Carried Interest Investment Decision General Partner, Mgt Co Advisory Svcs Invest Mgmt Fees Mgmt Svcs Company #1 Distribution ($) $$$ Limited Partners: Company #2 •Hi-Net Worth Individuals LP Interest Venture Fund •Institutions •Companies Limited Partnership •Other VC Funds $$$ Equity (Commitment) Information or services Company #n Capital Equity ownership
  • 30. Thaddeus Squire Artistic Executive Director Peregrine Arts
  • 31. Alan Kraus Sr. Director Investment Group at Ben Franklin Technology Partners
  • 32. Ben Franklin Technology Partners Of Southeastern Pennsylvania Global Creative Economy Convergence Summit October 5th, 2009
  • 33. Ben Franklin Technology Partners • Pennsylvania’s partners to drive technology based growth • Marked 25th Anniversary 2008 • Nationally acknowledged model -2008 Excellence In Economic Development Award: International Economic Development Council -2008 Technology-Led Economic Development Award: U.S. Department of Commerce • Part of a statewide network consisting of four regional partners
  • 34. Ben Franklin Technology Partners of Southeastern Pennsylvania Our Approach Capital…Knowledge…Networks • Seed & grow new technology companies. • Assist firms to develop & commercialize new products. • Develop and implement strategies & partnerships that strengthen the “infrastructure for innovation” across the Greater Philadelphia tri-state region.
  • 35. Creative Clients, Alumni & Partners (a sampling)
  • 36. Capital Money & Smarts at the Right Moment Funding for Innovative Seed & Early Stage Technology Enterprises Across Life Sciences, I.T. and Physical Sciences (with New Energy Programs) • $ 43 Million committed in the southeastern Pennsylvania region 2001-2008 – $957 Million+ in follow-on capital raised by BFTP/SEP companies – Approximately 120 active companies in Portfolio • $75-500K investments - up to $750K lifetime • Key Drivers Technology & Commercialization • Milestone & Budget Based Allocation of Funds • Funding accompanied by Comprehensive Business Services • Frequently Viewed by Investors as vital “Seal of Approval” 36
  • 37. What is BFTP/SEP Looking For? Some or all of the following: – Venture experienced business management – Active and diverse set of directors or advisors – Meaningful differentiation/barrier to entry. Intellectual Property may be useful but not necessarily required – Sound business & scientific approach – Leveraged sources of capital • SBIR, FFF, Angel, Seed/Early Stage Venture Capital, Other state funding sources. BFTP requires at least $1-$1 match, preferably in cash. – Ability to achieve significant milestone(s) with BFTP/SEP dollars – Long term sustainability & job creation – Early or established companies (post proof of concept, particularly in IT, often with beta customers &/or product sales)
  • 38. BFTP Networking: Value Added • Portfolio Development Services by Investment Group staff + contracted portfolio managers & consultants – Mentoring / Consulting – Success Teams: peer-to-peer coaching – Business Plan Development – Business Development – Capital Raising Strategy – Capital Connects: presentations to venture/private investors – Management / HR Strategy – Introductions • Customers • Investors • Management • Partners • Prospective Board Members • Resource Providers • Strategic Partners – Board of Directors Development/Strategy/Coaching – Advisory Board Development / Strategy
  • 39. Advantages of BFTP/SEP Funding • Position: BFTP/SEP funds fill a • Building Value: BFTP/SEP uses critical, often missing gap in its networks, skills, resources early-stage financing (including portfolio managers) to accelerate company value creation • Follow-on Investment: BFTP/SEP investment often • Cost of Capital: BFTP/SEP catalyzes additional infusions of investment terms are favorable capital given high risk profile • Patient Capital: BFTP/SEP will • Application Process: a valuable not force the company to resource of feedback for premature exit strategies entrepreneurs
  • 40. The Investment Process Investment Process Overview • Five-Step Process 1. Submit an Executive Summary (non-confidential) 2. Submit an Application 3. Q&A with Technical Advisory Committee (Professors, Tech Professionals, Service Providers) 4. Comprehensive Due Diligence Review by Outside Consultant 5. Presentation to Investment Advisory Committee (Regional Angels, VC’s and Service Providers) • Facts – The Investment Process, if approved, takes 9 – 11 weeks from application due date to final decision (up to 18 weeks for Life Science) • Note: investment conditions possible – Briefings offered across region ahead of each application date—Highly Recommended. Can register at: www.sep.benfranklin.org/capital/brief.html – 4 funding rounds per year, 3 for Life Science • Due Date for round just passed. Next round due in mid-January for March 2010 decision. – All BFTP/SEP staff and reviewers under signed confidentiality agreements
  • 41. BFTP Capital: Typical Structure of IT Deals Particularly ideal for companies able to use capital to reach technical and commercialization milestones that will lead directly to exit or significantly reduce risk of next investment round. Some flexibility depending on company. • Convertible Debt • Stand-alone, detachable warrants, (usually at $0.01/share exercise price, with the number of shares to be determined by next round’s price)* • Lien on technology – No personal guarantee! • Non-voting board observation rights * Terms subject to change without notice
  • 42. Thank You! www.sep.benfranklin.org
  • 43. Kevin Dow Deputy Commerce Director Neighborhood and Business Services City of Philadelphia
  • 44. Question & Answer
  • 45. Please complete the survey being distributed by the volunteers. Surveys may be returned to the volunteers or at the Registration Desk in Ballroom A.
  • 46. Thank you to our sponsors