Funding Options for Early-Stage Companies

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Funding Options at Harvard iLab

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.

www.thecapitalnetwork.org

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Funding Options for Early-Stage Companies

  1. 1. Upcoming Programs @TCNupdate   #tcnLIVE  #MCengage  
  2. 2. Funding Options for Early Stage Companies July 2, 2013
  3. 3. 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  
  4. 4. Agenda   •  Funding Sources –  Risk adjusted investing •  Business Stage –  Improving communication •  Experiences (Q&A) •  Backup other sources –  Government, etc 5  
  5. 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  
  6. 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  
  7. 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  
  8. 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  
  9. 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  
  10. 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  
  11. 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  
  12. 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  
  13. 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  
  14. 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  
  15. 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  
  16. 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  
  17. 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  
  18. 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 GrowthHigh Growth Friends, Family & Founders Friends, Family & Founders 19  
  19. 19. Agenda   •  Funding Sources –  Risk adjusted investing •  Business Stage –  Improving communication •  Experiences (Q&A) •  Backup other sources –  Government, etc 20  
  20. 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 ….    
  21. 21. 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  
  22. 22. 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  
  23. 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  
  24. 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  ?  
  25. 25. 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  
  26. 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  
  27. 27. 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  
  28. 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  
  29. 29. 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
  30. 30. 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  
  31. 31. Closing  Thoughts…   32 Leverage the Entrepreneurial Community in Boston! - Greenhorn Connect - The Capital Network - Etc.
  32. 32. Grants, etc Funding Options for Early Stage Companies 33  
  33. 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  
  34. 34. KATZ   NANNIS  +   SOLOMON,  PC   CERTIFIED  PUBLIC  ACCOUNTANTS   BUSINESS  ADVISOR    CONSULTANTS   lnannis@knscpa.com   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  
  35. 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  
  36. 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  
  37. 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  
  38. 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  
  39. 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  
  40. 40. 41  
  41. 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  
  42. 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  
  43. 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  

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