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Funding Options for Early Stage Companies


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June 28, 2012 Presentation on Funding Options to MassChallenge finalists.

June 28, 2012 Presentation on Funding Options to MassChallenge finalists.

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  • Compress phase I grants, accelors/comptitioncrowdfunding far to left
  • 39-end jeremy
  • Transcript

    • 1. Funding Options for Early Stage Companies June 28, 2012
    • 2. Jeremy Halpern• MassVentures (f/k/a MTDC) – Director & Investment Committee Member• The Capital Network – Director• Nutter, McClennen & Fish LLP - Partner; Director of Biz Dev, ECG• Tufts University; Professor of Entrepreneurial Leadership• Participate at Launchpad, Boston Harbor Angels and Golden SeedsDan Haarmann• Thinking Phone Networks – Chief Financial Officer• Previously: CEO,Ongo Inc; VP Finance and Operations, Axiom Global• Focus: marketing and subscriber acquisitionLiz Brown• Executive Director, GoldenSeeds• Bentley University – Lecturer, advanced business law• Previously: Partner at international law firm specializing in IP 2
    • 3. Dan Allred• Silicon Valley Bank - Senior Relationship Manager• SVB Foundation- Board of Directors of the SVB Foundation• The Capital Network – Board Member• Young Leadership Committee for the Museum of Science in Boston, MA• Steering committee for Start-up Massachusetts.• Previously: led SVB’s business development efforts in Research Triangle, NC, and Vice President of the Council for Entrepreneurial Development (CED)Larry Nannis• CPA & Partner, Katz Nannis+ Solomon• Specialty in SBIR and other R&D contracts• Active member of AICPA, MSCPA and Smaller Business Association of New England (SBANE) 3
    • 4. Funding the CompanyIs Angel, VC or “other” financing right for you? What are your options? 4
    • 5. Conventional vs. High Growth Path IDEA Evaluate: 1. Growth Potential Define Business Model) 2. Capital Efficiency 3. Total Capital required Conventional High-Growth Type of Business Identify Funding Sources Identify Funding Sources• Bootstrap• Gov’t Loans & Grants • High Growth Capital• Bank Loans• Friends & Family Develop Funding Plan Refine Business Model Raise Funds Expand Team Scale Business Exit / Operate 5
    • 6. Capital Source View Risk / Reward Return on Debt Return on EquityImpact / Tax Write off Income Growth Debt- Equity – Charity $$ Pay it back Ownership stake Fixed Amounts % of Future Value NON PROFIT HIGH EXTREME SOCIAL VENTURE NORMAL GROWTH (COMPANY / GROWTH HIGH GROWTH (COMPANY) (COMPANY) FOUNDATION) (COMPANY) (COMPANY) 6
    • 7. Capital Sources for Early Stage Ventures Source of Capital Product Stage P&L Performance Deal Size WACC / IRRFounder Capital Concept Losses $10,000 - $250,000 n/aVendor Financing Concept - Commercial Profit or Loss $25,000 - $250,000 8 - 12%F&F Capital Concept Losses $25,000 - $250,000 15-20%Govt/NGO Grants Initial R&D Losses $250,000 - $4,000,000 0%Customer Financing POC – Commercial Losses $10,000 - $10,000,000 3 - 20%Non-Equity Crowdfunding(e.g., Kickstarter) Concept - POC Losses $1,000 - $10,000 0%Portal Funding (JOBS Act) Concept - Commercial Losses ? 10-40%Early Angels POC - Alpha Losses $50,000 - $250,000 10-20%AngelList POC - Alpha Losses $100,000 -$750,000 30-40%Angel Groups Alpha / Beta Losses $200,000 - $750,000 30-40%Equipment Financing Concept - Commercial Losses $50,000 - $2,000,000 10 - 20%Micro VC (1st round) Concept - Commercial Profit or Loss $250k - $2m 25-35%Traditional VC (1st round) Concept - Commercial Profit or Loss $3m - $7m 30-40% 7
    • 8. Capital Sources for Later Stage Ventures Source of Capital Product Stage Revenue Range P&L Performance Deal Size WACC / IRRGrowth Equity Commercial $3 – 30m Profitable $5 – 50m 25%-35%Private Equity Commercial $5 – 250m Profitable $10m – 300m 30%-40%Traditional Debt Commercial $.5 – 1b Profitable $250k – 500m 5% - 10%Venture Debt Commercial $250k – 10m Profit or Loss $250k – 2m 10% - 14%Asset Based Lending Commercial $250k – 60m Profit or Loss $200k – 25m 7% - 13%Royalty Financing Commercial $1m – 100m Revenue $500k – 5m 18% - 24%Public Equity Commercial $5m – 1b Profitable $5m - $20b Variable 8
    • 9. High Growth Capital by Stage &Amount Traditional VC Micro VC Angel Groups AngelList Corporate VenturingInvestment Grants Equipment Financing Size Angels Portal Funding Customers Friends & Family Vendors Crowdfunding Founder Venture Stage 9
    • 10. High Growth Capital by Stage & Cost Angel Groups Micro VC Angels AngelList Traditional VC Investment Portal Funding Cost Friends & Family Corporate Venturing Founder Vendors Equipment Financing CustomersPhase I GrantsAccelerators/ Phase II Grants CompetitionCrowdfunding Venture Stage 10
    • 11. Sources of Capital By Investment Vehicle and Deal CostSource Form of Investment Avg. Deal CostFounder Capital Common Stock $3,000F&F Capital Common Stock; Debt; Convertible Debt $5,000Govt/NGO Grants (SBIR/STTR/Gates) Grants (no equity) $0 (Time)Vendor Financing (Cash/Credit) Credit terms for goods and services $500Customer Financing (Prepay) Prepayment of purchase price $3,000Early Angels Common / Preferred Stock; Convertible Debt $10,000Angel Groups Preferred Stock; Convertible Debt $15,000Equipment Financing Secured Loan $6,000Venture Capital Preferred Stock $40,000Venture Debt Secured Loan + Warrants on Common Stock $15,000Asset Based Lending Secured Loan +/- Warrants on Common Stock $25,000Royalty Financing Royalty Agreement +/- Secured Loan +/- Warrants $40,000Private Equity Preferred Stock; Subordinated Debt $200,000Traditional Debt Senior Secured Loan $30,000 11
    • 12. Impact of Equity on Balance Sheet and P&LEquity Value – Impact upon Exit (Equity) • Aggregate Return (multiple of investment “n”x) • Internal Rate of Return (IRR) • Balloon or deferred payments • Preferences • ParticipationCurrent Pay Obligations – Impact on Cash Flow (Cash) Royalties – Marked to revenue Interest – Marked to outstanding balances Dividends – Variable but typically a percentage of Invested Capital Periodic Redemptions – Variable 12
    • 13. Investment Criteria• Innovation • Existence of Likely Acquirers• Team • Total capital in Round• Product Development and • Total capital needed until exit Venture Stage • A+ Service Providers• Existing Customers and/or • Historical Financials and Revenue Projections (GAAP)• Vertical or Industry • Geography• Market size • Uses of Capital• Likely Return Range• Technology Risk• Market Risk• Competitive Environment 13
    • 14. Compliance and Control IssuesCompliance features Control • Audits and Financial Disclosure • Directorships • Working Capital Ratios • Special Consents &Negative Covenants • Account Balances • Hiring of Sr. Management • Milestone Reporting • Additional Capital • Inspection Rights • Exits or Mergers • Change of Business • Special Rights • Equity Calls and Puts • Rights of First Refusal (ROFRs) • Co-Sale Rights • Technology Rights 14
    • 15. 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? 15
    • 16. Thinking Phone NetworksMassChallenge Funding DayJune 28, 2012
    • 17. What we do1. Provide enterprise grade Cloud UC to businesses, specifically targeting the upper mid-market (500-5,000 users). Our unique offering is focused on business process enhancement by way of deeply integrated applications, web services API’s, and Analytics.2. Provide a complete platform enabling new entrants into the cloud communications space (PBX manufacturers, dealers, VAR’s, etc) allowing them to quickly and easily take advantage of a disruptive market opportunity with minimal investment as compared to legacy deployments. 17
    • 18. Funding background• Profitable since 2009• Initially self & friends and family funded• Focused on building a strong base of revenue generating customers to fund operations• Funding round (2010)• Commonwealth of Massachusetts Small Business Financing and Job Creation Initiative (2011)• Currently completing second funding round to support rapid growth, significant market opportunity for cloud services
    • 19.
    • 20. Pitching the PlanTHE PITCH DECK 20
    • 21. Table of Contents• Cover Slide Introduction• The Problem a/k/a the Opportunity• Product/Service Solution• Solution Value Proposition and Competitive Advantage• Strategy: Business and Revenue Model• Sales and Distribution Model• Competitive Landscape• Addressable Market• Defensibility• Management Team and Advisors• Current Status: Achievements and Upcoming Milestones• Funding, Cash and Use of Proceeds• Risks and Plans• Exit Strategy and Options• Summary Slide/Investment Rationale• Financials and Projections 21
    • 22. Pitching the Plan - Cover Slide Introduction• 1 Minute Elevator Pitch – Get their attention! • Introduce company without distracting from spoken introduction • Sets the tempo• Content: – Logo – Tag Line – should explain business and begin to differentiate – Contact information – Name of the investor/group to whom presentation is delivered – Possibly a non-distracting picture• Be enthusiastic – people buy from people not PowerPoint 22
    • 23. The Problem a/k/a the Opportunity• What is the unsolved problem or need?• Who has this problem? Define your Core Customer and their attributes• How serious is it? Do you have Metrics? – Magnitude : How significant is it? Can you quantify it? – Frequency: How often is pain experienced (life insurance vs. coffee) – Criticality: Will the pain disrupt the business (e.g., IT outage). • Cancer Drug vs. Aspirin vs. Vitamin?• How have the alternative offerings failed to meet the need?• Analysis of why has the problem not been solved until now?• Remember! – Customers buy if they experience need, not if society does. – Business customer buy to make money or solve problems. 23
    • 24. Product/Service Solution• Describe your product or service?• What does it do and how does it work? – Do not get too detailed? Assume technical matters will be validated later. – Use pictures or diagrams where possible. – Demo / screen shots, etc. if necessary.• How does it fit within the customer’s environment?• What proof of concept have you achieved? Prototype? Beta?• What proof do you have of its effectiveness?• Use accurate words to describe phase of development: – “it does” vs. “it will” vs. “it may” 24
    • 25. Solution Value Proposition and Competitive Advantage (*Zoom In)• How is your solution better, faster or cheaper than the existing solutions for your customer? **Remember Different ≠ Better** – Saves costs - – Drives revenue or customer acquisition – Allows customer to offer its customers a superior value proposition – Decreases risks – Leverages customer’s existing customers or solutions – Provides enjoyment, recreation, education, time saving… (consumer product)• How much better, faster, cheaper? Can you quantify the value proposition to the customer? – Can you validate that your solution is better? Do you have data to indicate that such items are meaningful to the customer? – Can you quantify a Return on Investment (ROI) for your customer. 25
    • 26. Strategy: Business and Revenue Model• Answer the question on the VC’s mind upfront: How and when will you make money?• Who is going to pay (i.e, what is the “Revenue Model”)? Explain are YOUR customers?• Manufacturing and commercialization strategies• Timing and frequency of buying decision and payments• Average $/purchase? Likely to increase or decrease?• Cost of Customer Acquisition (CCA/CAC) vs. Lifetime Value of Customer (LTV/LVC)• Fixed vs. variable costs• Direct Sales • Professional Services • Multi-level marketing (MLM)• Indirect Sales • SAAS • Cost Savings Share• Razor (asset) and blade • Licensing • Franchise (consumable) • Maintenance Contracts • Data Broker• Auction / Arbitrage • Insurance • Sponsorship• Digital Marketplace • Loyalty business models • Government Contractor• Subscription • Freemium business model• Advertising • Value Added Reseller (VAR) 26
    • 27. Sales and Distribution Model• How you get your customers and costs• How you actually deliver solution to customers (trucks, distributors or click?)• Go-to-Market and General Marketing strategies• How you incentivize and compensate sales (if applicable)• Explain geography and expansion strategy (scaling or growth issues)• Discuss critical distribution partners, options and roadblocks• Core business vs. non-core business • potential licensing or spin-off opportunity• Conversion metrics (identification > lead > sales process > conversion) 27
    • 28. Competitive Landscape• Who is competing with you?• Barriers to entry for you? For others? Ones that you are creating? • Blocking IP • Geography • Startup Cost to competition • Contract exclusivity or change penalties • Change Cost to customers • Market dominating companies (“800lb Gorillas”)• Competitive Advantage revisited - Why will you be able to win (not “cooler”)• Points solution vs. total solutions• Current major competitors and why you will beat them • Avoiding the “no-competition trap” • Explaining their trends of growth or contraction• On a matrix – show advantages and areas where you don’t compete • Pick metrics your customers care about not just those you “win” at! • Avoid upper right quadrant graphs 28
    • 29. The Addressable Market• Industry size = the total revenue generated in a segment of the economy. • These are what are tracked by Forrester, Gartner, Thomson etc. • Only useful for trend analysis, not for evaluating investability. • Example: “The internet advertising industry is an $X billion industry”• Addressable Market = the total amount of revenue that your company could generate if it acquired every potential customer (the “Addressable Population”). • Willing and able buyers that you can reach • Initial Target Market: subset of the addressable market for whom the value proposition is truly compelling and obvious at product introduction. • Annual Sales: that subset of the addressable market or the initial target market who buy or who are likely to buy each year.• Explain how the market is changing and why. • Customers, pricing, competition, new technology, etc.• $500m TAM vs. $50m TAM – know your investors! 29
    • 30. Defensibility• Intellectual Property: Patents, Trademarks, Copyrights, Trade Secret • Difference between provisional, applications and granted patents • Patent strategy • IP that covers advantage vs. extraneous claims/assets• How unique is your solution?• Trade Secret and development lead; Ease of replication• Cost/Ability of customer to replace your Solution• Key relationships• Contractual protection 30
    • 31. Management Team and Advisors• Top executives, Board of Directors, Board of Advisors & SAB • Startup, domain, customers or key opinion experience • Prior success • Balance • Cohesiveness • Don’t put their whole resume on the slide • Only show actives• Current staffing gaps and strategy for filling• Orientation towards success not control (“Rich” not “Monarch”) 31
    • 32. Current Status: Achievements and Upcoming Milestones• Demonstrate current progress and achievement of milestones – Development partnerships – Distribution partnerships – Customer acquisition progress (conversion rates) – Publications – Financing – Team Developments• Upcoming milestones and Challenges – Gant-style Charts – How you will overcome the challenges/weakness (ex. key hire) – Often integrated with use of proceeds slide 32
    • 33. Funding, Cash and Use of Proceeds• Identify existing/timing of prior preferred stock deals• Cash and monthly cash burn • How much of burn is variable vs. fixed • Lowest you can the Burn without killing the company• Time and investment dollars to reach cash flow positive• Timing and quantity of future rounds• Current round size and timing• Use of proceeds - what will it be used for? What will it buy?• Optimal deal structure• Pre Money Valuation • Dangers of including suggested valuations • Dangers of not knowing the appropriate valuations 33
    • 34. Risks and Plans• Technology / Product – Will the solution work? Can you build it?• Business Model – Can you sell the solution at margin?• Supply – Can you acquire and manage critical vendors• Customer Adoption Risk – Will the Dogs eat the Dog Food?• Market Dynamics – Do customers have cash and the will to spend?• Distribution Risk - Can you acquire and run critical distribution and sales points?• Competition Risk – Is there an opportunity in the marketplace? Will an 800lb gorilla eat your lunch?• Financial risks – Will you have positive cash flow? Will you have sufficient capital? Will investors be interested in you down the road?• Legal risks –Freedom to operate ? Do you have the ability to defend your IP?• Regulatory risks – Are there barriers beyond your ability to influence?• Team risks – Is our product or customer knowledge distributed and accessible?• Exit Risk – Are there willing buyers (or a public market) for your company? 34
    • 35. Exit Strategy and Options• Length to liquidity• IPO vs. M&A vs. Licensing (vs. other)• Potential Acquirers • Acquirer characteristics and rationale for acquisition• How frothy is the current/expected market now and at maturity• Recent exits for similarly situated companies • Valuations (if available)• Counterpoint: Building a company vs. building an exit 35
    • 36. Summary Slide/ Investment Rationale• End with a summary of what you have just said.• Leave them with the key message points you are trying to convey.• Be prepared for questions• Appendices – All of the information that may backstop your conclusions – Case studies – Customer testimonials – More detailed technical or product information – More detailed market or customer information – Demo videos 36
    • 37. Financials and Projections• P&L – Historical + 3-5yrs; Often with cash, customers and headcount• Segment revenue by type of revenue• Fixed vs. Variable cost structure• Revenue and Margin Ratios • Think about cash flow timing issues – see revenue model (e.g., direct/reimbursement)• Bottom-Up vs. Top-Down projections• Assumption tab in the Excel build• What does “conservative” mean: Use of High / Medium / Low• Perfect vs. Functional – Running your business vs. Building a model• Anticipating investor cutback• Risks of projections being tied to equity and compensation• Valuation Issues 37
    • 38. General Dos and Don’ts: “Presentation is a visual not a reference”Do Don’t• Use one topic per slide • Use sounds with slide transitions• Limit text on each slide • Overdo the ALL CAPS, bolded, italicized or underlined text• Use pictures, graphs, video’s – Not all bullets • Use too many different fonts• Choose fonts and colors that are easy • Overuse special effects – focus on the to read content• PowerPoint is the accessory to YOUR • Have technical difficulties – test presentation before the meeting• Spell Check 38
    • 39. Presentation Skills: Part I• Know your material cold! Don’t wing it.• DON’T READ your presentation.• You should have answers to likely questions.• Be clear when you don’t know an answer – then follow up.• When possible, know the room. Arrive early, walk around the speaking area and practice using the microphone and any visual aids.• Body language and appearance = 50% of the pitch• Prioritize and eliminate less critical points.• Be flexible – be prepared to be interrupted.• Understand the goal of your presentation. Is it to inspire, to educate, to connect, to get attention, to get a second more personal meeting? 39
    • 40. Presentation Skills: Part II• Modulate your pace, pitch, volume, tone and enthusiasm – like when you are telling a story. This helps keep the audience focused.• Use humor, personal stories and conversational language where possible. Use easy to understand analogies.• Practice. Practice. Practice! GO SEE OTHER PRESENTATIONS!• Slides should HELP the oral presentation, not BE the presentation.• Bring a backup copy on a flash drive and via cloud• Slides should be professional and consistent with your image.• Spend more time building the business than the presentation• Leave time for questions.• RELAX, BREATHE and SLOW DOWN 40
    • 41. Interacting with Investors Basic Principles - Overview• Research the investor in advance• Pay attention to what you say during the presentation banter• Communicate• Be likeable• State your value proposition up front• Come prepared with sufficient data (including back up slides)• Enjoy yourself and let it show• Keep the presentation within allotted time• Be realistic about valuations in the market• Make due diligence easy• Realize investors are thinking about exit strategy 41
    • 42. Interacting with Investors Cautionary Overview – Don’t do the following• Bash the competition• Hype• Condescend or talk down• Be arrogant• Be vague about your technology• Underestimate the importance of the core science/development• Deluge investors with facts• Act desperate for funding (even if you are)• Act like you don’t need money• List ‘the company is undervalued’ as a reason to invest• Overprice your rounds so you can keep stepping up valuation• Give investors a reason to turn you down 42