Plan for funding


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Part of the all day Venture Fast Track:

Plan for funding: What Stage Is Your Business and What Are Your Options

Is your business an idea, in the midst of formation, or ready to raise capital? The first step to identifying what comes next is understanding the stage of your business.

Join our fundraising experts for an in-depth discussion of what options you have for funding and how to decide which ones are right for you and for 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.


- Ben Littauer – Boston Harbor Angels & Walnut Venture Associates

- Panos Panay – Sonicbids

Published in: Business, Economy & Finance
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Plan for funding

  1. 1. Plan for Funding October 24, 2013 1  
  2. 2. Agenda •  Funding is an OUTCOME of your business •  You need to understand what kind of business you have –  Type of business –  Business model –  Stage of business –  Gaps in your business •  You need to learn the language of finance •  But the bottom line is: if you build the business well, the funding will follow 2  
  3. 3. Types of Business SOCIAL  VENTURE   COMPANY   •  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 NORMAL  GROWTH   COMPANY   “Small  &  Profitable”   HIGH   GROWTH   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.) •  Company can grow fast (on-line) or has a scalable system •  Team often motivated by exit •  $7-10M revenue in 5 yrs & market size allows significant additional growth •  Capital efficient total investment $2-4M •  Exit by M&A EXTREME   HIGH  GROWTH   COMPANY   •  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 3  
  4. 4. Typical Funding Sources SOCIAL  VENTURE   COMPANY   •  Friends family, founders •  Charity$$ •  Crowd funding (Kickstarter, etc) •  Impact Angels •  (Future) Crowd funding (portal style) NORMAL  GROWTH   COMPANY   “Small  &  Profitable”   •  Friends, family, founders •  Debt, Bank, and other •  (Future) Crowd funding (portal style) HIGH   GROWTH   COMPANY   EXTREME   HIGH  GROWTH   COMPANY   •  Angels •  Angel Groups •  Angel Group Syndication •  Angel List •  Micro-cap Funds •  (Future) Crowd funding (portal style) •  Increasingly Strategic Corporate VCs Early on •  Accelerators •  Individual Angels •  Micro Cap VCs •  Seed from VC Later stages •  Venture Funds •  Strategic VCs •  Angel Syndication 4  
  5. 5. 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   •  ConverOble  Debt–  really  another  form  of  equity  funding   5
  6. 6. Equity Capital •  •  “Risk  Capital”,  shared  upside   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  find  the  best  &  adding  resources  to  aid  success   –  ~$26.5B  annually,  ~  3,700  new  investments  2012   •  Angels  invest  own  money   –  –  –  –  –  –  Prefer  capital  efficient  /  early  exit  opportuniOes   ~$23B  annually,  ~  67,000  new  investments  2012   Angel  groups  (a  dozen  greater  Boston,  two  dozen  NE)  ~10-­‐15%,     Informal  networks  &  one-­‐Ome-­‐investors  ~15-­‐20%,     Super  angels  ~25-­‐30%,     Family  offices  ~35-­‐45%   6
  7. 7. Alternate Sources of Funding •  Business  Plan  CompeOOons  and  Accelerators   –  Many  firms  gain  enough  for  some  product  compleOon  steps     •  Revenue  –  Best  of  all    (Bootstrapping)   –  Revenue  history  opens  more  types  of  debts   –  Pre-­‐payments   •  Vendors,  partners  and  customers   –  Including  NRE  to  build  joint  product   –  Great  source  of  quick  capital  for  markeOng  or  sales  collaboraOon   •  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  converOble  notes   •  Crowdfunding   –  Pre-­‐sales  or  (coming  soon?)  equity   7
  8. 8. Business Models - Software Early  revenue  –  usually  more  capital  efficient   •  Sokware  license   •  SaaS   •  SubscripOon  fees   •  AcOon  or  TransacOon  fees   Later  revenue  –  usually  less  capital  efficient   •  Two-­‐sided  markets   •  “Freemium”   •  AdverOsing   •  Virtual  goods   •  “Big  data”   •  “Eyeball  plays”   8
  9. 9. Business Models - Other Consumer  goods   •  Brand  building   •  Manufacturing   •  DistribuOon   Life  sciences   •  Healthcare  IT   •  Medical  devices   •  PharmaceuOcals   9
  10. 10. High-Growth Funding •  Great  team   •  Great  idea  /  innovaOon   •  Large  market   •  Scalability   •  Great  ROI   The  choice  of  funding  can  be  cut  two  ways:     •  Choose  your  business  model  based  on  preferred  funding/exit   •  Choose  your  funding  based  on  preferred  business  model   10
  11. 11. Stages •  Crystal: Think out the issues –  Mostly about the TEAM, how you think, how you act, what you bring to the party –  Mentors / advisors critical: “socialize the company” •  Demonstrate Product –  Prototype / MVP –  Early customer acceptance / purchase •  Market Entry –  Cost metrics –  Scalability –  Beware the early adopter! •  Growth –  Repeatable cost model –  “Fuel the fire” 11  
  12. 12. Funding by Stage Stage   Crystallize  Idea   and  Early   DemonstraIon   Demonstrate   Product  &   Market   Interest   Market  Entry   and  Early   Growth   Early  Scaling   Repeatable   Growth   Growth   Capital   Source   Founders,   Friends,  Family,   Grants,   Kickstarter,  etc.   Accelerators,   Individual   Angels,  many   others  now   “exploring”   Angel  Groups,   Angel  Group   SyndicaOon,   Micro-­‐Cap   Funds   VCs,  Angel   Group   SyndicaOon,   Micro-­‐Cap   Funds   VCs   $25K  -­‐  $100K   $100K  -­‐  $500K   $500K  -­‐  $1M   $5M  –  as   needed   as  needed   Investment   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 ….     These  2  need   sophisOcated  growth  plans     12  
  13. 13. Gaps •  At each stage you need to identify the gaps that inhibit growth –  –  –  –  –  Product Personnel Promotion Plan Profits •  A strong investor can help with each of these –  Money addresses many problems –  Advice and mentorship solve others –  Industry connections can be key 13  
  14. 14. Language •  In order to build your business, you need to speak the language –  This is critical in thinking about your business •  Things like margins, CCA, LTV, MVP, viral coefficient •  Terms of art from your own industry –  Terms of the investment art •  •  •  •  •  •  •  •  Equity versus Convertible Debt Valuation Preference Governance Representations Restrictive Covenants Cap tables Etc, etc. 14