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  1. 1. Alternatives to Venture Capital for financing technology commercialization February 28, 2003
  2. 2. Corporate Finance Advisors (CFA) <ul><li>Specialize in assisting companies using a combination layering of equity, debt, subordinated debt, and other alternative financing sources for rapidly growing businesses </li></ul>
  3. 3. My Background <ul><li>Sam Thacker </li></ul><ul><li>Over $350 million in financing arranged since 1994 </li></ul><ul><li>Focus on structuring mix of debt / equity </li></ul><ul><li>Largest single deal $11 million </li></ul><ul><li>Average deal $1.5 - $2 M </li></ul>
  4. 4. Today’s Objective <ul><li>Introduce you to alternatives to classic venture capital and how they can be used </li></ul><ul><li>Provide “real world” examples of how the various alternatives to VC have been used </li></ul><ul><li>Challenge you to think differently about financing technology commercialization </li></ul>
  5. 5. Historical Foundation (pre 1990s) Government IBM 3M Etc. NASA Aerospace Defense
  6. 6. Changes in Financing 1988-1996
  7. 7. Grass Roots Financing Equipment Leasing Traditional LOC SBA Credit Card Angel Investor Construction Asset-Based SBIC ? Factoring Home Equity Conventional
  8. 8. Financing Pyramid IPO Institutional VC Early seed stage (SBICs) Larger-scale commercial loans Band of Angels Friends & Family Big-time VC Corp VC, Strategic Alliance Private Placement (PPM) Reg. D SBA / Microloan Comm Loans Personal Funds Angels (wealthy families), individuals
  9. 9. Advent of Small Business Investment Companies (SBICs) <ul><li>Small Business Investment Companies (SBICs) have provided approximately $27 billion in long-term debt and equity growth capital to nearly 90,000 small U.S. companies since 1959. </li></ul>
  10. 10. SBIC Success Stories <ul><li>Intel Corporation </li></ul><ul><li>Staples, Inc. </li></ul><ul><li>Extreme Networks, Inc. </li></ul><ul><li>Kronos, Inc. </li></ul>                                                                                                                                 
  11. 11. Venture Capital Fund Investments 1995-2001 $ Billions
  12. 12. Nature of the Technology <ul><li>Enabling </li></ul><ul><li>Disruptive </li></ul><ul><li>Can a company be formed around the technology? </li></ul><ul><ul><li>Companies vs technologies </li></ul></ul>
  13. 13. Enabling Technology <ul><li>Easy to understand implications </li></ul><ul><li>Fits current value chain </li></ul><ul><li>Incumbents will easily finance </li></ul>
  14. 14. Disruptive Technology <ul><li>Will not be understood at first </li></ul><ul><li>New markets need to be developed </li></ul><ul><li>System ‘anti-bodies’ kick in </li></ul>
  15. 15. Financing Companies vs. Financing Technology <ul><li>Companies are free standing </li></ul><ul><li>Technology needs a home </li></ul><ul><li>Companies are easier </li></ul><ul><li>Power of Strong Management </li></ul>
  16. 16. Investor / Lender expectations <ul><li>Value of Technology to “owners” </li></ul><ul><li>Liquidity </li></ul><ul><li>Risk vs. Reward </li></ul><ul><li>WIIFM? </li></ul><ul><li>Realistic expectations </li></ul>
  17. 17. Banks in the Financing Mix <ul><li>Debt, rarely equity </li></ul><ul><li>Three “Cs” of banking </li></ul><ul><ul><li>Character </li></ul></ul><ul><ul><li>Capacity </li></ul></ul><ul><ul><li>Collateral </li></ul></ul><ul><li>Cash Flow </li></ul>
  18. 18. “Venture Capital” Banks <ul><li>Silicon Valley Bank, Imperial Bank, etc. </li></ul><ul><li>Regularly provide debt / equity financing and take more risk than regular commercial bank. </li></ul><ul><li>Have high degree of expertise in technology </li></ul>
  19. 19. Balance Sheet Financing and Technology Commercialization <ul><li>Match financing method to asset being financed </li></ul><ul><li>Layer multiple types of methods to minimize equity dilution and mitigate risk </li></ul><ul><li>Understand key ratios </li></ul>
  20. 20. Current Asset Financing <ul><li>Purchase orders </li></ul><ul><li>Inventory </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Contracts </li></ul>
  21. 21. Financing Long-term Assets <ul><li>Equipment </li></ul><ul><li>FF&E </li></ul><ul><li>Real Estate </li></ul>
  22. 22. Intellectual and Intangible property <ul><li>Patents </li></ul><ul><li>Software </li></ul><ul><li>Goodwill </li></ul><ul><li>New GAAP rules </li></ul><ul><ul><li>SFAS 142 </li></ul></ul>
  23. 23. Mezzanine Debt Financing An investment of between $2 million and $20 million into a profitable company for a major expansion generally leading to an IPO in 3 to 18 months. <ul><li>Brick & Mortar Oriented </li></ul><ul><li>Strong EBITA </li></ul><ul><li>Strong track record of performance </li></ul>
  24. 24. Corporate Venture Money <ul><li>Why use this type of money? </li></ul><ul><ul><li>Few sources can have a profound impact on your outcome. </li></ul></ul><ul><ul><li>Less emphasis on strict investment criteria </li></ul></ul><ul><ul><li>A large strategic doesn’t mind being ‘first in’ on an investment round. </li></ul></ul><ul><ul><li>A large strategic looks very, very good on the cap table. </li></ul></ul>
  25. 25. Corporate Venture Money <ul><li>Example: $17B of Nortel’s recent writedown was from investments. </li></ul><ul><li>Corporations have different needs </li></ul><ul><li>Corporations are well versed in buy/make decisions. </li></ul><ul><ul><li>Equity ‘juices’ the deal </li></ul></ul>
  26. 26. Corporate Venture Money <ul><li>What makes you valuable? </li></ul><ul><ul><li>Technology is clearly yours </li></ul></ul><ul><ul><li>You are the expert </li></ul></ul><ul><ul><li>STRONG strategic component </li></ul></ul>
  27. 27. Corporate Venture Money <ul><li>The power of strategic intent </li></ul><ul><ul><li>Assume 5,000 wins </li></ul></ul><ul><ul><li>20000 engagements </li></ul></ul><ul><ul><li>Gross Revenue of $500M </li></ul></ul><ul><ul><li>Your product increases the wins by 10%. </li></ul></ul><ul><ul><li>Average win: $100,000 </li></ul></ul><ul><ul><li>New wins: 5,500 </li></ul></ul><ul><ul><li>Incremental Revenue: $50M </li></ul></ul>
  28. 28. Corporate Venture Money <ul><li>Techniques for finding the right strategic </li></ul><ul><ul><li>Who bears the cost of failure? </li></ul></ul><ul><ul><li>Who currently has the same customers as you? </li></ul></ul><ul><ul><li>Who wants the same customers as you? </li></ul></ul><ul><ul><li>Who has similar business/manufacturing processes </li></ul></ul>
  29. 29. Corporate Venture Money <ul><li>Top things to think about </li></ul><ul><ul><li>Strengths & Weaknesses </li></ul></ul><ul><ul><li>How do you create incremental revenue? </li></ul></ul><ul><ul><ul><li>Find the strategic connection </li></ul></ul></ul><ul><ul><li>Elephant on a leash </li></ul></ul>
  30. 30. Government Backed Programs <ul><li>Generally have a background agenda </li></ul><ul><li>Lift for specific: </li></ul><ul><ul><li>Industries </li></ul></ul><ul><ul><li>Geographic areas </li></ul></ul><ul><ul><li>Socio-economic </li></ul></ul><ul><ul><li>Gaps in banking system </li></ul></ul>
  31. 31. Government Backed Programs (SBA) <ul><li>Small Business Administration ( ) </li></ul><ul><li>Does not loan money </li></ul><ul><li>Allows lending institutions to consider higher risk loans Houston : ~$330M (2001) </li></ul>
  32. 32. Government Backed Programs (SBA) <ul><li>Several SBA programs </li></ul><ul><ul><li>Programs target specific businesses/goals </li></ul></ul><ul><li>Guarantee up to 80% of 100K </li></ul><ul><li>75% of > 100K, max 750K </li></ul><ul><li>Loans are made at the regional level </li></ul><ul><li>Collateral is important </li></ul>
  33. 33. Government Backed Programs (SBIC) <ul><li>Venture Investment Companies licensed by the SBA </li></ul><ul><li>Private Capital + Government Lending </li></ul><ul><ul><li>$4.8B in 2001 </li></ul></ul><ul><li>Profit Motivated (25 - 46% IRR) </li></ul>
  34. 34. Government Backed Programs (SBIC) <ul><li>Fill the gap just under typical VC financing. </li></ul><ul><li>Will be tough just like VC’s </li></ul><ul><li>Have specific focus’s </li></ul><ul><li>Provide expertise </li></ul>
  35. 35. Government Backed Programs (Local EDC’s) <ul><li>Focus on job creation / tax base </li></ul><ul><li>Regaining popularity </li></ul><ul><li>Community feels able to influence own destiny </li></ul>
  36. 36. Government Backed Programs (State Focus) <ul><li>Driven to attract certain sub-segments like biotechnology & medicine </li></ul><ul><li>Start off where local EDCs end, often cooperatively </li></ul><ul><li>Often involves academia / research </li></ul>
  37. 37. Philanthropic Investments <ul><li>Benefit society / mankind </li></ul><ul><li>Examples – drug discovery, biotechnology, medical, and learning technology </li></ul><ul><li>Find an insider to help you find sources </li></ul>
  38. 38. Angels and Angel Groups <ul><li>Tend to be either vertically or geographically focused </li></ul><ul><li>Small funds for early stage </li></ul><ul><li>Collective due diligence </li></ul>
  39. 39. Academic – Corporate “Partnership” <ul><li>“In kind” contribution may substitute for $$$ </li></ul><ul><li>Understand academic institution’s need </li></ul><ul><li>“Share” / collaborate IP creation </li></ul>
  40. 40. Incubators and Accelerators <ul><li>Many rethinking focus </li></ul><ul><li>Understand strengths & weaknesses </li></ul><ul><li>Have realistic expectations </li></ul>
  41. 41. Public vs. Private Company <ul><li>Current trend in becoming public via “reverse merger” </li></ul><ul><li>Do your homework, learn strengths / weaknesses </li></ul><ul><li>What reverse mergers do and don’t do </li></ul>
  42. 42. Conclusion <ul><li>Think creatively when considering financing sources for your project </li></ul><ul><li>When possible, layer financing methods to protect shareholder value while balancing speed to market </li></ul><ul><li>Be persistent and look at all options </li></ul>