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Today Funding your venture (45')


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Today Funding your venture (45')

  1. 1. <ul><li>Today </li></ul><ul><li>Funding your venture (45’) </li></ul><ul><li>Work Session- Financing proposal, overall plan preparation (60’) </li></ul><ul><li>Mon- 3/2 </li></ul><ul><li>Work Session- Preparation of Commercialization Plan Presentation (60’) </li></ul><ul><li>Paul Gulick “Lessons Learned from Serial Entrepreneur” (60’) </li></ul><ul><li>Reminders: </li></ul><ul><li>1 ) Review your plan with mentor and inventor </li></ul><ul><li>2) Invite your mentor and inventor to class presentations- next Wed 3/5 </li></ul>What’s Next????
  2. 2. The home stretch… Wed- 3/4 In class presentations of Commercialization Plans (~ 12 min each + questions) Mentors and Inventors Invited Mon- 3/9 Work Session- Revision of Commercialization Plan based on Feedback Wed- 3/11 (5:00-7:00 pm) Judged Competition- Portland Business Roundtable
  3. 3. Where do I find money? You need to know where to look! You need to pick the right source for your point in the funding life cycle.
  4. 4. Capital Sources for Formation and Growth From Bill Newman, NTV <ul><li>Commercialization Grants </li></ul><ul><li>- SBIR/STTR, SBA </li></ul><ul><li>- OSU venture fund </li></ul><ul><li>- NEC </li></ul>R&D Gov’t, Industry, Academic Ongoing Growth Public Markets Formation <ul><li>The “3 F’s” (friends, </li></ul><ul><li>family, & fools) </li></ul>Angel Ins t itutional <ul><li>Angel Investors </li></ul><ul><ul><li>- “early and often” </li></ul></ul><ul><ul><li>- Individuals, unorganized, </li></ul></ul><ul><ul><li> limited follow-on </li></ul></ul><ul><ul><li>- 2003: $18.1 billion </li></ul></ul><ul><ul><li>invested, 42,000 deals </li></ul></ul><ul><li>Venture Capital funds </li></ul><ul><ul><li>- Home run mentality </li></ul></ul><ul><ul><li>- Significant investment $$; </li></ul></ul><ul><ul><li>governance and oversight </li></ul></ul><ul><ul><li>- 2003: 915 funds, $18.2 billon </li></ul></ul><ul><ul><li>invested, 2,700 deals </li></ul></ul>“ Private Equity”
  5. 5. Startup Capital Sources <ul><li>Government & Incentive </li></ul><ul><ul><li>SBIR/STTR, OSU venture fund, ONAMI gap, etc </li></ul></ul><ul><li>The “3 F’s” (friends, family, & fools) </li></ul><ul><li>Angel Investors </li></ul><ul><ul><li>“ early and often” </li></ul></ul><ul><ul><li>Individuals, unorganized, limited follow-on </li></ul></ul><ul><li>Venture Capital funds </li></ul><ul><ul><li>Home run mentality </li></ul></ul><ul><ul><li>Significant investment $$; governance and oversight </li></ul></ul>NTV Obvious
  6. 6. Often Overlooked Sources NTV <ul><li>Organic growth (bootstrap) </li></ul><ul><li>Consulting-based funding </li></ul><ul><li>Customer deals (NRE) </li></ul><ul><li>Strategic partner deals </li></ul>
  7. 7. Government: SBIR and STTR <ul><li>The Small Business Innovative Research Grants (SBIR) and Small Business Technology Transfer (STTR) can be good sources of start up funds </li></ul><ul><li>SBIR created in 1982 </li></ul><ul><li>Requires 2.5% of all “extra-mural” research funds must be set aside for small business development ($2B in 2005) </li></ul><ul><li>Many government agencies participate: DOD, NIH, NASA, DOE, NSF, DOC, DoAg, EPA, DOE, DOT. Each agency has structured their program differently </li></ul><ul><li>There are some differences in SBIR and STTR with respect to required partnerships and percentage of total funds allocated </li></ul><ul><li>This a grant, NOT a loan. The small business is not required to repay. Also, the company can allocate up to 7% of the grant to profit. </li></ul>
  8. 8. SBIR/STTR Funding <ul><li>Structured around a 3 phase process </li></ul><ul><ul><li>Phase 1- feasibility ($50K-$100K, 6 mo) </li></ul></ul><ul><ul><li>Phase 2- prototype ($500K-$750K, 2 yr) </li></ul></ul><ul><ul><li>Phase 3- commercialization (not funded by government directly) </li></ul></ul><ul><li>Can be either a grant or contract </li></ul><ul><ul><li>Grant- no expectation of a product that funding agency will buy </li></ul></ul><ul><ul><li>Contract- expectation that in Phase 3 that agency will be a customer </li></ul></ul>
  9. 9. SBIR/STTR Funding <ul><li>Success rates vary among agencies </li></ul><ul><ul><li>NIH: Funds 1 out of 3 proposals </li></ul></ul><ul><ul><li>NSF: Funds 1 out of 13 proposals </li></ul></ul><ul><li>Most require a PI (principal investigator) with a good academic track record </li></ul><ul><li>41% of SBIR awardees are 2-9 employees </li></ul><ul><li>33% of SBIR awardees are new </li></ul><ul><li>More information is available at the website: , </li></ul>
  10. 10. OSU Venture Fund <ul><li>The State of Oregon passed a bill in 2005 for the purpose of “facilitating the commercialization of university R&D” </li></ul><ul><li>This fund is to provide </li></ul><ul><ul><li>Capital for university entrepreneurial programs </li></ul></ul><ul><ul><li>Opportunities for students to gain experience in applying research to commercial activities </li></ul></ul><ul><ul><li>Proof-of-concept funding </li></ul></ul><ul><ul><li>Entrepreneurial opportunities for those wishing to convert research into commercial enterprises </li></ul></ul><ul><li>It is funded by credits applied to state income taxes on a voluntary basis- </li></ul><ul><li>OSU received $5.3M last year </li></ul>
  11. 11. Other OSU Specific Funding <ul><li>OSU Venture Fund ($5.3M last year’s total) </li></ul><ul><li>ONAMI Gap Funding (individual grants up to $250K) </li></ul><ul><li>New Enterprise Challenge (AEP- $17 K total) </li></ul><ul><li>OSU Foundation Grants (College of Science- $5K each) </li></ul>
  12. 12. Funding Cycles and Timing <ul><li>Investor funding typically occurs in “rounds” of increasing amount </li></ul><ul><ul><li>First, second, mezzanine, etc </li></ul></ul><ul><ul><li>Subsequent rounds of funding can dilute the value of initial investors </li></ul></ul><ul><li>Tie funding to specific milestones- </li></ul><ul><ul><li>e.g. Prototype complete, beta testing complete </li></ul></ul><ul><ul><li>investors like to feel privy to new information to maximize their benefit and minimize risk </li></ul></ul>NTV
  13. 13. Typical Investment and Valuation, by Stage NTV Stage Objective Revenue Valuation Investment Seed Proof of concept 0 Below $5M $1M or less Early Product validation <$1M $5 – 10M $5M Growth Business validation <$10M $10 – 15M $5 – 10M Later Expansion $10M up $15M up $10M up
  14. 15. Raising Money From Angels <ul><li>Characteristics of a Likely Angel </li></ul><ul><ul><li>High Net Worth </li></ul></ul><ul><ul><li>Recent Liquidity Event </li></ul></ul><ul><ul><li>Industry Knowledge </li></ul></ul><ul><ul><li>Relationship Oriented </li></ul></ul><ul><li>Lead Versus Followers </li></ul><ul><ul><li>Target and Negotiate the Investment with a Few Lead Investors </li></ul></ul><ul><li>Angel Networks (OEN, WIN, WVN) </li></ul><ul><li>Only Take Money from Accredited Investors </li></ul><ul><li>Current Climate </li></ul>
  15. 16. Local Angel Networks <ul><li>There are MANY local groups of investors and forums who would like to hear about your ideas… </li></ul><ul><li>SWOT (monthly Corvallis group of business leaders) </li></ul><ul><li>Willamette Valley Investors Network (WVIN)- May 14 th conference ($150K+) at CH2M Hill Alumni center </li></ul><ul><li>Oregon Entrepreneurs Network- March 15 th Annual Meeting in Portland ($250K+) </li></ul><ul><ul><li> </li></ul></ul><ul><li>Portland Angel Network (PAN) </li></ul><ul><li>Women’s Investment Network (WIN) </li></ul>
  16. 17. Venture Capital <ul><li>What is a Venture Capital Fund? </li></ul><ul><ul><li>“ Mutual fund” for private, illiquid securities with 10 year life (in general); generally unproven businesses </li></ul></ul><ul><li>Who are investors in a VC partnership? </li></ul><ul><ul><li>Who has a 10-year investment horizon and can lose 100% of capital? </li></ul></ul><ul><ul><ul><li>Pension funds, foundations, endowments, trusts, banks, insurance companies, “some” high net worth individuals, corporations </li></ul></ul></ul><ul><li>Venture Capital </li></ul><ul><ul><li>Specialized: <2% of businesses formed (SBA) </li></ul></ul><ul><ul><li>Geographic concentration: 33% Silicon Valley, 50% California, 67% California and New England (role of research institution) </li></ul></ul><ul><ul><li>VC $$: metro=99.2%; non-metro=0.8%; rural=0% (infrastructure) </li></ul></ul><ul><ul><li>Home run mentality: 10% = 10x, 30-50% = write-off </li></ul></ul><ul><ul><li>Investment characteristics: high growth potential, capital efficiency, exit potential </li></ul></ul><ul><ul><li>Significant investment $$; governance and oversight </li></ul></ul>
  17. 18. Good and Bad Venture Deals <ul><li>“ faster, better, cheaper” </li></ul><ul><ul><li>if so, look for 10X; “move to the next curve” </li></ul></ul><ul><li>“ brave new world” </li></ul><ul><ul><li>not just new, but necessary </li></ul></ul><ul><li>“ are the dogs eating the dog food” </li></ul><ul><ul><li>do customers want your product? </li></ul></ul><ul><li>“ science projects” (also known as ratholes) </li></ul><ul><ul><li>is there a product and market in the foreseeable future? </li></ul></ul><ul><li>“ putting lipstick on the pig” </li></ul><ul><ul><li>no, really, this is a great deal! </li></ul></ul>
  18. 19. Industry Structure Matrix NTV Barriers to Entry High Low Switching Costs High Low
  19. 20. Industry Structure Matrix NTV Barriers to Entry High Low Switching Costs High Low <ul><li>Monopoly / oligopoly </li></ul><ul><li>Excess profits </li></ul><ul><li>Operating systems, Jet Engines, Life Sciences </li></ul>
  20. 21. Industry Structure Matrix NTV Barriers to Entry High Low Switching Costs High Low <ul><li>Monopoly / oligopoly </li></ul><ul><li>Excess profits </li></ul><ul><li>Intense competition </li></ul><ul><li>Concentrated industry </li></ul><ul><li>Low profitability / collusion </li></ul><ul><li>Commodity items </li></ul><ul><li>Airlines, auto, resource… </li></ul>
  21. 22. Industry Structure Matrix Barriers to Entry High Low Switching Costs High Low <ul><li>Monopoly / oligopoly </li></ul><ul><li>Excess profits </li></ul><ul><li>Intense competition </li></ul><ul><li>Concentrated industry </li></ul><ul><li>Low profitability / collusion </li></ul><ul><li>Commodity items </li></ul><ul><li>Fragmented industry </li></ul><ul><li>Growth via consolidation </li></ul><ul><li>Services </li></ul>
  22. 23. Industry Structure Matrix Barriers to Entry High Low Switching Costs High Low <ul><li>Monopoly / oligopoly </li></ul><ul><li>Excess profits </li></ul><ul><li>Intense competition </li></ul><ul><li>Concentrated industry </li></ul><ul><li>Low profitability / collusion </li></ul><ul><li>Commodity items </li></ul><ul><li>Fragmented industry </li></ul><ul><li>Growth via consolidation </li></ul><ul><li>Price parity </li></ul><ul><li>Intense competition </li></ul><ul><li>Margin pressure </li></ul><ul><li>Internet </li></ul>
  23. 24. Raising Institutional Capital: Overview of the Process <ul><li>Preparing the business plan </li></ul><ul><ul><li>A “business plan” or a plan for the business? </li></ul></ul><ul><li>Presenting the business plan </li></ul><ul><ul><li>Initial screening/filtering: status and fit </li></ul></ul><ul><li>Due diligence process </li></ul><ul><ul><li>Validation; based on interviews, research, expert opinion </li></ul></ul><ul><ul><li>Market, need, defensibility, management </li></ul></ul><ul><li>Valuation </li></ul><ul><ul><li>A negotiation </li></ul></ul><ul><li>Term sheet </li></ul><ul><li>Ongoing relationship </li></ul><ul><ul><li>Board of Directors, introductions, strategic advice </li></ul></ul><ul><li>Exit strategy </li></ul>NTV
  24. 25. Investment Evaluation: Key Issues <ul><li>Filtering process </li></ul><ul><ul><li>100:10:1 </li></ul></ul><ul><ul><li>invention : product : business : platform : investment </li></ul></ul><ul><li>Validation </li></ul><ul><ul><li>Attractive Market Opportunity </li></ul></ul><ul><ul><ul><li>size … growth … competition </li></ul></ul></ul><ul><ul><li>Compelling Need </li></ul></ul><ul><ul><ul><li>breakthrough solution </li></ul></ul></ul><ul><ul><li>Proprietary Position </li></ul></ul><ul><ul><ul><li>technology … product … market </li></ul></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><ul><li>visionary, committed, market-oriented </li></ul></ul></ul>NTV
  25. 26. TOP 10: What VCs Don’t Want to Hear <ul><li>Our projections are conservative </li></ul><ul><li>Our market is $$$ billion and we only need 0.00001% of it to succeed </li></ul><ul><li>We are in final negotiations with a large partner </li></ul><ul><li>We will sell only common stock to investors </li></ul><ul><li>We have no competition </li></ul><ul><li>Our technology cannot be duplicated </li></ul><ul><li>“ XYZ Co.” (a Fortune 100) is too slow moving </li></ul><ul><li>We are creating / changing the market and our product will become the standard </li></ul><ul><li>We have first mover advantage </li></ul><ul><li>Our goal is to attain 2% market share </li></ul>NTV
  26. 27. New Markets are Hard to Gauge <ul><li>&quot;This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is, inherently, of no value.&quot; </li></ul><ul><ul><li>Western Union internal memo, 1876. </li></ul></ul><ul><li>&quot;The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?&quot; </li></ul><ul><ul><li>RCA: David Sarnoff's associates in response to his urgings for investment in the radio in the 1920s </li></ul></ul>NTV
  27. 28. NTV New Markets are Hard to Gauge <ul><li>&quot;I think there is a world market for, maybe, five computers.&quot; </li></ul><ul><ul><li>Thomas Watson, chairman of IBM, 1943 </li></ul></ul><ul><li>&quot;There is no reason anyone would want a computer in their home.&quot; </li></ul><ul><ul><li>Ken Olson, Digital Equipment Corp.,1977 </li></ul></ul><ul><li>&quot;640K ought to be enough memory for anybody.&quot; </li></ul><ul><ul><li>Bill Gates, 1981 </li></ul></ul>
  28. 29. NTV The Second Mouse Gets the Cheese
  29. 30. Selling is What It’s All About <ul><li>“ Don't worry about people stealing your ideas. If your ideas are any good, you'll have to ram them down people's throats.” </li></ul>NTV Howard Aiken Computer Pioneer
  30. 31. OSU Ideas on their way… <ul><li>“ Nuke in a box” (recently received VC investment- ‘06 MBA project) </li></ul><ul><li>Nanobits, Inc (received 2007 ONAMI gap funding-evolved from ‘06 undergrad class) </li></ul><ul><li>I5 Logic, Inc (recently received large VC investment- from ‘06 undergrad class) </li></ul><ul><li>Printable electronics (received 2008 OSU Venture Grant- from ‘07 undergrad class) </li></ul>