Funding Options for High Growth Consumer Product Companies                                           September 6, 2012
Today’s	  Experts	  •  Jeremy	  Halpern	  	         –    Partner,	  Nu8er	  McClennen	  &	  Fish	  LLP	  –	  Top	  10	  Bo...
Funding	  the	  Company	                   Assuming	  you	  plan	  to	  be	  	  a	  “high	  growth”	  consumer	  products	...
Entrepreneurship	  comes	  in	  many	  types	  	  	                                                               HIGH	   ...
Close	  Up:	  Extreme	  High	  Growth	  vs	  High	       Growth	                               M&A	  or	       	          ...
High	  Growth	  Company	  •    DisrupXve	  InnovaXon	  CharacterisXcs	                                 with	  Strong	  val...
High	  Growth	  Company	  •                              CharacterisXcs	       Large	  Total	  Addressable	  Market	  (TAM...
Capital	  Source	  View	                                                                                                  ...
Match	  Funding	  Sources	                                                        HIGH	             EXTREME	  SOCIAL	  VEN...
Non-­‐Equity	  Sources	  •  Accelerators	  (some)	  •  Kickstarter	  type	  donaXons	  •  Pre-­‐orders	  from	  end-­‐cust...
Case	  Studies	  •  Pre-­‐orders	  from	  end-­‐customers	       –      Company	  sold	  products	  online	  with	  a	  14...
Equity	  Sources	  •  Accelerators	  (some)	  •  Friends	  &	  Family	  	  Common	  Theme:	  SupporXng	  success	  of	  th...
Specialized	  Equity	  Sources	  •  Angel	  groups	  	        –  CircleUp	  	        –  Investors	  Circle	  (Sustainable	...
High	  Growth	  Capital	  by	  Stage	                         &Amount	                                                    ...
Capital	  Sources:	  Size	  &	  Cost	                                                           Angels	                 An...
So	  What	  is	  Equity	  Anyway?	  •  Stock	  =	  right	  to	  residual	  economic	  interests	  upon	  sale/liquidaXon	 ...
Equity	  Type	  Comparisons	                              Solo	  Angel	         Super	  Angel	         Angel	  Group	     ...
Equity	  Type	  Comparisons	                          Solo	  Angel	     Super	  Angel	     Angel	  Group	     MicroVC	    ...
Structure	  of	  an	  Equity	  Deal	  •  Company	  and	  Investors	  agree	  on	  a	  “pre-­‐money	     valuaXon”	  (PM)	 ...
Understand	  the	  Funding	  Path	  •  We’re	  talking	  about	  1st	  funding	  here	  •  What	  is	  the	  probable	  co...
Understand	  the	  Funding	  Path,	                      cont.	  •  What	  if	  things	  aren’t	  going	  so	  well?	     ...
What	  about	  ConverXble	  Debt?	  •  Many	  seed-­‐stage	  companies	  use	  an	  instrument	     called	  ConverXble	  ...
ConverXble	  Debt	  provides	  •                               OpXonality	       ConverNble	  Debt	  =	  unsecured	  debt	...
Basic	  Structure	  of	  ConverXble	  Debt	  •  Investor	  loans	  $	  to	  Company	  an5cipa5ng	  another	  round	  of	  ...
ConverXble	  Debt	  –	  ComplicaXons!	  •  What	  if	  only	  a	  li8le	  money	  comes	  in?	  •  When	  does	  the	  deb...
ConverXble	  Debt	  –	  SoluXons?	  •  Caps	  and	  Floors	       –  May	  defeat	  purpose	  with	  signaling	  •    Defa...
ConverXble	  Debt	  –	  Worse	  than	  •                                 Equity?	   2008)	       MulXple	  liquidaXon	  pr...
www.TheCapitalNetwork.org	  
Upcoming	  Programs	  Sep	  18	     Financial	  ProjecXons	  for	  PresentaXons	                  	  Oct	  16	     Buildin...
Leveraging The Crowd
Crowdfunding	  v.	  CrowdinvesXng	      Perks	         Debt/Equity	  Financing	  
Crowdfunding	  is	  a	  phenomenon	  Global	  Crowdfunding	  Market	  USD	  Millions	                                     ...
Perk	  Crowdfunding	  •  DonaXons	  or	  pre-­‐product	  sales	  •  Low	  cost	  way	  to	  test	  the	  market	  	  	  • ...
Kickstarter	  v.	  Indiegogo	                 	                             	                 	                           ...
Crowd	  InvesXng	  •  Enabled	  by	  the	  JOBS	  Act	  •  Debt	  or	  equity	  investment	  	  •  Company	  focused	  not...
Crowd	  investors	  add	  daily	  value	  Crowd	  investors	  add	  everyday	  operaXonal	  value.	  	  Crowd	  investors	...
Why	  Seek	  Crowd	  investment?	  	  •  Structured	  to	  compliment	  Angel	  and	  VC	  	  •  Access	  hundreds	  of	  ...
QuesXons?	                   	  	            Mike	  Norman	                    	         Mike@wefunder.com	               ...
Debt Alternatives to VC Financing                                      Dan Allred                             Silicon Vall...
Funding	  sources:	  the	  lines	  are	  blurring	                          TradiXonal	                           VC	  Fun...
Debt	  vs.	  Equity	  Debt 	  	                                       Equity	  •  Lower	  risk:	  first	  money	  to	      ...
Primary	  uses	  of	  debt	  •  Financing	  assets	     –  Working	  capital	     –  Fixed	  assets	  •  Financing	  growt...
Think	  like	  a	  lender	  The	  tradiXonal	  credit	  model	     –  Primary	  source	  of	  repayment:	  cash-­‐flow	    ...
Think	  like	  a	  “venture	  lender”	  A	  twist	  on	  the	  tradiXonal	  credit	  model	      –  Primary	  source	  of	...
Think	  like	  a	  working	  capital	  lender	  Another	  twist	  on	  the	  tradiXonal	  credit	  model	      –  Primary:...
Working	  capital	  lines	  of	  credit	  •  Uses	  of	  capital	        –  Financing	  working	  capital	  assets	  such	...
Recurring	  revenue	  lines	  of	  credit	  •  Uses	  of	  capital	        –  MoneXze	  value	  associated	  with	  recurr...
QuesXons?	                        	  	                  Dan	  Allred	             Silicon	  Valley	  Bank	               (...
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Funding options for consumer products companies

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The Capital Network's Funding Options for Consumer Products Companies presented at MassChallenge on September 13, 2012
Speakers:
Jeremy Halpern, Nutter McClennen and Fish LLP
Mike Norman, WeFunder
Dan Allred, Silicon Valley Bank

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Funding options for consumer products companies

  1. 1. Funding Options for High Growth Consumer Product Companies September 6, 2012
  2. 2. Today’s  Experts  •  Jeremy  Halpern     –  Partner,  Nu8er  McClennen  &  Fish  LLP  –  Top  10  Boston  Law  Firm   –  Director,  MassVentures  –  Venture  Capital  Firm  owned  by  the  Commonwealth   –  Adjunct  Professor,  TuLs  University,  Entrepreneurial  Leadership   –  Director,  The  Capital  Network   –  Angel  Investor   –  Former  entrepreneur   –  Geek     2  
  3. 3. Funding  the  Company   Assuming  you  plan  to  be    a  “high  growth”  consumer  products  company…     What  are  your  funding  opXons?    
  4. 4. Entrepreneurship  comes  in  many  types       HIGH   EXTREME   SOCIAL  VENTURE   NORMAL  GROWTH   GROWTH   HIGH  GROWTH   COMPANY   COMPANY   COMPANY   COMPANY   •  Goal is to fulfill •  Includes all •  Company can •  Growth profile a social need service grow fast (on-line) ultra-scalable businesses or has a scalable •  Has mission system •  Team focus is exit orientation •  Exploiting a local market need •  Team often •  Revenue $40M+ •  Team needs to motivated by exit support with lots of room •  Team has ‘great for growth (5 yr.) mission jobs’ •  $10m revenue in •  Growth profile 5 yrs & market •  Based on $20M+ often one •  Growth by adding size allows investment resources one by significant resource at a additional growth •  Exit targeted to time one •  Exit will be based •  Capital efficient IPO or by ‘large’ •  Exit …much total investment M&A event harder to find on value of cash fit flow (mature biz.) $2-4M •  Exit by M&A 4
  5. 5. Close  Up:  Extreme  High  Growth  vs  High   Growth   M&A  or     IPO   Later  VC   Capital  Needs   Rounds   High   Formal   Risk   Venture   Capital   M&A      Angels  or   Accelerators  or   Angel  Group  (or   Micro-­‐cap   Micro-­‐cap)   funds      Angels  or   SyndicaNon   Friends,   Family  &   Accelerators  or   Micro-­‐cap   Founders   Business   Low     funds     Friends,   Angels   Risk   Extreme  High   Family  &   Growth   Founders   Time    High  Growth  Crystallize   Demonstrate   Early  Scaling   Sustained   Ideas   Product   Market  Entry   5     Growth   Growth  
  6. 6. High  Growth  Company  •  DisrupXve  InnovaXon  CharacterisXcs   with  Strong  value  proposiXon   –  CorrelaXon  between  Large  Unmet  Need  :  SoluXon   –  How  do  you  define  “need”  for  brand  companies  •  High  Margin  Product  (RaXo  of  Revenue  :  COGS)     –  SomeXmes  Massive  Volume  Products  where  innovaXon  is  incremental    •  High  Rate  of  Revenue  Growth  over  sustained  period     –  CauXon  against  fad  products  •  Scalable  (Fixed  cost  is  a  low  percent  of  Revenue)   –  Usually  markeXng  and  distribuXon  are  the  big  spends  •  No  major  barriers  to  conXnued  growth  (ex.  blocking  IP;  geography;   regulatory)     –  Access  to  distribuXon  networks  is  oLen  a  concern  •  Repeatable  sales  and  distribuXon  model  with  many  credit  worthy   customers   –  Is  this  a  direct  or  indirect  model     6  
  7. 7. High  Growth  Company  •  CharacterisXcs   Large  Total  Addressable  Market  (TAM)     –  SegmentaXon  and  key  understanding  of  target  customers  •  Defensible  innovaXon  able  to  withstand  compeXXon  and  changing   condiXons     –  Is  this  patent,  trademark  or  “experience”/usability  •  Capital  efficiency  within  the  verXcal   7  
  8. 8. Capital  Source  View   HIGH   EXTREME   NON  PROFIT   SOCIAL  VENTURE   NORMAL  GROWTH   GROWTH   COMPANY   COMPANY   HIGH  GROWTH   ORGANIZATION   (COMPANY)   (COMPANY)   Risk  /  Return   Return  on  Debt   Return  on  Equity  Impact  /  Tax  Write  off   Income   High  Return   Debt-­‐   Equity  –   Charity  $$   Pay  it  back   Ownership  stake   Fixed  Amounts     %  of  Future  Value       8  
  9. 9. Match  Funding  Sources   HIGH   EXTREME  SOCIAL  VENTURE   NORMAL  GROWTH   GROWTH   HIGH  GROWTH   COMPANY   COMPANY   COMPANY   COMPANY  •  Friends •  Friends family, •  Angels Early on family, founders •  Angel Groups •  Accelerators founders •  Debt Bank and •  Angel Group •  Individual Angels•  Charity$$ other Syndication •  Micro Cap VCs•  Crowds (Kick- •  (Future) Crowd •  Angel List •  Seed from VC starter) funding (portal style) •  Micro-cap Funds Later stages•  Impact Angels •  (Future) Crowd •  Venture Funds•  (Future) funding (portal Crowd funding •  Strategic VCs style) (portal style) •  Angel •  Increasingly Syndication Strategic Corporate VCs 9  
  10. 10. Non-­‐Equity  Sources  •  Accelerators  (some)  •  Kickstarter  type  donaXons  •  Pre-­‐orders  from  end-­‐customers  •  Credit  from  vendors  •  Strategic  VCs  •  Strategic  NREs  •  DistribuXon  Contracts    Common  Theme:    Providing  early  cash  in  exchange  for  a  be8er  commercial  opportunity       10  
  11. 11. Case  Studies  •  Pre-­‐orders  from  end-­‐customers   –  Company  sold  products  online  with  a  14  day  delivery  window   –  Company  collected  all  cash  up  front  via  credit  cards   –  Company  used  cash  to  pay  a  net  30  vendor  to  produce  goods   –  ProducXon  and  delivery  enabled  within  10  days.     Day  1:  Collect  Cash   –  IniXate  Order   Day  40:  Vendor  Paid   Day  10:  Order  Ships      •  Strategic  NREs   –  Strategic  partner  sold  large  devices;  one  key  customer  complaint  was   throughput  on  the  machine   –  Company  was  producing  a  consumable  product  that  would  work  on  mulXple   machines   –  Company  received  $600k+  of  NRE  cash  in  exchange  for  a  1  year  lead  on  its   compeXtors     –  Company  believed  that  reduced  buying  pool  only  limited  revenue  in  yr.  1  by   20%   11  
  12. 12. Equity  Sources  •  Accelerators  (some)  •  Friends  &  Family    Common  Theme:  SupporXng  success  of  the  entrepreneur;  business  terms  vary  •  Portal  Funding  •  Early  Angels  •  Super  Angels  •  Angel  Groups  •  Micro  VC  •  TradiXonal  VC  (1st  Round)  •  Private  equity  for  later  stage    Common  Theme:  All  are  looking  for   –  sale  (or  IPO)  of  the  Company  at  4-­‐10  x  original  investment   –  Capital  gains  treatment  on  all  sale  proceeds   –  PreferenXal  treatment  on  subopXmal  exit  versus  the  founders   12  
  13. 13. Specialized  Equity  Sources  •  Angel  groups     –  CircleUp     –  Investors  Circle  (Sustainable  products)  •  Private  Equity     –  TSG  Consumer  Partners   –  Baird  •  Inventory  or  Component  Financing  •  Vendor  Financing   –  manufacturing  partners  (credit  +/-­‐  Cash  for  long  term  lock)   –  prototyping  vendors   –  TesXng  and  design  vendors  •  Royalty  Financing   13  
  14. 14. High  Growth  Capital  by  Stage   &Amount   Private  Equity   TradiXonal  VC   Micro  VC   Angel  Groups   AngelList   Corporate  Venturing  Investment   Grants   Equipment  Financing   Size   Angels   Portal  Funding   Customers   Friends  &  Family   Vendors   Crowdfunding   Founder   Venture  Stage   14  
  15. 15. Capital  Sources:  Size  &  Cost   Angels   Angel  Groups   TradiXonal  VC   AngelList   Private  Equity   Micro  VC   Corporate  /  Strategic   Crowdfunding   Venture  Investment   Friends  &  Family   Portal  Funding   “Cost”   Founder   Venture   Bank   Debt   Loans   Vendors   Equipment  Financing   Personal   Loans   Customers   Grants   Investment  Size  
  16. 16. So  What  is  Equity  Anyway?  •  Stock  =  right  to  residual  economic  interests  upon  sale/liquidaXon  +   stockholder  voXng  rights  (usually  limited  to  Board  of  Directors  and  Sale  of   the  Company)  •  Preferred  Stock  =  right  to  be  paid  before  Common  Stock  ParXcipaXng  =   original  investment  PLUS  a  pro  rata  share  of  remainder  Non-­‐ParXcipaXng   =  original  investment  OR  a  pro  rata  share  •  Common  Stock  =  whatever  is  leL  aLer  all  other  creditors  and  preferred   stockholders  are  paid  •  Dividend  =  a  right  to  an  addiXonal  amount  upon  liquidaXon  measured  as  a   funcXon  of  Xme  x  percentage  of  original  investment  .  Ex.  6.0%  per  annum  •  OpNons  /  Warrants  =  Contracts  allowing  holder  to  purchase  an  amount  of   stock  in  the  future  at  a  pre-­‐determined  price  •  Control  Rights  =  Statutory  and  Contractual   16  
  17. 17. Equity  Type  Comparisons   Solo  Angel   Super  Angel   Angel  Group   MicroVC   VC  ValuaXons   High  relaXve  to   High  relaXve  to   Low  relaXve  to   Low  relaXve  to   Medium   stage   stage   stage   stage  Type  -­‐  Likely   Common   Conv  Note   Preferred   Preferred   Preferred  (less  likely)   (Warrants)   (Preferred)   (Conv  Note)   (Conv  Note)  Board  Seat   Maybe   1  or  none   1-­‐2  of  5  +/-­‐   1  of  5  +/-­‐   1-­‐2  of  5  +/-­‐   Observer   Observer   Observer  Audited   No   No   No  (reviewed)   Yes   Yes  Financials  NegaXve   No   SomeXmes   Yes   Yes   Yes  Covenants  PreempXve   No   SomeXmes   Yes   Yes   Yes  Rights  VerXcal   SomeXmes   Rarely   Some   Usually   Always  ExperXse   17  
  18. 18. Equity  Type  Comparisons   Solo  Angel   Super  Angel   Angel  Group   MicroVC   VC  Exit  Horizon   7  years   5  years   4  years   5  -­‐7  years   4-­‐5  years  (from  $  in)  Exit  Range   $20m+   $40m+   $50m+   $100m+   $250m+   18  
  19. 19. Structure  of  an  Equity  Deal  •  Company  and  Investors  agree  on  a  “pre-­‐money   valuaXon”  (PM)  which  leads  to  a  price  per  share  •  Investors  put  in  $X  •  Investors  then  own:  X  /  (X  +  PM)  of  the  company   Example:   PM  =  $1M   X  =  $0.5M   Investors  own  0.5/1.5  =  33%     Remember:  New  issuance  NOT  transfer   19  
  20. 20. Understand  the  Funding  Path  •  We’re  talking  about  1st  funding  here  •  What  is  the  probable  complete  funding  picture?   –  This  is  only  funding   –  Another  small  round  then  probable  small  exit   –  Big  money  needed  before  exit  •  Each  funding  event  should  occur  at  an  “inflecXon   point”   –  Hopefully  at  a  point  where  risk  is  removed   –  Increased  PM  =  so-­‐called  “up  round”   20  
  21. 21. Understand  the  Funding  Path,   cont.  •  What  if  things  aren’t  going  so  well?   –  Flat  or  decreased  PM  =  so-­‐called  “down  round”  •  More  money  coming  in  without  increased  PM   means  everyone  gets  diluted,  but…  •  Depending  on  anX-­‐diluXon  provision   entrepreneur  may  carry  more  burden  than  the   investors   21  
  22. 22. What  about  ConverXble  Debt?  •  Many  seed-­‐stage  companies  use  an  instrument   called  ConverXble  Debt.  Huh?  •  ConverXble  debt  is  not  tradiXonal  bank  debt  •  Converts  exist  for  two  major  reasons   –  Investors  and  Entrepreneurs  find  it  hard  to  agree  on  a   PM  valuaXon   –  SomeXmes  quicker  and  cheaper  to  document  than   equity  deals  (but  not  really)     22  
  23. 23. ConverXble  Debt  provides  •  OpXonality   ConverNble  Debt  =  unsecured  debt  obligaXon  of  the  Company   that  may  be  converted  into  equity  of  the  Company.      •  Conversion  Trigger  =  Qualified  Financing  usually  at  some   minimum  amount  of  funds  (ex.  $500,000)  •  If  Notes  stays  as  Debt  =  Get  back  principal  and  interest  ahead   of  other  equity  (behind  other  creditors  typically)  •  If  Notes  Convert    =  Convert  amount  of  debt  and  interest  into   equity  at  the  valuaXon  in  the  next  round   •    aLer  applicaXon  of  a  Discount  (oLen  5  –  20%)   •    subject  to  a  maximum  valuaXon  amount  (the  “Cap”)     23  
  24. 24. Basic  Structure  of  ConverXble  Debt  •  Investor  loans  $  to  Company  an5cipa5ng  another  round  of  funding  •  Investment  accrues  small  interest    •  When  the  funding  occurs,  investment  +  interest  convert  to  equity,   usually  at  a  discount  (5-­‐20%  typically)    Example:  •  Investors  loan  $200K  to  Company    •  20%  discount  •  As  of  conversion,  interest  of  $10k  has  accrued  •  Next  Round  PM  =  $2m  •  Conversion  Amount  =  1/(1  -­‐  0.2)*  $210k    =  $262,500    At  Conversion,  Noteholders  receive  262.5K  /  (PM  +  262.5K  +  New  Money)   24  
  25. 25. ConverXble  Debt  –  ComplicaXons!  •  What  if  only  a  li8le  money  comes  in?  •  When  does  the  debt  convert?  •  What  happens  if  PM  of  next  round  is  huge?  •  Does  the  investor  have  any  say  in  things?  •  What  if  there  is  an  equity  investment  that  doesn’t   trigger  conversion?  •  What  happens  if  it  never  converts?  •  What  happens  if  Company  gets  bought?   25  
  26. 26. ConverXble  Debt  –  SoluXons?  •  Caps  and  Floors   –  May  defeat  purpose  with  signaling  •  Default  conversion  price  and  security  at  maturity  •  Open  round,  minimum  close  •  Quick  sale  preferences  (ex.  2x)  •  Governance  provisions  •  Careful  a8enXon  to  conversion  condiXons   26  
  27. 27. ConverXble  Debt  –  Worse  than  •  Equity?   2008)   MulXple  liquidaXon  preference  (circa   –  Ex.  $500k  of  Notes  with  cap  at  $2m  PM   –  Next  Round  at  $6m  PM   –  Issue  Noteholders  3x  number  of  shares   –  3x  shares  equals  3x  liquidaXon  preference!!  •  Without  a  floor,  effecXvely  Full  Ratchet  AnX-­‐diluXon  •  Preference  Overhang   –  In  prior  example  Noteholders  bought  $262,500  of  preference  for   $200,000.       –  All  other  Series  A  Holders  bought  1:1  preference  •  Not  Just  a  Price  Adjustment   27  
  28. 28. www.TheCapitalNetwork.org  
  29. 29. Upcoming  Programs  Sep  18   Financial  ProjecXons  for  PresentaXons    Oct  16   Building  a  High  Growth  Business  for  Angel  and   Venture  Capital  Oct  24   Structuring  Founder  RelaXonships:     Stockholder  Agreements  &  Choice  of  EnXty  Nov  5   Mobile  Fast  Track   29  
  30. 30. Leveraging The Crowd
  31. 31. Crowdfunding  v.  CrowdinvesXng   Perks   Debt/Equity  Financing  
  32. 32. Crowdfunding  is  a  phenomenon  Global  Crowdfunding  Market  USD  Millions   2,806   63%   CAGR   1,470   854   North  American   non-­‐equity   530   crowd-­‐funding:   $837  million     2009   2010   2011   2012(est.)  
  33. 33. Perk  Crowdfunding  •  DonaXons  or  pre-­‐product  sales  •  Low  cost  way  to  test  the  market      •  Create  buzz  about  your  product  •  Event  focused  not  company  focused  
  34. 34. Kickstarter  v.  Indiegogo              •  More  selecXve   •  Open  pla{orm  •  Larger  community   •  Smaller  community  •  More  restricXons   •  Fewer  restricXons  
  35. 35. Crowd  InvesXng  •  Enabled  by  the  JOBS  Act  •  Debt  or  equity  investment    •  Company  focused  not  event  focused  •  Long  term  investor  involvement  
  36. 36. Crowd  investors  add  daily  value  Crowd  investors  add  everyday  operaXonal  value.    Crowd  investors  help  with:  •  A/B  tesXng  •  Social  media  markeXng    •  RecruiXng  •  Market  research  •  Customer  acquisiXon  
  37. 37. Why  Seek  Crowd  investment?    •  Structured  to  compliment  Angel  and  VC    •  Access  hundreds  of  investor  advocates  •  Efficiently  acXvate  and  manage  investors  
  38. 38. QuesXons?       Mike  Norman     Mike@wefunder.com    
  39. 39. Debt Alternatives to VC Financing Dan Allred Silicon Valley Bank (617) 796-6904 dallred@svb.com Twitter: @dgallred http://danallred.tumblr.com
  40. 40. Funding  sources:  the  lines  are  blurring   TradiXonal   VC  Funds   Seed   Funds   Super   Angels   Angels  
  41. 41. Debt  vs.  Equity  Debt     Equity  •  Lower  risk:  first  money  to   •  Higher  risk:  lives  &  dies  with   be  paid  back   the  company  •  RelaXvely  inexpensive   •  Very  expensive  •  First  lien  on  company  assets   •  Unsecured  (typically)  •  NegaXve  covenants   •  BOD  governance  
  42. 42. Primary  uses  of  debt  •  Financing  assets   –  Working  capital   –  Fixed  assets  •  Financing  growth   –  Growth  capital   –  “Venture  debt”  •  Special  situaXons   –  Bridge  loans   –  Financing  “near”  assets  
  43. 43. Think  like  a  lender  The  tradiXonal  credit  model   –  Primary  source  of  repayment:  cash-­‐flow   •  QuesXon:  what  is  the  probability  that  cash-­‐flow  will  be   sufficient  to  support  operaXons  and  repay  the  loan?   –  Secondary  source  of  repayment:  collateral  value     •  QuesXon:  what  is  the  probability  that  the  liquidaXon   value  of  the  assets  would  be  sufficient  to  repay  the   loan  should  the  cash-­‐flow  prove  insufficient?  
  44. 44. Think  like  a  “venture  lender”  A  twist  on  the  tradiXonal  credit  model   –  Primary  source  of  repayment:  cash-­‐flow  from   future  equity   •  QuesXon:  what  is  the  probability  that  the  investors  will   provide  addiXonal  equity  sufficient  to  support   operaXons  and  repay  the  loan?   –  Secondary  source  of  repayment:  enterprise  value   •  QuesXon:  what  is  the  probability  that  the  enterprise   value  (IP,  customer  base,  licenses,  etc.)  is  sufficient  to   repay  the  loan  should  the  venture  support  prove   insufficient?  
  45. 45. Think  like  a  working  capital  lender  Another  twist  on  the  tradiXonal  credit  model   –  Primary:  cash-­‐flow  within  the  working  capital  cycle   •  QuesXon:  what  is  the  probability  that  the  accounts   receivable  are  collectable  in  a  Xmeframe  sufficient  to   revolve  the  loan?   –  Secondary:  collateral  value  of  working  capital  assets   •  QuesXon:  what  is  the  probability  that  the  Bank  could  collect   the  accounts  receivable  and  liquidate  the  other  working   capital  assets  aLer  the  Company  ceases  operaXons?  
  46. 46. Working  capital  lines  of  credit  •  Uses  of  capital   –  Financing  working  capital  assets  such  as  A/R  and  inventory   –  SomeXmes  includes  a  porXon  available  to  finance  POs  •  Security   –  First  priority  lien  on  all  business  assets   –  Typically  a  negaXve  pledge  on  IP  •  Structure   –  Revolving  line  of  credit  with  formula  borrowing  base  (i.e.  80%  of  A/R)   –  Financial  covenants  to  measure  liquidity  (i.e.  balance  sheet  covenant)   &  performance  to  plan  (i.e.  income  statement  covenant)   –  Standard  negaXve  covenants  (similar  to  prior  slide)  •  Pricing   –  Prime  based  interest  rates  ranging  from  Prime  to  mid  double  digits   based  on  liquidity  levels   –  Commitment  fee  ~0.5-­‐1.0%  and  perhaps  unused  line  fees  as  well   –  Warrants  may  be  included  if  there  is  an  element  of  “venture  risk”  
  47. 47. Recurring  revenue  lines  of  credit  •  Uses  of  capital   –  MoneXze  value  associated  with  recurring  revenue   –  Support  sales,  markeXng  &  product  development  as  MRR  grows  •  Security   –  First  priority  lien  on  all  business  assets   –  Typically  a  negaXve  pledge  on  IP  •  Structure   –  Revolving  line  of  credit  with  formula  borrowing  base  (i.e.  1-­‐3x  MRR)   –  Financial  covenants  to  measure  liquidity  &  performance  to  plan   (similar  to  prior  slide)   –  Standard  negaXve  covenants  (similar  to  prior  slide)  •  Pricing   –  Prime  based  interest  rates  ranging  from  Prime  to  mid  double  digits   based  on  liquidity  levels   –  Commitment  fee  ~0.5-­‐1.0%  and  perhaps  unused  line  fees  as  well   –  Warrants  may  be  included  if  there  is  an  element  of  “venture  risk”  
  48. 48. QuesXons?       Dan  Allred   Silicon  Valley  Bank   (617)  796-­‐6904   dallred@svb.com   Twi8er:  @dgallred   h8p://danallred.tumblr.com    

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