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Funding options - Life Science Fast Track


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From the life science venture fast track:

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Funding options - Life Science Fast Track

  1. 1. Funding  Op*ons  for  Life  Science  Companies   January 21, 2014
  2. 2. Funding  the  Company   Assuming  you  plan  to  be     a  “high  growth”  company…   What  are  your  funding  op*ons?  
  3. 3. Entrepreneurship  comes  in  many  types       SOCIAL  VENTURE   COMPANY   NORMAL  GROWTH   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 •  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.) HIGH   GROWTH   COMPANY   •  Company can grow fast (on-line) or has a scalable system •  Team often motivated by exit •  $10m revenue in 5 yrs & market size allows significant additional growth •  Capital efficient total investment $2-4M •  Exit by M&A 3 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
  4. 4. Close  Up:  Extreme  High  Growth  vs  High   Growth   M&A or IPO Later VC Rounds Capital Needs High Risk Formal Venture Capital Friends, Family & Founders Friends, Family & Founders Crystallize Ideas Angels or Accelerators or Micro-cap funds Busines s Angels Demonstrate Product M&A Angels or Accelerators or Micro-cap funds Angel Group (or Micro-cap) Syndication Low Risk Time Market Entry Early Scaling Growth Extreme High Growth High Growth Sustained Growth 4  
  5. 5. High  Growth  Company  Characteris*cs   •  Disrup*ve  Innova*on  with  Strong  value  proposi*on   –  Correla*on  between  Large  Unmet  Need  :  Solu*on   •  High  Margin  Product  (Ra*o  of  Revenue  :  COGS)     –  Some*mes  Massive  Volume  Products  where  innova*on  is  incremental   •  High  Rate  of  Revenue  Growth  over  sustained  period     •  Scalable  (Fixed  cost  is  a  low  percent  of  Revenue)     •  No  major  barriers  to  con*nued  growth  (ex.  blocking  IP;  geography;   regulatory)     •  Repeatable  sales  and  distribu*on  model  with  many  credit  worthy   customers     •  Large  Total  Addressable  Market  (TAM)     •  Defensible  innova*on  able  to  withstand  compe**on  and  changing   condi*ons     •  [Capital  efficient]   5  
  6. 6. Capital  Source  View   NON  PROFIT   ORGANIZATION   SOCIAL  VENTURE   COMPANY   NORMAL  GROWTH   COMPANY   HIGH   GROWTH   (COMPANY)   EXTREME   HIGH  GROWTH   (COMPANY)   Risk / Return Impact  /  Tax  Write  off   Charity  $$   Return  on  Debt   Income   DebtPay it back Fixed Amounts Return  on  Equity   High  Return   Equity – Ownership stake % of Future Value 6  
  7. 7. Match  Funding  Sources   SOCIAL  VENTURE   COMPANY   •  Friends family, founders •  Charity$$ •  Crowds (Kickstarter) •  Impact Angels •  (Future) Crowd funding (portal style) NORMAL  GROWTH   COMPANY   •  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 7  
  8. 8. Non-­‐Equity  Sources   •  Accelerators  (some)   •  Kickstarter  type  dona5ons   •  •  •  •  •  Pre-­‐orders  from  end-­‐customers   Credit  from  vendors   Strategic  VCs   Strategic  NREs   Distribu5on  Contracts   Common  Theme:    Providing  early  cash  in  exchange  for  a  beHer   commercial  opportunity     8  
  9. 9. Equity  Sources   •  Accelerators  (some)   •  Friends  &  Family   Common  Theme:  Suppor5ng  success  of  the  entrepreneur;  business  terms  vary   •  •  •  •  •  •  Portal  Funding   Early  Angels   Super  Angels   Angel  Groups   Micro  VC   Tradi5onal  VC  (1st  Round)   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   –  Preferen5al  treatment  on  subop5mal  exit  versus  the  founders   9  
  10. 10. Sources  of  Equity  Capital   Must  have  exits  for  equity  model  to  work!!   –  2011  US  IPOs  -­‐  $36B   –  2011  US  M&A  -­‐  $57B     –  2011  US  Private  Equity  -­‐$35B   •  Exit  sources  extremely  variable  …  health  of  economy   •  All  exits:  indica*ve  of  future  cash  flow  or  market  control     Idea  Stage     Demonstrate   Market  Entry  &   Product  &   • Friends     Early  Growth   Market  Interest     •   Crowdfunding   family,   founders   • Grants   • Crowds   (Kick-­‐   starter)   • Accelerators   • Individual  Angels   • Angel  Groups   • Accelerators   • Micro  Cap  VCs   (portal  style)   •   Angel  Groups   •   Angel  Group   SyndicaSon   •   Angel  List   •   Micro-­‐cap  Funds   Early  Scaling   Growth   •  Most  Venture   Funds   •  Angel   SyndicaSon   Repeatable   Growth   • Most  Venture   Funds   • Strategic  VCs   • Angel   SyndicaSon   • Private  Equity    
  11. 11. High  Growth  Capital  by  Stage   &Amount   Traditional VC Micro VC Angel Groups AngelList Investment Size Corporate Venturing Equipment Financing Grants Angels Portal Funding Customers Friends & Family Vendors Crowdfunding Founder Venture Stage 11  
  12. 12. Capital  Sources:  Size  &  Cost   Angel Groups Angels Traditional VC AngelList Micro VC Crowdfunding Investment “Cost” Friends & Family Founder Personal Loans Bank Loans Vendors Private Equity Corporate / Strategic Venture Portal Funding Venture Debt Equipment Financing Customers Grants Investment Size
  13. 13. So  What  is  Equity  Anyway?   •  Stock  =  right  to  residual  economic  interests  upon  sale/liquida*on  +   stockholder  vo*ng  rights  (usually  limited  to  Board  of  Directors  and  Sale  of   the  Company)   •  Preferred  Stock  =  right  to  be  paid  before  Common  Stock  Par*cipa*ng  =   original  investment  PLUS  a  pro  rata  share  of  remainder  Non-­‐Par*cipa*ng  =   original  investment  OR  a  pro  rata  share   •  Common  Stock  =  whatever  is  lep  aper  all  other  creditors  and  preferred   stockholders  are  paid   •  Dividend  =  a  right  to  an  addi*onal  amount  upon  liquida*on  measured  as  a   func*on  of  *me  x  percentage  of  original  investment  .  Ex.  6.0%  per  annum   •  OpSons  /  Warrants  =  Contracts  allowing  holder  to  purchase  an  amount  of   stock  in  the  future  at  a  pre-­‐determined  price   •  Control  Rights  =  Statutory  and  Contractual   13  
  14. 14. Equity  Type  Comparisons   Solo  Angel   Super  Angel   Angel  Group   MicroVC   VC   Valua*ons   High  rela*ve  to   High  rela*ve  to   Low  rela*ve  to   Low  rela*ve  to   Medium   stage   stage   stage   stage   Type  -­‐  Likely   (less  likely)   Common   (Warrants)   Conv  Note   (Preferred)   Preferred   (Conv  Note)   Preferred   (Conv  Note)   Preferred   Board  Seat   Maybe   1  or  none   1-­‐2  of  5  +/-­‐   Observer   1  of  5  +/-­‐   Observer   1-­‐2  of  5  +/-­‐   Observer   Audited   Financials   No   No   No  (reviewed)   Yes   Yes   Nega*ve   Covenants   No   Some*mes   Yes   Yes   Yes   Preemp*ve   Rights   No   Some*mes   Yes   Yes   Yes   Ver*cal   Exper*se   Some*mes   Rarely   Some   Usually   Always   14  
  15. 15. Equity  Type  Comparisons   Solo  Angel   Super  Angel   Angel  Group   MicroVC   VC   Exit  Horizon   (from  $  in)   7  years   5  years   4  years   5  -­‐7  years   4-­‐5  years   Exit  Range   $20m+   $40m+   $50m+   $100m+   $250m+   15  
  16. 16. Structure  of  an  Equity  Deal   •  Company  and  Investors  agree  on  a  “pre-­‐money   valua*on”  (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   16  
  17. 17. 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  “inflec5on   point”   –  Hopefully  at  a  point  where  risk  is  removed   –  Increased  PM  =  so-­‐called  “up  round”   17  
  18. 18. 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  anS-­‐diluSon  provision   entrepreneur  may  carry  more  burden  than  the   investors   18  
  19. 19. What  about  Conver*ble  Debt?   •  Many  seed-­‐stage  companies  use  an  instrument   called  Conver5ble  Debt.  Huh?   •  Conver5ble  debt  is  not  tradi5onal  bank  debt   •  Converts  exist  for  two  major  reasons   –  Investors  and  Entrepreneurs  find  it  hard  to  agree  on   a  PM  valua5on   –  Some5mes  quicker  and  cheaper  to  document  than   equity  deals  (but  not  really)   19  
  20. 20. Conver*ble  Debt  provides  Op*onality   •  ConverSble  Debt  =  unsecured  debt  obliga*on  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  valua*on  in  the  next  round   •    aper  applica*on  of  a  Discount  (open  5  –  20%)   •    subject  to  a  maximum  valua*on  amount  (the  “Cap”)   20  
  21. 21. Basic  Structure  of  Conver*ble  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)   21  
  22. 22. Conver*ble  Debt  –  Complica*ons!   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?   •  •  •  •  22  
  23. 23. Conver*ble  Debt  –  Solu*ons?   •  Caps  and  Floors   –  May  defeat  purpose  with  signaling   •  •  •  •  Default  conversion  price  and  security  at  maturity   Quick  sale  preferences  (ex.  2x)   Governance  provisions   Careful  agenSon  to  conversion  condiSons   23  
  24. 24. Conver*ble  Debt  –  Worse  than  Equity?   •  MulSple  liquidaSon  preference  (circa  2008)   –  –  –  –  Ex.  $500k  of  Notes  with  cap  at  $2m  PM   Next  Round  at  $6m  PM   Issue  Noteholders  3x  number  of  shares   3x  shares  equals  3x  liquidaSon  preference!!   •  Without  a  floor,  effecSvely  Full  Ratchet  AnS-­‐diluSon   •  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   24  
  25. 25.