Funding Options for Early-Stage Companies


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Funding Options at MassChallenge

Are you thinking about what you need to fund your company? Where do you start? Funding is not one size fits all. Every company has to approach their pathway to funding with a unique approach. Join our fundraising experts for an in depth discussion of what options you have for funding and how to decide which paths are right for you and 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.

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  • Key point all types of start ups are “worthy and good”Capital comes in complex flavors … need to find the matchAsking the “peppermint chip” capital to get friendly with an “dill pickle” company type
  • Detailed specialist … don’t ask a dermatologist to take on brain surgeryOr a radiologist to be a psychiatrist In general, when you ask a brain surgeon about you pimple they just stare at you.Funding criteria includes timing
  • Funding Options for Early-Stage Companies

    1. 1. @TCNupdate #tcnLIVE #MCengage
    2. 2. Breakfast Roundtables Expert Lunches Fast Track Investor Attendance Launchpad on Demand Network Events @TCNupdate #tcnLIVE #MCengage
    3. 3. Connect with us @TCNupdate #TCNlive #MCengage13 4
    4. 4. Funding Options for Early Stage Companies June 27, 2013
    5. 5. Today’s Experts • The Angel – Sheryl Schultz, Golden Seeds • The VC – Kent Bennett, Bessemer Venture Partners • The Crowd – Dan Sullivan, Crowdly • The Grants – Dr. Ruth Shuman, National Science Foundation • The Bank – Dan Allred, Silicon Valley Bank • Moderator: David Jegen, Devonshire Investors @TCNupdate #tcnLIVE #MCengage
    6. 6. Funding the Company Before you can get funded, you have to know where to look Before you know where to look, you need to understand what you are 7 @TCNupdate #tcnLIVE #MCengage
    7. 7. Companies come in many forms NORMAL GROWTH COMPANY HIGH GROWTH COMPANY EXTREME HIGH GROWTH COMPANY SOCIAL VENTURE 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.) • 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 • 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 • 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 8 HOW YOU DO IT • IP licensing • Manufacturing • R&D focused • Product vs. services
    8. 8. Understand how different investors see your risks 9 Market • Market size, unproven market demand? Product • Technical feasibility, time to build, IP? Management • Domain knowledge, past successes? Bus. model • Established, recurring rev, sticky? Competition • Some, but not too much? Exit opportunities • Growth potential, active buyers, profitability? Financial partners are specialists, but the most basic rule is: the more risk a funding partner takes, the more return (and control) they are going to require Types of risk Ways you can mitigate • Stage appropriate growth strategy • Flexible, high performing team • Deep market understanding • Profitable business model • IP and product differentiation • Right partners in key areas (e.g., manufacturing, sales) • Legal and corporate governance • Solid bookkeeping and accounting
    9. 9. Growth and Maturity Reduce Risk 10 Size of Capital Raise: High Time High Risk Low Risk Crystallize Ideas Demonstrate Product Early Scaling Growth Sustained Growth Market Entry As you develop your company, you reduce risk for your financial partners Size of Capital Raise: Low 10
    10. 10. Capital Sources: Size & Cost Investment Size Investment “Cost” Traditional VC Micro VC Equipment Financing Angel GroupsAngels Angel List, etc Corporate / Strategic Venture Customers Jobs Bill Portal Vendors Founder Friends &Family Crowdfunding: etc. Grants Venture Debt Bank Loans Personal Loans Private Equity B’Plan Competition Accelerators 11 Bootstrap @TCNupdate #tcnLIVE #MCengage
    11. 11. The World of Angel Capital • Angels invest own money – Prefer capital efficient / early exit opportunities (5-7years) – target of $10 - $15M in revenue within five years – Products, not services – food and fashion have generally been difficult to fund through angel groups. – Capital Requirements: $100k to $10M • Angel Ecosystem – 2012 ~$23B annually, ~ 67,000 new investments – 26 angel groups in New England (for full list, go to – we syndicate with one another! – Important to find the right fit • Do your homework – target angels that fit your profile • Engage early and informally • FIND A CHAMPION! 12 @TCNupdate #tcnLIVE #MCengage
    12. 12. Are You Ready for Angel Funding? 13 • Stage of development • Concept (probably friends and family, maybe an individual angel) • Prototype (some angel group interest) • First revenues (lots of angel group interest) • Team in place or identified • Clear understanding of your capital requirements, and in-depth understanding of your financials • Differentiated technology or service and a substantial market opportunity • Ideally – 1 to 2 paying customers, but product in beta is often enough. @TCNupdate #tcnLIVE #MCengage
    13. 13. Equity Capital: Shared Upside - VC • VCs invest other people’s money (pension funds, etc.) – Returns are measured on a per fund basis – 3X return target with some funds doing much better – Small number of deals drive returns for the entire fund – Big question: is there a chance we could return HALF OF OUR FUND with this investment? 14 EARTH: some substance that defends you and your margins (IP, network effects, brand, deep tech) WIND: a HUGE or dynamic market that will reward you for changing just a fraction of it FIRE: a crazy obsessed founder or group of founders who want to win more than anything WATER: a model that will scale cost efficiently (at least once it gets going) What VCs Want @TCNupdate #tcnLIVE #MCengage
    14. 14. Debt vs. Equity Debt • Lower risk: first money to be paid back • Relatively inexpensive • First lien on company assets • Negative covenants Equity • Higher risk: lives & dies with the company • Very expensive • Unsecured (typically) • BOD governance @TCNupdate #tcnLIVE #MCengage
    15. 15. Primary uses of debt • Financing assets – Working capital – Fixed assets • Financing growth – Growth capital – “Venture debt” • Special situations – Bridge loans – Financing “near” assets @TCNupdate #tcnLIVE #MCengage
    16. 16. Right capital for the right purpose Venture Debt Fixed Assets Working Capital Cash-flow Financing Purpose Augment VC, invest in value drivers. Finance fixed assets. Finance A/R & inventory. Leverage cash-flow for growth. Structure 6-12 month I/O then 3 year payback. Amortize over life of asset. Revolving line w/ formula borrowing. Term loan,multiple of EBITDA. Primary Repayment Source Future equity. Existing and future cash. Cash flow within W/C cycle. Cash-flow from operations. Secondary Repayment Source Enterprise value. Liquidation value of fixed assets Liquidation value of W/C assets Liquidation value of all assets. Pricing 8-10% interest& 3- 6% warrants. 7-8% interest & warrant (or higher rate). 5-7% interest w/ covenants. Depends on leverage. @TCNupdate #tcnLIVE #MCengage
    17. 17. @TCNupdate #tcnLIVE #MCengage
    18. 18. @TCNupdate #tcnLIVE #MCengage
    19. 19. @TCNupdate #tcnLIVE #MCengage
    20. 20. SBIR/STTR Program Fundamentals • Provides early-stage funding for R&D on high-risk technologies with high potential for economic/societal benefits • Targets early-stage development of technology on a commercial path • Seeks to fund transformational, game-changing technology • Looks for significant market opportunity • Awards based on both technical and commercial merit • Values academic collaboration/translation • Strong focus on commercialization • Encourages ties to private sector 21 @TCNupdate #tcnLIVE #MCengage
    21. 21. SBIR/STTR Program • Pros: – Provides “pre-seed” funding to demonstrate proof-of- concept – Non-dilutive investment; not a loan/equity-free – Provides validation, recognition, visibility – May be leveraged to attract investment/partnerships – Small business retains IP – Encourages partnerships • Cons: – 6 month solicitation process – March-in rights – Accounting systems must be compliant with the government – Very competitive in some agencies 22 @TCNupdate #tcnLIVE #MCengage
    22. 22. • Department of Agriculture • Department of Commerce – National Oceanic and Atmospheric Administration – National Institute of Standards and Technology • Department of Defense • Department of Education • Department of Energy • Department of Health and Human Services • Department of Homeland Security • Department of Transportation • Environmental Protection Agency • National Aeronautics and Space Administration • National Science Foundation SBIR/STTR Participating Agencies 23SBA Web Site: SBIR (2.7%) + STTR (.4%) = >$2.5 B @TCNupdate #tcnLIVE #MCengage
    23. 23. Company data from FY 2012 Phase I awardees: – 86% of Phase I awardees have 10 or fewer employees – 90% of Phase I awardee companies were incorporated since 2007 – 73% of Phase I awardees have never received a Phase II award from any agency University ties to Phase II projects*: ‒ 37% involve faculty members ‒ 27% involve graduate students ‒ 25% rent/use university facilities ‒ 17% issue a subcontract to a university SBIR/STTR NSF Awardee Demographics 24 Phase I Proposals received: >2,100; funding rate 16% Phase II Proposals received: >300; funding rate 39% * National Academies Study, 2007 @TCNupdate #tcnLIVE #MCengage
    24. 24. Additional Resources Commonwealth of Massachusetts Smaller Business Association of New England Association of Corporate Growth City of Boston Resource Guide States of NH, CT, RI,VT, ME Doing Business Guides www.ct.govthen go to “Doing Business” 25 @TCNupdate #tcnLIVE #MCengage
    25. 25. @TCNupdate #tcnLIVE #MCengage