Funding Options for Early-Stage Companies

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2. Funding Options for Early Stage Companies July 2, 2013

3. Today’s Presenter •  Jean Hammond; •  Suppor@ng Growth of educa@on and learning cluster in Boston: LearnLaunch, LearnLaunchX, •  Ac@ve angel in lots of deals, ﬁrst investor in Zip car: Launchpad, Golden Seeds, & Hub Angels •  Serial entrepreneur: Axon Networks and Quarry Technologies •  Eco-‐system supporter: Board TCN, MIT Trust Center, Mass Challenge, TechStars, & ACA/ARI trainer jean@jph-‐associates.com 4

4. Agenda •  Funding Sources –  Risk adjusted investing •  Business Stage –  Improving communication •  Experiences (Q&A) •  Backup other sources –  Government, etc 5

5. How Can We Build Value and Reduce Risk? What type of company should we build ? Stage-appropriate growth-oriented strategy Flexible, High- Performance Team - that can grow & change IP & Differentiated Product Bookkeeping & Accurate Accounting Legal Structure Boards Governance Partners: manufacturing, development, distribution, etc. Deep Market Understanding & Marketing Execution Profitable Business Model Outer ring: this is how you grow. By growing, you prove the market exists, REDUCE RISK, and earn access to different financial partners 6

6. How Can We Build Value and Reduce Risk? What type of company should we build ? Stage-appropriate growth-oriented strategy Flexible, High- Performance Team - that can grow & change IP & Differentiated Product Bookkeeping & Accurate Accounting Legal Structure Boards Governance Partners: manufacturing, development, distribution, etc. Deep Market Understanding & Marketing Execution Profitable Business Model Outer ring: this is how you grow. By growing, you prove the market, REDUCE RISK, and earn access to different financial partners 7

7. 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 8

8. What Type of Company Are You? •  In many cases the nature of the business decides the type of company … •  In others, changing how you bring the product to market can really aﬀect the cost of scaling and the funding requirements •  Example: license new baeery technology to exis@ng players vs build a baeery company with outsource manufacturing or build a manufacturer •  Every company’s ﬁnancing path is unique 9

9. All Financial Partners Are Specialists •  Funding comes in dis@nct flavors; all financial partners are specialists •  To understand who to approach and when to get to them takes really understanding what they specialize in. You need to match type of company to the type of funding partner •  Different types of funding partners specialize in different levels of risk, so apply different funding criteria •  Most basic rule: the more risk a funding partner takes, the more return (and control) they are going to require 10

10. Entrepreneurship comes in many types 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 4-5 yrs & market size allows significant additional growth •  Capital efficient total investment $2-4M •  Exit by M&A 11

11. Growth and Maturity Reduce Risk 12 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 12

12. Capital Sources: Size & Cost Investment Size Investment “Cost” Traditional VC Micro VC Equipment Financing Angel Groups Angels Equity Crowdfunding Angel List, Circle Up, etc Corporate / Strategic Venture Customers Jobs Bill Portals Vendors Founder Friends & Family Crowdfunding: etc. Grants Venture Debt Bank Loans Personal Loans Private Equity B’Plan Competition Accelerators 13

13. Match Funding Sources NORMAL GROWTH COMPANY HIGH GROWTH COMPANY EXTREME HIGH GROWTH COMPANY SOCIAL VENTURE COMPANY •  Friends, family, founders •  Debt, Bank, and other •  (Future) Crowd funding (portal style) Early on •  Accelerators •  Individual Angels •  Micro Cap VCs •  Seed from VC Later stages •  Venture Funds •  Strategic VCs •  Angel Syndication •  Friends family, founders •  Charity$$ •  Crowd funding (Kickstarter, etc) •  Impact Angels •  (Future) Crowd funding (portal style) •  Angels •  Angel Groups •  Angel Group Syndication •  Angel List •  Micro-cap Funds •  (Future) Crowd funding (portal style) •  Increasingly Strategic Corporate VCs 14

14. Alterna@ve Sources of Capital •  Business Plan Compe@@ons and Accelerators •  Many ﬁrms gain enough for some product comple@on steps •  Revenue – Best of all (Bootstrapping) •  Revenue history opens more types of debts •  Pre-‐payments from business partners •  Self-‐interested support from supply chain •  Vendors, partners and customers •  Including NRE to build joint product •  Great source of quick capital for marke@ng or sales collabora@on •  SBIR Grants •  ~$2 Billion department speciﬁc funding •  2 or 3 ‘research’ calls from each department each year, must be used for research … then you commercialize with other funding •  Other government funding, lots of “detailed” sources •  Mass Life Science & Sustainable Energy –loans or conver@ble notes 15

15. Debt Capital: Repayment •  Debt Capital –  Funding based on a set schedule of principal and interest payments that provide a ﬁxed return for the lender. Availability may be based on asset value or cash ﬂow or personal guarantee •  Sources: –  Personal Loans – Friends/Family –  Bank Loans –  SBA Loans –  Expect debt classes from Jobs Bill crowd funding portals –  Credit Cards –  Venture Debt usually linked to equity 16

16. Equity Capital: Shared Upside (VC / Angels) •  Equity Capital requires an exit: –  IPO & Private Equity –  M&A (most) •  VCs invest other people’s money (from pension funds etc.) –  Returns are measured on a per fund basis –  Focus is on finding the best as fast as possible and adding resources to aid success –  ~$26.5B annually, ~ 3,700 new investments 2012 •  Angels invest own money –  Prefer capital efficient / early exit opportuni@es –  ~$23B annually, ~ 67,000 new investments 2012 –  24 New England, 10 greater Boston •  Angel groups ~10-‐15%, •  Informal networks & one-‐@me-‐investors ~15-‐20%, •  Super angels ~25-‐30%, •  Family offices ~35-‐45% 17

17. Example VC & Angel Deal Metrics •  Time to closing •  Investment dollar range •  Success rate – How narrow is the funnel? •  Accept/require Credit Support / Guarantees •  Total # of Similar Sources •  Aﬀected by general economic condi@ons? •  Dry Powder / Secondary Capital Reserved? 18

18. Close Up: Extreme High Growth vs High Growth Capital Needs Time High Risk Low Risk Formal Venture Capital M&A or IPO Crystallize Ideas Demonstrate Product Early Scaling Growth Sustained Growth Angel Group (or Micro-cap) Syndication Angels or Accelerators or Micro-cap funds Angels or Accelerators or Micro-cap funds Angels Market Entry M&A Later VC Rounds Extreme High GrowthHigh Growth Friends, Family & Founders Friends, Family & Founders 19

19. Agenda •  Funding Sources –  Risk adjusted investing •  Business Stage –  Improving communication •  Experiences (Q&A) •  Backup other sources –  Government, etc 20

20. “Stage” & Equity Capital Sources 21 Stage Crystallize Idea and Early DemonstraHon Demonstrate Product & Market Interest Market Entry and Early Growth Early Scaling Growth Repeatable Growth Capital Source Founders, Friends, Family, Grants, Kickstarter, etc. Accelerators, Individual Angels, many others now “exploring” Angel Groups, Angel Group Syndica@on, Micro-‐Cap Funds VCs, Angel Group Syndica@on, Micro-‐Cap Funds VCs Investment $25K -‐ $100K $100K -‐ $500K $500K -‐ $1M $5M – as needed as needed These 2 need sophis@cated growth plans This is the stage where advice can make you eligible for outside funding later Accelerators and a few individual angels play here … unless it is a big idea This is where Angel Groups do most 1st investments ….

21. 22 What Investors (and others) Need to Know •  5 P’s of investment –  Product – differen@ated technology or service that serves market need for a significant, large market product –  PromoHon –market entry strategy, with detailed plan –  Profits – a business model that has margins and distribu@ons costs that are profitable –  People – a team to meet the needs of the business –  Plan – good idea of the steps (& prioi@es) needed to create a repeatable business model •  Some key concepts to convey: –  What our poten-al customers are saying to us: is this a nice to have or must have –  How we plan to run a series of market entry tests delivering meaningful metrics –  How the team matches the needs of the business –  How we will scale against a repeatable business model

22. What Do We Mean By “Risk” Examples of things that make a company risky to a ﬁnancial partner: •  Your company is early stage •  You need more money, now or down the road •  You are a new entrepreneur •  You have unproven technology •  You need to raise equity instead of asset backed debt with obliga@on to repay •  You are chasing a new unproven market •  You have less IP or defensibility •  Your business does not have high growth •  You have a longer path to exit •  You have fewer exit op@ons 23

23. Crystal: Idea to Business Plan •  Goal of Stage: Think out the issues –  No one wants to read a plan … but organizing your thinking in a structured way will help you get things done at the right time •  The Team –  Why do you folks have unique knowledge to understand this market opening •  The Key Stage Specific Information –  Product: How big is the market, the product nice to have or is there a need •  How will we learn the answers –  What do we know about this industry •  What is the margin structure and how buying is done, how competitive, etc. –  At the highest level … how long to reach a shippable product and how much money does that take 24

24. Crystal: Idea to Business Plan 25 #2 Is it a big market, with a big need … when will the product be done? #4 What are total expenses #3 Can this industry be penetrated and have we talked to poten@al customers #1 How much experience ?

25. Demonstrate: Product & Market Entry Plan •  Goal of Stage: Think out the issues to drive market –  Show the product works, show your path to market is working •  Traditionally called Beta test –  You want lots use so you can find patterns especially in how to find and match with customers •  The Team –  Path to market is the … key –  Time to fill out team to reach the market … marketing and selling skills •  The Key Stage Specific Information –  Customers want it, … can we fell customers leaning in … goal at end of stage is equivalent of pipeline –  Product Fit… understand use of product –  Promo@on – start market trails … develop a detail list of ideal metrics and then start ﬁlling in the grid 26

26. Demonstrate: Product & Market Entry Plan 27 #3 Build metrics to show sales and marke@ng cost? #2 Fill in team .. Start to build external team #1 Understand customer ….lots of market trials #4 Market dynamics

27. Market Entry & Early Growth Stage Early Repeatable Business Model •  Goal of Stage: Think out the issues to drive scale –  Show market metrics are scalable –  Goal of the stage: what resources will drive growth … exact metrics for the immediate plan … big ideas for the “add-on” products and markets –  Execution •  The Team –  Can this team scale •  The Key Stage Specific Information –  Refine metrics and build “what-if” plans –  Details plans for varying market conditions based on scaling knowledge –  Work with industry partners –  Find other market gaps 28

28. Market Entry & Early Growth Stage Early Repeatable Business Model 29 #3 How to hit the rest of the market #2 Can this team scale #4 Asses proﬁtability of business and eﬀect on capital needs #1 Understand growth metrics

29. Factors deﬁning a Business 30 Factors Crystal Stage Demo Stage Growth Product / Service and Market #2 #4 #3 Promotion and Market Strategy #3 #1 #1 Profits and Business Model #3 #4 People #1 #2 #2 Plan #4

30. Funding Sources 1.  Funding partners are specialists 2.  To understand who to approach and when to get to them takes really understanding what they specialize in. You need to match your company type to the right type of funding partner 3.  Company stage is shorthand for types of risks that business faces – Risk awareness is the key to early successful communica@on with funders 31

31. Closing Thoughts… 32 Leverage the Entrepreneurial Community in Boston! - Greenhorn Connect - The Capital Network - Etc.

32. Grants, etc Funding Options for Early Stage Companies 33

33. SBIR/STTR Program SBIR + STTR = 3% -‐ 3.6% of federal R&D Budget Best for research … need other commercial $$ •  Pros: –  It is a contract/grant – non dilu@ve •  Cons: –  Long Solicita@on Process –  March-‐in Rights –  Work with universi@es for exper@se –  Best to incorporate (but more acceptance of LLCs) –  Accoun@ng systems must be compliant with the government –  Very compe@@ve in some agencies KATZ NANNIS + SOLOMON, PC CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISORS www.knscpa.com 34

34. KATZ NANNIS + SOLOMON, PC CERTIFIED PUBLIC ACCOUNTANTS BUSINESS ADVISOR CONSULTANTS lnannis@knscpa.com DOD HHS NASA DOEnergy NSF USDA DOC EPA DOT ED NIST DHS DOEducaHon SBIR/STTR Par@cipa@ng Agencies Web site address at SBA for the agencies’ SBIR links: http://www.sbir.gov/federal_links.htm Innovation Development Institute www.inknowvation.com 35

35. www.masslifesciences.com •  Small Business Matching Grant Program •  Competitive Program - $500k Matching Funds •  Life Science Accelerator Program •  Loan up to $750k 5 year 10% with warrant coverage www.masscec.com •  Various projects centered around Clean Energy •  $40,000 grants with Tech Transfer Center •  Dealings with ARPA-E program •  Supplementary Funds SBIR/STTR Par@cipa@ng Agencies (cont’d) 36

36. Massachusetts Technology Transfer Center www.mattcenter.org Mission is to support technology transfer activities between research institutes and companies in Massachusetts. •  Fund researchers at universities •  Move their inventions to development •  Development of the feasibility in specific industry applications •  Small and Medium Massachusetts manufacturers •  Term loans and working capital loans •  Contract and purchase order financing •  Targeted technical assistance-50% paid by MGCC SBIR/STTR Par@cipa@ng Agencies (cont’d) 37

37. Web site for entrepreneurs is: http://www.sba.gov/starting_business/ index.html Web site for lending programs is: http://www.sba.gov/financing/ index.html 7(a) Loan Program Disaster Recovery CDC / 504 Program Micro Loans Small Business Investment Companies Services Specific Territories Management Consulting Start-up Consulting Business Plan Development Financing Plan Development Low Cost Training Programs Procurement Technical Assistance Center Mass Export Center SBIR/STTR Par@cipa@ng Agencies (cont’d) 38

38. www.mass-ventures.com •  Normally fills a gap in Angel or Venture Round, Seed / 1st •  Massachusetts-based companies •  $250,000 - $500,000 •  State-funded VC •  START Program- Phase II Matching Grant Program •  Initially $6M as part of bond fund •  10 at $100k; 5 at $200K; 2 at $500K in first year •  2nd year of program – first 100K applications are over SBIR/STTR Par@cipa@ng Agencies (cont’d) 39

39. Addi@onal Resources Commonwealth of Massachusetts www.mass.gov/bizteam Smaller Business Association of New England www.sbane.org Association of Corporate Growth www.acgboston.org City of Boston Resource Guide www.cityofboston.gov/dnd/obd/BRG/A_intro.asp States of NH, CT, RI,VT, ME Doing Business Guides www.nh.gov/businesses/doing.html www.ct.gov then go to “Doing Business” www.ri.gov/business/ vermont.gov/doing_business/business.html www.maine.gov/portal/business/small_bus.html 40

40. 41

41. Example VC & Angel Deal Metrics •  Time to closing •  Investment dollar range •  Success rate – How narrow is the funnel? •  Accept/require Credit Support / Guarantees •  Total # of Similar Sources •  Aﬀected by general economic condi@ons? •  Dry Powder / Secondary Capital Reserved? 42

42. Return on Equity Return on Debt Income High Return NON PROFIT ORGANIZATION Capital Source View Debt- Pay it back Fixed Amounts Equity – Ownership stake % of Future Value Charity $$ Impact / Tax Write oﬀ NORMAL GROWTH COMPANY HIGH GROWTH (COMPANY) EXTREME HIGH GROWTH (COMPANY) Risk / Return SOCIAL VENTURE COMPANY 43

43. If You Cannot Reduce Risk, You’ll Pay More For Your Capital •  Examples of ways riskier companies aeract risk capital: –  offer more shares (beeer price) –  have collateral (pledges, guaran@es) –  offer beeer conversion terms (price) –  offer more control (board seats, vo@ng agreements) –  go a}er an extreme high growth market: •  massive poten@al •  possibly faster path to exit •  possibly more exit op@ons 44

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Funding Options for Early-Stage Companies

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