Funding options early stage companies april30 v2-lsn.pptx 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. www.thecapitalnetwork.org

2. Funding Options for Early Stage Companies
April 30, 2013

3. Today’s
Panel
• The
Angel:
Jean
Hammond;
Launchpad,
Golden
Seeds,
Hub
Angels,
&
LearnLaunch,
Board
TCN,
jean@jph-­‐associates.com
• The
Venture
Capitalist:
Tim
Wright,
Partner,
Grand
Banks
<twright@grandbankscapital.com>
• The
Banker
-­‐Dan
Allred
,
Silicon
Valley
Bank,
Board
TCN,
dallred@svb.com
• Grants
&
Programs
Expert
–
Larry
Nannis;
Katz
Nannis
+
Solomon
P.C.
(KNS)
CerXfied
Public
Accountants
and
SBANE
LNannis@knscpa.com
• The
Entrepreneur:
Raj
Aggarwal,
CEO
LocalyXcs,
raj@localyXcs.com
3

4. Agenda
• Quick
Overview
Funding
Sources
–
Jean
• Focus
in
on
Government
Support
–
Larry
• View
from
the
VC
-­‐Tim
• View
from
the
Bank
–
Dan
• How
it
Really
Works
-­‐
Raj
• Q
and
A
4

5. 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
5

6. 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
5 yrs & market
size allows
significant
additional growth
• Capital efficient
total investment
$2-4M
• Exit by M&A
6

7. 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
baiery
technology
to
exisXng
players
vs
build
a
baiery
company
with
outsource
manufacturing
or
build
a
manufacturer
• Every
company’s
financing
path
is
unique
7

8. All
Financial
Partners
Are
Specialists
• Funding
comes
in
disXnct
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
8

9. 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
obligaXon
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
opXons
9

10. 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

11. 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
11

12. 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
12

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
13

14. AlternaXve
Sources
of
Capital
• Business
Plan
CompeXXons
and
Accelerators
• Many
firms
gain
enough
for
some
product
compleXon
steps
• Revenue
–
Best
of
all
(Bootstrapping)
• Revenue
history
opens
more
types
of
debts
• Pre-­‐payments,
etc.
• Vendors,
partners
and
customers
• Including
NRE
to
build
joint
product
• Great
source
of
quick
capital
for
markeXng
or
sales
collaboraXon
• 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
converXble
notes
14

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
15

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
opportuniXes
– ~$23B
annually,
~
67,000
new
investments
2012
– 24
New
England,
10
greater
Boston
• Angel
groups
~10-­‐15%,
• Informal
networks
&
one-­‐Xme-­‐investors
~15-­‐20%,
• Super
angels
~25-­‐30%,
• Family
offices
~35-­‐45%
16

17. 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
fundsBusiness
Angels
Market Entry
M&A
Later VC
Rounds
Extreme
High
GrowthHigh
Growth
Friends,
Family &
Founders
Friends,
Family &
Founders
17

18. Grants, etc
Funding Options for Early Stage Companies
18

19. 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
diluXve
• Cons:
– Long
SolicitaXon
Process
– March-­‐in
Rights
– Work
with
universiXes
for
experXse
– Best
to
incorporate
(but
more
acceptance
of
LLCs)
– AccounXng
systems
must
be
compliant
with
the
government
– Very
compeXXve
in
some
agencies
KATZ
NANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS ADVISORS
www.knscpa.com
19

20. 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
ParXcipaXng
Agencies
Web site address at SBA for the agencies’ SBIR links:
http://www.sbir.gov/federal_links.htm
Innovation Development Institute
www.inknowvation.com
20

21. 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
ParXcipaXng
Agencies
(cont’d)
21

22. 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
ParXcipaXng
Agencies
(cont’d)
22

23. 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
ParXcipaXng
Agencies
(cont’d)
23

24. 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
ParXcipaXng
Agencies
(cont’d)
24

25. AddiXonal
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
25

26. 26

27. 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
condiXons?
• Dry
Powder
/
Secondary
Capital
Reserved?
27

28. 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
28

29. If
You
Cannot
Reduce
Risk,
You’ll
Pay
More
For
Your
Capital
• Examples
of
ways
riskier
companies
airact
risk
capital:
– offer
more
shares
(beier
price)
– have
collateral
(pledges,
guaranXes)
– offer
beier
conversion
terms
(price)
– offer
more
control
(board
seats,
voXng
agreements)
– go
a~er
an
extreme
high
growth
market:
• massive
potenXal
• possibly
faster
path
to
exit
• possibly
more
exit
opXons
29