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. Jean Hammond – LearnLaunchX, LearnLaunch.org, Hub Angels, Launchpad Venture Group, Golden Seeds Robert Bishop - Goodwin Procter In partnership with: Founders Workbench

2. Funding Options for Early Stage Companies
November 14, 2013

3. Today’s Expert
• Jean Hammond;
• Supporting Growth of education and learning cluster in Boston: LearnLaunch,
LearnLaunchX,
• Active 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
3

4. Agenda
•
–
•
–
•
•
–
4

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

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

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
7

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 battery technology to existing
players vs build a battery company with outsource
manufacturing or build a manufacturer
• Every company’s financing path is unique
8

9. All Financial Partners Are Specialists
• Fundingcomes in distinct 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
9

10. 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
• $7-10M revenue in
4-5 yrs & market
size allows
significant
additional growth
• Capital efficient
total
investment$2-4M
• Exit by M&A
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
10

11. Growth and Maturity Reduce Risk
High
Risk
As you develop your company, you
reduce risk for your financial
partners
Size of Capital
Raise: Low
Size of Capital
Raise:
High
Low
Risk
Time
Crystallize
Ideas
Demonstrate
Product
Market Entry
Early Scaling
Growth
Sustained
Growth 11
11

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

13. Match Funding Sources
SOCIAL VENTURE
COMPANY
• Friends
family,
founders
• Charity$$
• Crowd funding
(Kickstarter,
etc)
• 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)
Early on
• Accelerators
• Individual Angels
• Micro Cap VCs
• Seed from VC
Later stages
• Venture Funds
• Strategic VCs
• Angel
Syndication
• Increasingly
Strategic
Corporate VCs
13

14. Alternative Sources of Capital
• Business Plan Competitions and Accelerators
• Many firms gain enough for some product completion 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 marketing or sales collaboration
• 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 convertible 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 opportunities
– ~$23B annually, ~ 67,000 new investments 2012
– 24 New England, 10 greater Boston
•
•
•
•
Angel groups ~10-15%,
Informal networks & one-time-investors ~15-20%,
Super angels ~25-30%,
Family offices ~35-45%
16

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
conditions?
Dry Powder / Secondary Capital
Reserved?
17

18. 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
Angels or
Accelerators
or Micro-cap
funds
Friends,
Family &
Founders
Crystallize
Ideas
Demonstrate
Product
Angels
M&A
Angels or
Accelerators
or Micro-cap
funds
Angel Group
(or Micro-cap)
Syndication
Low
Risk
Time
Market Entry
Early Scaling
Growth
Sustained
Growth
Extreme
High
Growth
High
Growth
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19. Agenda
•
–
•
–
•
•
–
19

20. What Investors (and others) Need to Know
• 5 P’s of investment
– Product – differentiated technology or service that serves market
need for a significant, large market product
– Promotion –market entry strategy, with detailed plan
– Profits – a business model that has margins and distributions costs
that are profitable
– People – a team to meet the needs of the business
– Plan – good idea of the steps (& priorities) needed to create a
repeatable business model
• Some key concepts to convey:
– What our potential 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
20

21. First Time Entrepreneurs
• Without a startup track record, funding can be a challenge
– …. Later stage because of risk
• Moving from negative to positive
– Communicate relevant experience
– Hire a compelling management team
– Surround yourself with experts
– Show us some milestone accomplishments
• Don’t ask us to take a leap of faith – show us how you are
going to be successful
21

22. Compare what makes it and what doesn’t
Factors
Companies getting angel
investment
Companies that don’t
CEO
Some experience or ‘coachable’
wants listen
CEO talks about him or her
‘expertise’ forever
Team
Enthusiastic! pretty good match
to required skills
One person, says no one will work
without $$
Unique
A neat idea, could be big
Seems ‘me too’
Stage
Lots done, working code, just
needs mkt. entry $$
Idea and ppt., or a complex science
project, or “old”
Market size, Market is big and can be reached Market is huge or
str.
Market extremely fragmented
Total
investment
Valuation
Cashflow breakeven known,
Can use more $$
Needs $10-20M more after this
round
Willing discuss a range of values
& funding strategies
Is fixated on a very unrealistic high
value

23. The odds are bad …
• What doesn’t work
• Deals that can’t develop an exit should bootstrap, get debt, etc
• Companies at too early of stage – risk set large
• Entrepreneurs expecting too high a valuations
• Asking for the wrong amount of money
• And .. The odds are bad … may have a “hard presentation slot”
• Find a champion (before you apply if possible) !!!!

24. What are the Deal Marketing Materials
• Business Summary -2-5 pages with financial summary
• 12-20 slide pitch deck with a backup side for every serious
question
• 5-8 page market (size and structure) summary
• Integrated financial model
• 30 second elevator pitch
• 1-2 minute tell me more / meeting request pitch
(write a business plan for yourself)

25. Creating an Effective Presentation
• Elevator pitch – who are you and what do you do and why?
• Market opportunity
– What is the problem you are solving
– How big is the market
• Product or service (intellectual property)
• Target clients and business model
• Go to market strategy
• Competitive landscape and advantage
– Barriers to entry
• The management team
– Hiring plan
• Financial summary, including last year’s P & L and 3 year projections
• Funding needs for this round & use of funds
– history of funding to date
– pre-money valuation

26. Agenda
•
–
•
–
•
•
–
26

27. “Stage” & Equity Capital Sources
Stage
Crystallize Idea
and Early
Demonstration
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
Syndication,
Micro-Cap
Funds
VCs, Angel
Group
Syndication,
Micro-Cap
Funds
VCs
$25K - $100K
$100K - $500K
$500K - $1M
$5M – as
needed
as needed
Investment
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
….
These 2 need
sophisticated growth plans
27

28. 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
communication with funders
28

29. Closing Thoughts…
Leverage the Entrepreneurial Community in Boston!
-Greenhorn Connect
-Etc.
29

30. Funding Options for Early Stage Companies
Grants, etc
30

31. 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 dilutive
• Cons:
– Long Solicitation Process
– March-in Rights
– Work with universities for expertise
– Best to incorporate (but more acceptance of LLCs)
– Accounting systems must be compliant with the
government
KATZ
– Very competitive in some agencies
NANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS ADVISORS
www.knscpa.com
31

32. SBIR/STTR Participating Agencies
Web site address at SBA for the agencies’ SBIR links:
http://www.sbir.gov/federal_links.htm
DOD
HHS
DOEnergy NSF
DOC
EPA
ED NIST
DHS
DOEducation
NASA
USDA
DOT
Innovation Development Institute
www.inknowvation.com
KATZ
NANNIS +
SOLOMON, PC
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS ADVISOR CONSULTANTS
lnannis@knscpa.com
32

33. SBIR/STTR Participating Agencies (cont’d)
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
33

34. SBIR/STTR Participating Agencies (cont’d)
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
34

35. SBIR/STTR Participating Agencies (cont’d)
Web site for entrepreneurs is:
http://www.sba.gov/starting_business/ind
ex.html
Services Specific Territories
Management Consulting
Start-up Consulting
Web site for lending programs is:
http://www.sba.gov/financing/
index.html
Business Plan Development
Financing Plan Development
Low Cost Training Programs
7(a) Loan Program
Disaster Recovery
CDC / 504 Program
Micro Loans
Procurement Technical Assistance
Center
Mass Export Center
Small Business Investment Companies
35

36. SBIR/STTR Participating Agencies (cont’d)
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
36

37. Additional 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.govthen go to “Doing Business”
www.ri.gov/business/
vermont.gov/doing_business/business.html
www.maine.gov/portal/business/small_bus.html
37

38. 38

39. 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
obligation 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 options
39