Funding Your Business Roc Bp 2012

Funding Your Business-
Capital Options
Rami Katz
Chief Operating Officer
Excell Partners

Agenda:
• Stages of Financing
• Key types of financing
• Boot strapping
• Grants
• Loans / Debt
• Equity
• Excell Partners
• If we have the time…

2/28/2012 2012 Rochester Regional Business Plan Contest 2

• Personal assets
• “Boot strapping”
• Grants
• SBIR, NYSERDA
• Foundations, Economic Development
• Loans / Debt
• Bank loans
• Economic Development
• Equity
• 3Fs
• Angels
• VCs


− “Down-n-dirty” prototypes
− Pre-payments from customers
− Progress payments (Gov’t contracting)
− Extended payment terms from suppliers
− Factoring
− Risk sharing partnerships
Beg, Borrow, or…


Agenda:
• Boot strapping
• Grants
• Loans / Debt
• Equity
• Excell


− Free Money (Almost…)
− ~15% hit rate
− S.O.S. – is it aligned with your goals?
− Accounting
− Reporting


− SBIR/STTR – high-risk, high return product
development
− Phase-1: $150K, Phase-2: ~$1MM
− NYSERDA – Energy savings projects,
− $100K - $MMs,
− Usually requires a match
− Government- http://grants.gov/
− PTAC - http://www.rochesterptac.com/


Agenda:
• Boot strapping
• Grants
• Loans / Debt
• Equity
• Excell


Senior, secured debt
− Usually commercial banks
− Common misperception:
− BANKS DON’T FINANCE LOSSES !
− Need multiple collateral sources (assets):
− A/R – 80%,
− Inventory – 20-60%,
− Fixed assets – 50%
− Cash flow – debt service as small % of earnings/cash
− PERSONAL GUARANTEES!


Other Debt sources
− SBA – www.sba.gov – 7(a), Microloans…
− ~75% government guarantee
− Factoring
− IDA – COMIDA, etc.
− Trade Associations, etc.
− HUD


Agenda:
• Boot strapping
• Grants
• Loans / Debt
• Equity
• Excell


• The investor becomes part owner
• Most returns come through exit
• Put, dividend, stock buy-back
• Plan for Liquidity event
• Requires size and growth


• Pre-Seed: Business plan; technical feasibility
• Seed / Startup: Prototype development; non-
revenue customers; company infrastructure
• Early Stage / A round: Initial Mfg.; revenue
generation
• Second Stage: Shipping , but not profitable
• Third Stage: Profitable, need expansion
• Bridge Financing: Additional growth prior to
liquidity event
• Exit: – M&A, LBO, IPO


Target – 10X in 5 years  58.5% PA
Actual (%):
Fund Type 1-Year 3-Year 5-Year 10-Year 15-Year 20-Year Target
Early Stage 21.88 4.36 6.26 0.89 43.08 31.46 40-100%
Later Stage 25.57 12.71 12.87 6.65 13.16 21.44 25%+
Multi-Stage 17.71 2.91 5.04 4.53 29.49 24.44 30-50%
S&P500 1.14 1.23 (1.18) 2.82 5.23 7.64
NASDAQ 1.97 4.91 1.35 4.89 4.62 7.91
Dow Jones 3.83 3.15 1.37 4.66 6.53 9.16
Source: Cambridge Associates & NVCA – US VC Index 09/30/2011


VCs Vs. Angels
Late

Mostly later stage
3,673 deals
$28.4B
Stage

$20.1B
61,900 deals Early Stage
Mostly early stage (1,414, $8.3B)
Early

Seed
(396, $0.9B)
Angel Investment VC Investment
source: UNH CVR-2010 source: PWC-2011
Q1+Q2-2011 - $9B


VCs Vs. Angels – Cont’d

Angels:
• Invest own money
• Avg. deal - $325K
VCs:
• OPM
• Avg. deal - ~$7.7MM
• Fund size = deal size & investment stage
• KNOW YOUR AUDIENCE


Current valuation: $2MM
Investment required: $1MM
Pre-Money = $2MM
Post-Money = $3MM (Current+Investment)
Investors’ share: $33%
B-plan: Yr-5 valuation= $30MM (10X, 5yrs)


• Term Sheet
• Common Stock
• Preferred Stock
• Convertible Debt


• Deal Summary – pre “legal contract”
• Terms included:
• Representations & Warranties
• Positive and negative covenants
• Securities description
• Rights & responsibilities
• Examples: NVCA => resources
• www.ExcellNY.com


• Investors & Founders on the same basis
• Cash vs. Sweat Equity
• Difference in returns
• Most company favorable
• Little/no protection for the investors
• Votes proportional to shares
• “Passive” investors
• Requires agreement on Valuation


• A Separate class - Typical of VC’s
• “Liquidation preference”
• Participating preferred
• Anti-dilution / Ratcheting
• Benefits
• Protection / Control
• Specific Distributions
• Requires agreement on Valuation


Example Preferred Stock Covenants:
Need 2/3 majority of Preferred Investors to:
• Issue stock;
• Sell or merge
• Declare dividends;
• Repurchase stock (except employee);
• Amend By-Laws;
• Create a subsidiary;
• Incur debt greater than $X;
• Acquire or dispose of assets greater than $Y;
• Incur capital expenditure greater than $Z


• Common for angels
• Technically debt, but intended to become equity
• No real collateral
• Delays decision on valuation
• Converts at a discount to future investment
• Preference in liquidation
• What if no future investment?


• Understand the different funding sources
• Understand where your company is
• Understand your investors and the implications
of an equity deal before you start the process.
• Remember that you will all be partners when
the deal is done.
• The term sheet process is a good free look.
• Involve your advisors early.


Product Concepts & New IP
Venture
Stages

Early
Concept Pre-Seed Seed Growth Maturity
Stage
Customer Market
Idea Prototype Revenues Profitability
Validation Extension

Grants Grants – SBIR, NYSERDA, ARRA, etc.

3Fs
Equity

Seed– Excell, RAN

A/B Series– Trillium, CVF, HP

Econ. Dev. / Factoring
Debt

Senior/Bank Debt


Agenda:
• Boot strapping
• Grants
• Loans / Debt
• Equity
• Excell


Excell – A Dedicated Seed Fund
• Part of the UR, representing:
• Cornell, UB, SU and RIT
• Invests $150K-$250K in Seed/Pre-Seed deals
• Looking to make 5-10 investments this year
• To date:
• 22 Investments, 9.3% IRR
• $134MM of follow-on funding
• 245 FTEs with >$76K in avg. salaries
www.ExcellNY.com – (585) 458-SEED


Thank You!
Rami Katz
rkatz@excellny.com
585-458-SEED


Since we have the time:

• How not to make Investor pitches and what
VCs will NEVER say-
http://www.youtube.com/watch?v=8SaHW6Y7_Yg


Funding Your Business Roc Bp 2012

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