The document summarizes an upcoming presentation on funding options for early stage companies. Jean Hammond will discuss different funding sources that are appropriate for companies at various stages of growth and maturity levels. These include friends and family funding for normal growth companies, angel investors and accelerators for high growth companies, and strategic corporate investors for extreme high growth companies seeking large exits. The presentation will also cover how growing a company and reducing risks makes it eligible for larger sources of capital.
4. 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
5. Agenda
• Funding Sources
– Risk adjusted investing
• Business Stage
– Improving communication
• Experiences (Q&A)
• Backup other sources
– Government, etc
5
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
exists,
REDUCE
RISK, and
earn access
to different
financial
partners
6
7. 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
8. 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
9. 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
10. 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
11. 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
12. 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
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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
19. 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
20. Agenda
• Funding Sources
– Risk adjusted investing
• Business Stage
– Improving communication
• Experiences (Q&A)
• Backup other sources
– Government, etc
20
21. “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
….
22. 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
23. 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
24. 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
25. 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
?
26. 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
27. 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
28. 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
29. 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
30. 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
31. 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
32. Closing
Thoughts…
32
Leverage the Entrepreneurial Community in Boston!
- Greenhorn Connect
- The Capital Network
- Etc.
34. 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
35. 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
36. 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
37. 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
38. 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
39. 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
40. 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
42. 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
43. 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
44. 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