The document discusses various funding options for early stage companies. It provides information on different types of investors such as angels, VCs, crowdfunding, grants, and banks. It explains what each investor looks for in terms of risks, returns, and company stage/profile. The document also summarizes SBIR/STTR grants and eligibility. Overall, the document aims to help early stage companies understand the funding landscape and identify suitable options given their business needs and risks.

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Network Events
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5. Funding Options for Early Stage Companies
June 27, 2013

6. Today’s Experts
• The Angel – Sheryl Schultz, Golden Seeds
• The VC – Kent Bennett, Bessemer Venture
Partners
• The Crowd – Dan Sullivan, Crowdly
• The Grants – Dr. Ruth Shuman, National
Science Foundation
• The Bank – Dan Allred, Silicon Valley Bank
• Moderator: David Jegen, Devonshire Investors
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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
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8. Companies come in many forms
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
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HOW YOU DO IT
• IP licensing • Manufacturing • R&D focused • Product vs. services

9. Understand how different investors see your risks
9
Market • Market size, unproven
market demand?
Product • Technical feasibility,
time to build, IP?
Management • Domain knowledge,
past successes?
Bus. model • Established, recurring
rev, sticky?
Competition • Some, but not too
much?
Exit
opportunities
• Growth potential, active
buyers, profitability?
Financial partners are specialists, but the most basic rule is: the more risk a
funding partner takes, the more return (and control) they are going to require
Types of risk Ways you can mitigate
• Stage appropriate growth strategy
• Flexible, high performing team
• Deep market understanding
• Profitable business model
• IP and product differentiation
• Right partners in key areas
(e.g., manufacturing, sales)
• Legal and corporate governance
• Solid bookkeeping and accounting

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
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11. 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
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Bootstrap
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12. The World of Angel Capital
• Angels invest own money
– Prefer capital efficient / early exit opportunities (5-7years) –
target of $10 - $15M in revenue within five years
– Products, not services – food and fashion have generally been
difficult to fund through angel groups.
– Capital Requirements: $100k to $10M
• Angel Ecosystem
– 2012 ~$23B annually, ~ 67,000 new investments
– 26 angel groups in New England (for full list, go to
angelcapitalassociation.org) – we syndicate with one another!
– Important to find the right fit
• Do your homework – target angels that fit your profile
• Engage early and informally
• FIND A CHAMPION!
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13. Are You Ready for Angel Funding?
13
• Stage of development
• Concept (probably friends and family, maybe an individual angel)
• Prototype (some angel group interest)
• First revenues (lots of angel group interest)
• Team in place or identified
• Clear understanding of your capital requirements, and in-depth
understanding of your financials
• Differentiated technology or service and a substantial market
opportunity
• Ideally – 1 to 2 paying customers, but product in beta is often
enough.
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14. Equity Capital: Shared Upside - VC
• VCs invest other people’s money (pension funds, etc.)
– Returns are measured on a per fund basis – 3X return target with
some funds doing much better
– Small number of deals drive returns for the entire fund
– Big question: is there a chance we could return HALF OF OUR
FUND with this investment?
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EARTH: some substance
that defends you and
your margins (IP, network
effects, brand, deep tech)
WIND: a HUGE or
dynamic market that will
reward you for changing
just a fraction of it
FIRE: a crazy obsessed
founder or group of
founders who want to win
more than anything
WATER: a model that will
scale cost efficiently (at
least once it gets going)
What VCs Want
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15. Debt vs. Equity
Debt
• Lower risk: first money to
be paid back
• Relatively inexpensive
• First lien on company assets
• Negative covenants
Equity
• Higher risk: lives & dies with
the company
• Very expensive
• Unsecured (typically)
• BOD governance
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16. Primary uses of debt
• Financing assets
– Working capital
– Fixed assets
• Financing growth
– Growth capital
– “Venture debt”
• Special situations
– Bridge loans
– Financing “near” assets
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17. Right capital for the right purpose
Venture Debt Fixed Assets Working
Capital
Cash-flow
Financing
Purpose Augment VC,
invest in value
drivers.
Finance fixed
assets.
Finance A/R &
inventory.
Leverage
cash-flow for
growth.
Structure 6-12 month
I/O then 3
year payback.
Amortize over
life of asset.
Revolving line
w/ formula
borrowing.
Term
loan,multiple
of EBITDA.
Primary
Repayment
Source
Future equity. Existing and
future cash.
Cash flow
within W/C
cycle.
Cash-flow
from
operations.
Secondary
Repayment
Source
Enterprise
value.
Liquidation
value of fixed
assets
Liquidation
value of W/C
assets
Liquidation
value of all
assets.
Pricing 8-10%
interest& 3-
6% warrants.
7-8% interest
& warrant (or
higher rate).
5-7% interest
w/ covenants.
Depends on
leverage.
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21. SBIR/STTR Program Fundamentals
• Provides early-stage funding for R&D on high-risk
technologies with high potential for economic/societal
benefits
• Targets early-stage development of technology on a
commercial path
• Seeks to fund transformational, game-changing technology
• Looks for significant market opportunity
• Awards based on both technical and commercial merit
• Values academic collaboration/translation
• Strong focus on commercialization
• Encourages ties to private sector
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22. SBIR/STTR Program
• Pros:
– Provides “pre-seed” funding
to demonstrate proof-of-
concept
– Non-dilutive investment;
not a loan/equity-free
– Provides validation,
recognition, visibility
– May be leveraged to attract
investment/partnerships
– Small business retains IP
– Encourages partnerships
• Cons:
– 6 month solicitation process
– March-in rights
– Accounting systems must be
compliant with the
government
– Very competitive in some
agencies
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23. • Department of Agriculture
• Department of Commerce
– National Oceanic and
Atmospheric
Administration
– National Institute of
Standards and
Technology
• Department of Defense
• Department of Education
• Department of Energy
• Department of Health and
Human Services
• Department of Homeland
Security
• Department of
Transportation
• Environmental Protection
Agency
• National Aeronautics and
Space Administration
• National Science Foundation
SBIR/STTR Participating Agencies
23SBA Web Site: http://www.sbir.gov/applicants#eight
SBIR (2.7%) + STTR (.4%) = >$2.5 B
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24. Company data from FY
2012 Phase I awardees:
– 86% of Phase I awardees
have 10 or fewer
employees
– 90% of Phase I awardee
companies were
incorporated since 2007
– 73% of Phase I awardees
have never received a
Phase II award from any
agency
University ties to Phase II
projects*:
‒ 37% involve faculty
members
‒ 27% involve graduate
students
‒ 25% rent/use university
facilities
‒ 17% issue a subcontract
to a university
SBIR/STTR NSF Awardee Demographics
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Phase I Proposals received: >2,100; funding rate 16%
Phase II Proposals received: >300; funding rate 39%
* National Academies Study, 2007
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25. 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
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