alternatives_to_venture_capital_2003.ppt
TRANSCRIPT
04/13/231
CFA v. 2.0
Alternatives to Venture Capitalfor financing technology commercialization
February 28, 2003
04/13/232
CFA v. 2.0
Corporate Finance Advisors (CFA)
• Specialize in assisting companies using a combination layering of equity, debt, subordinated debt, and other alternative financing sources for rapidly growing businesses
• Specialize in assisting companies using a combination layering of equity, debt, subordinated debt, and other alternative financing sources for rapidly growing businesses
04/13/233
CFA v. 2.0
My Background
Sam Thacker
• Over $350 million in financing arranged since 1994
• Focus on structuring mix of debt / equity
• Largest single deal $11 million
• Average deal $1.5 - $2 M
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CFA v. 2.0
Today’s Objective
• Introduce you to alternatives to classic venture capital and how they can be used
• Provide “real world” examples of how the various alternatives to VC have been used
• Challenge you to think differently about financing technology commercialization
• Introduce you to alternatives to classic venture capital and how they can be used
• Provide “real world” examples of how the various alternatives to VC have been used
• Challenge you to think differently about financing technology commercialization
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CFA v. 2.0
Historical Foundation (pre 1990s)
GovernmentIBM
3M
Etc.
NASA
AerospaceDefense
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CFA v. 2.0
Changes in Financing 1988-1996
1988 1992 19960
5
10
15
20
1988 1992 1996
Nationwide GrowthNon-Traditional Financing Programs
Traditional Lending
Non-TraditionalFinancing
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CFA v. 2.0
Grass Roots Financing
EquipmentLeasing
TraditionalLOC
SBA
Credit Card
AngelInvestor
Construction
Asset-Based
SBIC
?
Factoring
HomeEquity
Conventional
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CFA v. 2.0
Financing Pyramid
IPO
Institutional VC
Early seed stage (SBICs)
Larger-scale commercial loans
Band of Angels
Friends & Family
Big-time VC
Corp VC, Strategic Alliance
Private Placement (PPM) Reg. D
SBA / Microloan Comm Loans
Personal Funds
Angels (wealthy families), individuals
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CFA v. 2.0
Advent of Small Business Investment Companies (SBICs)
• Small Business Investment Companies (SBICs) have provided approximately $27 billion in long-term debt and equity growth capital to nearly 90,000 small U.S. companies since 1959.
• Small Business Investment Companies (SBICs) have provided approximately $27 billion in long-term debt and equity growth capital to nearly 90,000 small U.S. companies since 1959.
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SBIC Success Stories
• Intel Corporation
• Staples, Inc.
• Extreme Networks, Inc.
• Kronos, Inc.
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CFA v. 2.0
Venture Capital FundInvestments 1995-2001
0
20
40
60
80
100
1995 1996 1997 1998 1999 2000 2001
$ Billions
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CFA v. 2.0
Nature of the Technology
• Enabling
• Disruptive
• Can a company be formed around the technology?
– Companies vs technologies
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CFA v. 2.0
Enabling Technology
• Easy to understand implications
• Fits current value chain
• Incumbents will easily finance
• Easy to understand implications
• Fits current value chain
• Incumbents will easily finance
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CFA v. 2.0
Disruptive Technology
• Will not be understood at first
• New markets need to be developed
• System ‘anti-bodies’ kick in
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CFA v. 2.0
Financing Companies vs. Financing Technology
• Companies are free standing
• Technology needs a home
• Companies are easier
• Power of Strong Management
• Companies are free standing
• Technology needs a home
• Companies are easier
• Power of Strong Management
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CFA v. 2.0
Investor / Lender expectations
• Value of Technology to “owners”
• Liquidity
• Risk vs. Reward
• WIIFM?
• Realistic expectations
04/13/2317
CFA v. 2.0
Banks in the Financing Mix
• Debt, rarely equity
• Three “Cs” of banking
– Character
– Capacity
– Collateral
• Cash Flow
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CFA v. 2.0
“Venture Capital” Banks
• Silicon Valley Bank, Imperial Bank, etc.
• Regularly provide debt / equity financing and take more risk than regular commercial bank.
• Have high degree of expertise in technology
• Silicon Valley Bank, Imperial Bank, etc.
• Regularly provide debt / equity financing and take more risk than regular commercial bank.
• Have high degree of expertise in technology
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CFA v. 2.0
Balance Sheet Financing and Technology Commercialization
• Match financing method to asset being financed
• Layer multiple types of methods to minimize equity dilution and mitigate risk
• Understand key ratios
• Match financing method to asset being financed
• Layer multiple types of methods to minimize equity dilution and mitigate risk
• Understand key ratios
04/13/2320
CFA v. 2.0
Current Asset Financing
• Purchase orders
• Inventory
• Accounts Receivable
• Contracts
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CFA v. 2.0
Financing Long-term Assets
• Equipment
• FF&E
• Real Estate
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CFA v. 2.0
Intellectual and Intangible property
• Patents
• Software
• Goodwill
• New GAAP rules
– SFAS 142
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CFA v. 2.0
Mezzanine Debt Financing
An investment of between $2 million and $20 million into a profitable company for a major expansion generally leading to an IPO in 3 to 18 months.
An investment of between $2 million and $20 million into a profitable company for a major expansion generally leading to an IPO in 3 to 18 months.
• Brick & Mortar Oriented
• Strong EBITA
• Strong track record of performance
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CFA v. 2.0
Corporate Venture Money
• Why use this type of money?– Few sources can have a profound impact on
your outcome.
– Less emphasis on strict investment criteria
– A large strategic doesn’t mind being ‘first in’ on an investment round.
– A large strategic looks very, very good on the cap table.
• Why use this type of money?– Few sources can have a profound impact on
your outcome.
– Less emphasis on strict investment criteria
– A large strategic doesn’t mind being ‘first in’ on an investment round.
– A large strategic looks very, very good on the cap table.
04/13/2325
CFA v. 2.0
Corporate Venture Money
• Example: $17B of Nortel’s recent writedown was from investments.
• Corporations have different needs
• Corporations are well versed in buy/make decisions.
– Equity ‘juices’ the deal
• Example: $17B of Nortel’s recent writedown was from investments.
• Corporations have different needs
• Corporations are well versed in buy/make decisions.
– Equity ‘juices’ the deal
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CFA v. 2.0
Corporate Venture Money
• What makes you valuable?
– Technology is clearly yours
– You are the expert
– STRONG strategic component
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CFA v. 2.0
Corporate Venture Money
• The power of strategic intent– Assume 5,000 wins
– 20000 engagements
– Gross Revenue of $500M
– Your product increases the wins by 10%.
– Average win: $100,000
– New wins: 5,500
– Incremental Revenue: $50M
04/13/2328
CFA v. 2.0
Corporate Venture Money
• Techniques for finding the right strategic
– Who bears the cost of failure?
– Who currently has the same customers as you?
– Who wants the same customers as you?
– Who has similar business/manufacturing processes
• Techniques for finding the right strategic
– Who bears the cost of failure?
– Who currently has the same customers as you?
– Who wants the same customers as you?
– Who has similar business/manufacturing processes
04/13/2329
CFA v. 2.0
Corporate Venture Money
• Top things to think about
– Strengths & Weaknesses
– How do you create incremental revenue?
• Find the strategic connection
– Elephant on a leash
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Government Backed Programs
• Generally have a background agenda
• Lift for specific:
– Industries
– Geographic areas
– Socio-economic
– Gaps in banking system
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Government Backed Programs (SBA)
• Small Business Administration (www.sba.gov)
• Does not loan money
• Allows lending institutions to consider higher risk loans
Houston : ~$330M (2001)
• Small Business Administration (www.sba.gov)
• Does not loan money
• Allows lending institutions to consider higher risk loans
Houston : ~$330M (2001)
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CFA v. 2.0
Government Backed Programs (SBA)
• Several SBA programs
– Programs target specific businesses/goals
• Guarantee up to 80% of 100K
• 75% of > 100K, max 750K
• Loans are made at the regional level
• Collateral is important
• Several SBA programs
– Programs target specific businesses/goals
• Guarantee up to 80% of 100K
• 75% of > 100K, max 750K
• Loans are made at the regional level
• Collateral is important
04/13/2333
CFA v. 2.0
Government Backed Programs (SBIC)
• Venture Investment Companies licensed by the SBA www.sba.gov/INV
• Private Capital + Government Lending
– $4.8B in 2001
• Profit Motivated (25 - 46% IRR)
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CFA v. 2.0
Government Backed Programs (SBIC)
• Fill the gap just under typical VC financing.
• Will be tough just like VC’s
• Have specific focus’s
• Provide expertise
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CFA v. 2.0
Government Backed Programs (Local EDC’s)
• Focus on job creation / tax base
• Regaining popularity
• Community feels able to influence own destiny
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Government Backed Programs (State Focus)
• Driven to attract certain sub-segments like biotechnology & medicine
• Start off where local EDCs end, often cooperatively
• Often involves academia / research
• Driven to attract certain sub-segments like biotechnology & medicine
• Start off where local EDCs end, often cooperatively
• Often involves academia / research
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CFA v. 2.0
Philanthropic Investments
• Benefit society / mankind
• Examples – drug discovery, biotechnology, medical, and learning technology
• Find an insider to help you find sources
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CFA v. 2.0
Angels and Angel Groups
• Tend to be either vertically or geographically focused
• Small funds for early stage
• Collective due diligence
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CFA v. 2.0
Academic – Corporate “Partnership”
• “In kind” contribution may substitute for $$$
• Understand academic institution’s need
• “Share” / collaborate IP creation
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CFA v. 2.0
Incubators and Accelerators
• Many rethinking focus
• Understand strengths& weaknesses
• Have realisticexpectations
04/13/2341
CFA v. 2.0
Public vs. Private Company
• Current trend in becoming public via “reverse merger”
• Do your homework, learn strengths / weaknesses
• What reverse mergers do and don’t do
04/13/2342
CFA v. 2.0
Conclusion
• Think creatively when considering financing sources for your project
• When possible, layer financing methods to protect shareholder value while balancing speed to market
• Be persistent and look at all options