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Evidence-Based Start-Up Financing Errol Arkilic (errol@m34capital.com)

Founding and Former Lead I-Corps Program Director

M34 CAPITAL

M34 CAPITAL

M34 CAPITAL

M34 CAPITAL

Varga Design & Marketing

4-7-14

The views expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation

I Just Won an NSF Award, Why Should I “Give Away” Part of My Company

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I Just Won an NSF Award, Why Should I “Give Away” Part of My Company

• NSF defrays some of the R&D Expense – (There are other expenses)

It’s Pragmatic

• Believe or Not, Investors can add Value,

It’s Effective

• Capitalism is a Good Thing,

It’s the Social Contract

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$ell

Identify customer segment

With current team?

Hypotheses Validated?

Market Flow

Team/Company Flow

Financing Flow

Identify Pains/Gains

Building a Company

Develop MVP

Build out POC

Technology Flow

SEARCH PROVE SCALE

Yes

Validated Customer Segment?

Customer Creation/

Scale Sales Repeatable/scalable sales model?

Founding Team – who?

Does team Match Activities?

Equity Split – how?

What? Early Exit or Build?

Acquisition

Build Advisory

Board

Raise Seed Round

No official board of directors Raise VC

“A” Round

Build out Product

Build Customer Support

Team

Raise 2nd Seed

Round Needed?

Early Exit

Funded POCs?

Round out Team/ Create Culture

Build Company

Yes

Later VC

Rounds

Yes

No

Round out Team/ Create Culture

No

EXECUTE

SBIR Phase I

SBIR Phase II

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M34 CAPITAL

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M34 CAPITAL

M34 CAPITAL

Varga Design & Marketing

4-7-14

M34: What you need to reach escape velocity

Entrepreneurship*

• Entrepreneurship is the process of starting a business or other organization. The entrepreneur chooses/develops a business model, acquires the human and other required resources and is fully responsible for it success or failure.

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*Wikipedia: July 2014

Business Model Canvas

? ? ? ?

?

?

?

? ?

✔ ✔

✔

✔

✔

✔

✔

✔

✔

So, you need to finance exploration!

• Remember you Business Model has 4 stages of deployment

1. Searching

2. Proving

3. Executing

4. Scaling

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Where are You in the Life Cycle

Search

Scale

Prove

Execute

Why is Financing a Tech-based Startup so difficult?

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Venture Capital

Angels / Friends & Family

Private Equity

Company Profits

Non-profits / Grants

The Government

Commercial Banks

Sources of Funding for Innovation

3RD Party Risk

?

?

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Venture Capital Threshold

Angel Capital Threshold Economic

Development

Funds Threshold

NSF

SBIR/STTR

Threshold

Technology Risk

Market Risk

People Risk Finance Risk

Friends,

Family

(and Fools)

Threshold

What is NSFs Business Model?

Senior Debt

Threshold

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It’s not rocket-science…

Financing 101

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Time

Cashflow

Searching Proving

Executing

Scaling

Value or Stock Price

2.5x

2x(2.5)

1.5x(2)x(2.5)

1.25x1.5x2x2.5

1

More Realistically

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Time

Cashflow

Searching Proving

Executing

Scaling

Value or Stock Price

2.5x

2x(2.5)

1.5x(2)x(2.5)

1.25x1.5x2x2.5

1

Executing: Where the Rubber Hits the Road

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Time

Cashflow

Searching Proving

Executing

Scaling

Value or Stock Price

2.5x

2x(2.5)

1.5x(2)x(2.5)

1.25x1.5x2x2.5

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Planning the Raise (KISS)

• Search +Founders Salary (research) +T/E (research) +Legal (research) +IP +MVP (research) +Rent month-by-month Income = 0 Important Numbers Payroll taxes: 13% Workers Comp: 1% Benefits: 20% Licenses: $10K Research Shop Research:Sale Exp. ~10:1

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• Proving All That &

+Engineering

+Employees

+Sales Exp.

+Marcomm

+Facilities (lease)

+CEO

Income = ε

Adolescent Comp

R&D:Sales Exp ~3:1

• Executing All That &

+COGS

++Sales

++ Sales

++ Sales

++Marcomm

+CMO

+Accounting/CFO

Income = real

Sales Oriented

R&D:Sales Exp ~1:2

Use of Proceeds: Building the Ask

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Expenses

Month 1 Month 2 Month 3

G&A

Founder1 80K/year 6667 6667 6667

Rent $1500/month 1500 1500 1500

Legal 500/month 500 500 500

T/E 1500/month 1500 1500 1500

Patent

Benefits & Taxes (25% and 13%) 2533 2533 2533

G&A Total 12700 12700 12700

COGS

COGS Total 0 0 0

R&D and Regulatory

Equipment 500/month 500 500 500

Lab Rental 2000/month 2000 2000 2000

MVP

R&D Total 2500 2500 2500

Sales and Marketing

Founder 2 80K/year 6667 6667 6667

Conferences 3500

Benefits & Taxes (25% and 13%) 2533 2533 2533

Sale/Marketing Total 9200 12700 9200

Total 24400 27900 24400

Cumulative 24400 52300 76700

When Modeling

• Keep it time-based by month

• Focus on Cashflow (Not P&L)

• Know Implications of budget

• Investors Dirty Little Secret….

• More Money ≠ More Dilution (in general)

– “Deal Optics”… Rule of thumb not intrinsic value for valuation – Seed = 30-40%, Series A = 20-30%, Series B = 15-25%, Series C = 10-15%

• More money = higher expectations!

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What makes a good business

• Raving Customers

• Forgiving Unit Economics (High Margins)

• Defensible Business Models

• Growing Markets (hint they can initially be small)

• Raving Customers

• Solid Partners

• Raving Customers

• Raving Customers

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Musings on Startup Financing

• Know your Investor’s Business Model (including F&F and SBIR) – Only target where there is a fit

• Don’t B.S. your investors (means don’t B.S. yourself)

• Articulate your BUSINESS MILESTONES – Let the technical milestones follow

• Keep it lean until you hit “Execution”

• You are always raising money

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Thank You, Questions?

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