Chad Barden

Financing Options for Financing Options for EntrepreneursEntrepreneurs

Discussion OverviewDiscussion Overview

• Available OptionsVenture Capital

Private Equity (Angels)

Grants

Strategic Partners

• Choosing an OptionExit Strategy

Returns and Timing

Financing Sources – Private Financing Sources – Private EquityEquity

• Candidates:Friends, Family & FoolsIndiana Angels through Tax CreditPrivate Equity Raise from a Firm like Crown or Perriculum

• Pros:Friendly terms to existing investorsRelatively passive investors

• Cons:Fund raising is time consumingRelatively passive investors

• Risks:Raising enough money to get to a milestoneVC’s sometimes will shy away from a deal with lots of angel investors

• Mitigation:Set an escrow level that gets you 2 months past the milestone, then keep raising to get the company 6 months past the milestoneGroup angels into LLC’s so that a subset of them control the votes of all the investors

Financing Sources – Financing Sources – VC’sVC’s

• Pros:Industry connections & credibilityOne stop shopping…maybeIndustry terms are improving in the Bay Area (Fenwick & West)IFF pressure is increasing

• Cons:Due diligence time periodAdverse terms for existing investorsTypically later stage investorsCoastal money may involve a move of the company

• Risks:Timing, given length of due diligence

• Mitigation:Identify milestones you can achieve and that add real value

Reducing uncertainty about market, technology, or exit

Financing Sources – GrantsFinancing Sources – Grants• Candidates:

21st Century Fund SBIR / STTR

• Pros:Cheap money…Free

• Cons:SBIR / STTR’s are based on specific programs

• Not necessarily in concert with your development plansReporting obligations can be time consumingTiming – process can be lengthy

• Risks:Time invested may yield no results, requires technical time away from product development

• Mitigation:Hire a grant writer

Funding Sources – Strategic Funding Sources – Strategic PartnersPartners

• Pros:Validates market need for VC’sCan create more favorable investment terms from VC’s

• Cons: Expensive money in business deal associated with investment

• Risks:Partnering usually occurs when funding risk is mitigated, asking for funding complicates the negotiation

• Mitigation:Secure partner traction first, then pursue investment as part of negotiations

Choosing an OptionChoosing an Option

DON’T CHOOSE…DON’T CHOOSE…

……PURSUE THEM ALL!!!!PURSUE THEM ALL!!!!

Available Exit StrategiesAvailable Exit Strategies

1) Technology AcquisitionIndustry leader acquires technology based on DISRUPTIVE potential

2) Business AcquisitionTypically requires achievement of $10M - $30M annual salesRequires dilutive financing for achieving revenue AND growth

3) IPOCould be a viable option, but timing will likely be the same as Business Acquisition

Much more expensive and painful than pre-Enron days

Technology AcquisitionTechnology Acquisition

• Risks:M&A discussions can disrupt your ability to get a viable business deal established with a partner...needed for VC funding

• Mitigation:Engage a limited set of potential partners outside of a technology acquisition process

ALWAYS Manage to ALWAYS Manage to Exit Options 2 & 3Exit Options 2 & 3

• Need to plan to raise all money needed to get to cash flow positive

Sources:• Private Equity• Grants (21st Century, SBIR)• VC’s• Strategic Partners

• Identify key milestones that increase the certainty around your exit strategy

Plan funding rounds about 6 months after each significant milestone

Why Angels InvestWhy Angels Invest• The Person

Familiarity with the integrity and abilities of the management teamOR

Friends, Family & Fools

• The “Cause”The company is doing something that contributes to a social cause that is meaningful to the angel…

• Curing cancer, improving the environmentThe company is targeting a market segment in which the angel has experience and insight

• Perceived BIG opportunityThe Angel perceives the technology to be disruptive and does some cursory due diligence that confirms his / her suspicions

What a VC Looks for in a What a VC Looks for in a DealDeal

SEEDSEEDDeveloping product

250K-$1M

IRR 70+% Need 10X in 5 years

Series ASeries A Revenue - paying Customers

$1- $3M IRR 50% Need 5 X in 3-4 years

Series BSeries BSales Expansion

$3- 10M IRR 40% Need 3X in 2-3 years

Late StageLate StageMature Business

$15-50M IRR 25% Need 1.25X in 12 mos

What a VC Looks for in a Seed What a VC Looks for in a Seed DealDeal

• Technology that is proven to workAt least proof of concept, if not a prototype

• Validated marketSomeone credible will validate the pain that the product or service is solvingThat company is perceived to be indicative of a larger market opportunity

• Validated exit strategyComparable deals that have exited for a value that yields requisite returns

• Management team