funding your business roc bp 2012

Funding Your Business-

Capital OptionsRami Katz

Chief Operating OfficerExcell Partners

2012 Rochester Regional Business Plan Contest

Financing Your BusinessAgenda:• Stages of Financing• Key types of financing

• Boot strapping• Grants• Loans / Debt• Equity

• Excell Partners• If we have the time…

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Stages of Financing

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Key Types of Financing• Personal assets• “Boot strapping”• Grants

• SBIR, NYSERDA• Foundations, Economic Development

• Loans / Debt• Bank loans• Economic Development

• Equity• 3Fs• Angels• VCs

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Boot-Strapping - Guerilla Financing

− “Down-n-dirty” prototypes− Pre-payments from customers− Progress payments (Gov’t contracting)− Extended payment terms from suppliers− Factoring− Risk sharing partnerships

Beg, Borrow, or…

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Financing Your BusinessAgenda:• Stages of Financing• Key types of financing• Boot strapping

• Grants• Loans / Debt• Equity• Excell• If we have the time…

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Grant Funding− Free Money (Almost…)− ~15% hit rate− S.O.S. – is it aligned with your goals?− Accounting− Reporting

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Grant Funding – cont’d− SBIR/STTR – high-risk, high return product

development− Phase-1: $150K, Phase-2: ~$1MM

− NYSERDA – Energy savings projects,− $100K - $MMs,− Usually requires a match

− Government- http://grants.gov/− PTAC - http://www.rochesterptac.com/

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Financing Your BusinessAgenda:• Stages of Financing• Key types of financing• Boot strapping• Grants

• Loans / Debt• Equity• Excell• If we have the time…

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Loans / DebtSenior, secured debt

− Usually commercial banks− Common misperception:

− BANKS DON’T FINANCE LOSSES !− Need multiple collateral sources (assets):

− A/R – 80%,− Inventory – 20-60%,− Fixed assets – 50%

− Cash flow – debt service as small % of earnings/cash− PERSONAL GUARANTEES!

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Loans / Debt – Cont’d

Other Debt sources− SBA – www.sba.gov – 7(a), Microloans…

− ~75% government guarantee− Factoring− IDA – COMIDA, etc.− Trade Associations, etc.− HUD

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http://www.sba.gov/


Financing Your BusinessAgenda:• Stages of Financing• Key types of financing• Boot strapping• Grants• Loans / Debt

• Equity• Excell• If we have the time…

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Equity Investments

• The investor becomes part owner• Most returns come through exit

• Put, dividend, stock buy-back

• Plan for Liquidity event• Requires size and growth

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Stages of Equity Capital:• Pre-Seed: Business plan; technical feasibility

• Seed / Startup: Prototype development; non-revenue customers; company infrastructure

• Early Stage / A round: Initial Mfg.; revenue generation

• Second Stage: Shipping , but not profitable

• Third Stage: Profitable, need expansion

• Bridge Financing: Additional growth prior to liquidity event

• Exit: – M&A, LBO, IPO

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Stages of Financing

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Equity Investments - returns Target – 10X in 5 years 58.5% PA

Actual (%):

Source: Cambridge Associates & NVCA – US VC Index 09/30/2011

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Fund Type 1-Year 3-Year 5-Year 10-Year 15-Year 20-Year TargetEarly Stage 21.88 4.36 6.26 0.89 43.08 31.46 40-100%Later Stage 25.57 12.71 12.87 6.65 13.16 21.44 25%+Multi-Stage 17.71 2.91 5.04 4.53 29.49 24.44 30-50%

S&P500 1.14 1.23 (1.18) 2.82 5.23 7.64NASDAQ 1.97 4.91 1.35 4.89 4.62 7.91

Dow Jones 3.83 3.15 1.37 4.66 6.53 9.16


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Early Stage (1,414, $8.3B)

Angel Investmentsource: UNH CVR-2010Q1+Q2-2011 - $9B

Earl

y

Sta

ge

Late

$20.1B61,900 dealsMostly early

stage

VC Investment

source: PWC-2011

Mostly later stage 3,673 deals

$28.4B

Seed (396, $0.9B)

VCs Vs. Angels


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VCs Vs. Angels – Cont’d

Angels:• Invest own money• Avg. deal - $325K

VCs:• OPM• Avg. deal - ~$7.7MM• Fund size = deal size & investment stage• KNOW YOUR AUDIENCE


Investors ownership stake

Current valuation: $2MM

Investment required: $1MM

Pre-Money = $2MM

Post-Money = $3MM (Current+Investment)

Investors’ share: $33%

B-plan: Yr-5 valuation= $30MM (10X, 5yrs)

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Equity Financing – Key terms

• Term Sheet• Common Stock• Preferred Stock• Convertible Debt

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Term sheet

• Deal Summary – pre “legal contract”• Terms included:

• Representations & Warranties• Positive and negative covenants• Securities description• Rights & responsibilities

• Examples: NVCA => resources• www.ExcellNY.com

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http://nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136

http://www.excellny.com/


Common Stock• Investors & Founders on the same basis

• Cash vs. Sweat Equity• Difference in returns

• Most company favorable• Little/no protection for the investors

• Votes proportional to shares• “Passive” investors

• Requires agreement on Valuation

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Preferred Stock

• A Separate class - Typical of VC’s• “Liquidation preference”• Participating preferred• Anti-dilution / Ratcheting

• Benefits • Protection / Control• Specific Distributions

• Requires agreement on Valuation

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Preferred Stock – Cont’dExample Preferred Stock Covenants: Need 2/3 majority of Preferred Investors to:

• Issue stock;• Sell or merge• Declare dividends;• Repurchase stock (except employee);• Amend By-Laws;• Create a subsidiary;• Incur debt greater than $X;• Acquire or dispose of assets greater than $Y;• Incur capital expenditure greater than $Z

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Convertible debt

• Common for angels• Technically debt, but intended to become equity

• No real collateral

• Delays decision on valuation• Converts at a discount to future investment

• Preference in liquidation• What if no future investment?

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Equity capital - The Bottom Line:• Understand the different funding sources• Understand where your company is

• Understand your investors and the implications of an equity deal before you start the process.

• Remember that you will all be partners when the deal is done.

• The term sheet process is a good free look.

• Involve your advisors early.

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Financing Sources - Summary

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Concept Pre-Seed SeedEarlyStage

Growth

CustomerValidation

Maturity

ProfitabilityMarket

ExtensionIdea RevenuesPrototype

Product Concepts & New IP

Grants – SBIR, NYSERDA, ARRA, etc.

Seed– Excell, RAN

A/B Series– Trillium, CVF, HP

Ven

ture

Sta

ges

3Fs

Senior/Bank Debt

Econ. Dev. / Factoring

Grants

Eq

uit

yD

eb

t


Financing Your BusinessAgenda:• Stages of Financing• Key types of financing• Boot strapping• Grants• Loans / Debt• Equity

• Excell• If we have the time…

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Excell – A Dedicated Seed Fund

• Part of the UR, representing:• Cornell, UB, SU and RIT

• Invests $150K-$250K in Seed/Pre-Seed deals• Looking to make 5-10 investments this year• To date:

• 22 Investments, 9.3% IRR• $134MM of follow-on funding• 245 FTEs with >$76K in avg. salaries

www.ExcellNY.com – (585) 458-SEED

http://www.excellny.com/


Questions?

Thank You!

Rami [email protected]

585-458-SEED

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mailto:[email protected]


Financing Your BusinessSince we have the time:

• How not to make Investor pitches and what VCs will NEVER say-

http://www.youtube.com/watch?v=8SaHW6Y7_Yg

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http://www.youtube.com/watch?v=8SaHW6Y7_Yg

funding your business roc bp 2012

Documents

later stage

year targetearly stage

secured debt

deal size investment

expansion bridge financing

debt sources sba

stock covenants

stock buy