securing early stage capital

Securing Early Stage Funding

David Berry, MD PhD Partner, Flagship Ventures

Confidential and Proprietary

Overview

How does VC work?

A snapshot of venture capital: then and now

How to raise money

Examples in raising money:

– Friends and family

– Venture capital

– Large scale financing

2


A Primer on Venture Capital

Venture capital firms are managed by a General Partner

The General Partner invests funds from Limited Partners

Funds have a ten year life with a limited number of extensions

The General Partner receives is compensated by a management fee and carry

– Management fees cover salary and expenses

– Carry is a percent of the profits

– Most partnerships have to pay back the LPs and the fees before the General

Partner can share in the profits

Incentives vary based on fund size and number of partners

– Small funds are typically driven by carry only

– Large funds can be driven by fees

3


How Venture Capital Works

The General Partner invest from the fund into a number of companies defined by the strategy

Typically, subsequent rounds are required after an investment by a given VC

– Existing investors are driven to increase share price and reduce dilution

– VCs are motivated to ‘enhance’ the fundraise

– The single biggest value of a VC is reducing the cost of capital

Venture capitalists only make a profit upon an IPO or M&A

Fund life may influence exit behavior

4


Understanding the VC Incentives

2 and 20

– Management fees provide for salaries (2% per year)

– After the LPs are repaid, 20% of profits (the carry) are split by the GP in a pre-

defined manner

VCs are eager to return the fund

VCs are eager to get disproportionate returns

Strategies define the motivation

– Spray and pray

– Targeted bets

– Portfolio plays

Venture capitalists bet on people, trends, IP, and the potential to ‘create value’

5


Venture Capital: A Major Economic Engine

6


Venture Capital is Not Evenly Distributed

7


What Happens to Venture Backed Companies

Remember: Entrepreneurs Build Companies…VCs just fund them

8


The Venture Industry Is Now in Challenging Times

9

Vintage Year Mean Return (%)

1999 -1.79

2000 -1.83

2001 0.38

2002 0.83

2003 3.20

2004 3.19

2005 -0.46

2006 -1.74

2007 -0.95

2008 2.20

2009 2.17


Snapshot on venture backed M&A

Acquisition volume has decreased, and remains down

– Transactions over last 10 years are reduced compared to the 90’s boom

– Volume has been decreasing on a quarterly basis since 2007

The average age to acquisition has increased, and remains high

10 Source: Dow Jones VentureSource Source: Dow Jones VentureSource

M&A Transactions since 2000 Time from Equity financing to M&A

$98.3

$24.0

$12.1 $14.0

$27.7 $31.5

$37.7

$61.1

$26.9

$19.0 $17.7

491

460440

410

534 507 524 526

421

385

298

$0

$25

$50

$75

$100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10

0

150

300

450

Amount Paid ($B) Number of Transactions

2.52.1

2.8

3.7

4.6

5.4

6.0

6.66.1

5.55.1

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10


IPOs in a mixed environment

IPOs have returned

– 2010 activity is the highest since 2007

– Data is trending higher

IPOs have an evolving character

– Higher valuation

– Flat/less money raised


IPOs since 2000 IPO sizes since 2000

$0.9$0.6

$7.5

$3.7$2.3

$5.0

$1.5$1.6$1.7

$19.0

$2.3

32

87

79

5644

67

23

205

20 23

$0

$5

$10

$15

$20

$25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10

0

50

100

150

200

Amount Raised ($B) Venture-Backed IPOs

$275

$367

$229 $226 $227

$166

$202

$309$284

$383$395

$76$56

$80$65

$51 $50 $52

$75

$54

$80$56

$0

$100

$200

$300

$400

$500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10

$0

$50

$100

$150

$200

$250

$300

$350

Median Pre-Valuation at IPO ($M) Median Amount Raised at IPO ($M)


IPO exits are taking longer

The amount of time to IPO has consistently risen

The amount of equity financing prior to IPO is markedly increased

The increase in median valuation does not compensate for the increased time and money prior to IPOs


Time from equity financing to IPO Money raised prior to IPO

3.1

4.6

3.6

5.7 5.7 5.76.2

6.8

8.7

7.9

8.8

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10

$44$48

$57$55

$73

$51

$58

$65

$55

$72

$43

$0

$25

$50

$75

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10


The ecosystem is responding

Entrepreneurs are responding to the changes

Firms are focusing their efforts

13

$85.5

$42.5

$19.0

$10.4

$18.9

$28.7$31.2

$40.1

$28.6

$13.5$9.2

$0

$20

$40

$60

$80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q-

3Q'10


How To Raise Money

3 Rules:

– Give yourself options

– Create scarcity

– Raise money when you don’t need to

14


Give Yourself Options

Options give you flexibility in any negotiation

Allows you to better match with your goals

Flexibility is essential to create options

Be creative and aggressive

15


Example 1: Wellstone Filters

Based on the development on dialdehyde starches as effective binders of AGEs

– Removes 96% carcinogens

– Removes 94% tar

– Removes 10% nicotine

Initially commercialized to remove carcinogens from cigarettes

Funded by angel investment, brought public within 12 months

16


Create Scarcity

People want what they cant have

Investors need to be compelled to have something

If they feel they can get something at any time, they will wait

Only 3 in 1000 deals a VC sees get funded—scarcity and essentialness are differentiating

17

Confidential and Proprietary - 18 - Proprietary & Confidential

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Any

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Drop-in

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Most

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The Best Route to Hydrocarbons

Metabolic Modeling

Carboxylic

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Fatty Acid Biosynthesis Preferred pathway

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Commercial productivity

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cre

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2009 2010 2012 2013 and

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© 2010 Joule Biotechnologies, Inc., Proprietary and Confidential www.joulebio.com

of infrastructure-compatible renewable fuels

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22

or fresh water

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Joule’s Way

Harnessing nature to produce fuels

Channeling the Power of Photosynthesis to Produce Fuels

23

CO2

Nature’s Way

Sunlight, CO2, and water make trees grow and produce O2

Water

O2

Waste

CO2

Water

Solar Fuel

O2


Integrating Synthetic Biology with Bioreactor Design

24

SolarConverter

Joule’s Proprietary Organism

Waste CO2

Joule Production Facility

Waste

CO2

PRODUCT


Towards Future of Unlimited Reserves

25

Joule’s New Mexico 1000 Acre SunSprings Diesel Plant

(in process) Joule’s current Pilot Plant, Leander, TX


Raise Money When You Don’t Need To

Give your self options

Give yourself leverage

Give your self time

Give yourself opportunity

26

© 2011 Essentient, Inc., Proprietary and Confidential 28 www.essentientinc.com

Securing an Essential Nutrient Supply is THE Most Important Challenge for 21st Century Health

• The current infrastructure is an enormous resource drain

– Agriculture covers >40% of all land

– Produces >30% greenhouse gases

– Responsible for over 75% of fresh water use

– The single greatest driver of land degradation, ground water depletion, habitat destruction, and biodiversity loss

• Yet it cannot sustainably provide nutrition

– ~1 billion people are chronically undernourished

– Another 2 billion people are poorly nourished

– The ‘properly’ nourished often have an inappropriate nutrient balance leading to the major causes of developed world mortality: cancer, heart disease, diabetes

• Nutrition and food security has been lacking needed innovation

© 2011 Essentient, Inc., Proprietary and Confidential 29 www.essentientinc.com

Essentient’s Nutrient Proteins will Transform Global Nutrition

No requirement for arable land Minimized GHG emissions No dependency on fresh water

Reliable, predictable supply At ultra-low costs Nutrition tailored to needs


Summary

Raising money is about matching your offer to funder needs

Venture capital is a potent source of capital, but not the only one

Raise money from venture capitalists requires creating the sense of need

There is no one way to get there

Once you get investment, interests are generally aligned

30

Thank you!

3

1

securing early stage capital

Economy & Finance