Plan for funding
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Plan for Funding 1 October 24, 2013
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Part of the all day Venture Fast Track: http://www.thecapitalnetwork.org/programs/venture-fast-track/ Plan for funding: What Stage Is Your Business and What Are Your Options Is your business an idea, in the midst of formation, or ready to raise capital? The first step to identifying what comes next is understanding the stage of your business. Join our fundraising experts for an in-depth discussion of what options you have for funding and how to decide which ones are right for you and for your company. Topics covered will include investment criteria, time to closing, investment range, success rates, control features, compliance requirements, and the overall costs of capital from each such source. Experts: - Ben Littauer – Boston Harbor Angels & Walnut Venture Associates - Panos Panay – Sonicbids
Transcript of Plan for funding
Plan for Funding
1
October 24, 2013
Agenda
• Funding is an OUTCOME of your business • You need to understand what kind of business
you have – Type of business – Business model – Stage of business – Gaps in your business
• You need to learn the language of finance • But the bottom line is: if you build the business
well, the funding will follow
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Types of Business
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NORMAL GROWTH COMPANY
“Small & Profitable”
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• Includes all service businesses
• Exploiting a local market need
• Team has ‘great jobs’
• Growth by adding resources one by one
• Exit will be based on value of cash flow (mature biz.)
• Growth profile ultra-scalable
• Team focus is exit • Revenue $40M+
with lots of room for growth (5 yr.)
• Based on $20M+ investment
• Exit targeted to IPO or by ‘large’ M&A event
• Goal is to fulfill a social need
• Has mission orientation
• Team needs to support mission
• Growth profile often one resource at a time
• Exit …much harder to find fit
• Company can grow fast (on-line) or has a scalable system
• Team often motivated by exit
• $7-10M revenue in 5 yrs & market size allows significant additional growth
• Capital efficient total investment$2-4M
• Exit by M&A
Typical Funding Sources
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NORMAL GROWTH COMPANY
“Small & Profitable”
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• Friends, family, founders
• Debt, Bank, and other
• (Future) Crowd funding (portal style)
Early on • Accelerators • Individual Angels • Micro Cap VCs • Seed from VC Later stages • Venture Funds • Strategic VCs • Angel
Syndication
• Friends family, founders
• Charity$$ • Crowd funding
(Kickstarter, etc)
• Impact Angels • (Future)
Crowd funding (portal style)
• Angels • Angel Groups • Angel Group
Syndication • Angel List • Micro-cap Funds • (Future) Crowd
funding (portal style)
• Increasingly Strategic Corporate VCs
Debt Capital
• Funding based on a set schedule of principal and interest payments that provide a fixed return for the lender. Availability may be based on asset value or cash flow or personal guarantee
• Sources: – Personal Loans – Friends/Family
– Bank Loans – SBA Loans – Expect debt classes from Jobs Bill crowd funding portals
– Credit Cards
• Venture Debt – usually linked to equity
• ConverOble Debt– really another form of equity funding
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Equity Capital
• “Risk Capital”, shared upside
• Equity Capital requires an exit: – IPO & Private Equity – M&A (most)
• VCs invest other people’s money (from pension funds etc.) – Returns are measured on a per fund basis – Focus find the best & adding resources to aid success – ~$26.5B annually, ~ 3,700 new investments 2012
• Angels invest own money – Prefer capital efficient / early exit opportuniOes – ~$23B annually, ~ 67,000 new investments 2012 – Angel groups (a dozen greater Boston, two dozen NE) ~10-‐15%,
– Informal networks & one-‐Ome-‐investors ~15-‐20%, – Super angels ~25-‐30%, – Family offices ~35-‐45%
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Alternate Sources of Funding
• Business Plan CompeOOons and Accelerators – Many firms gain enough for some product compleOon steps
• Revenue – Best of all (Bootstrapping) – Revenue history opens more types of debts – Pre-‐payments
• Vendors, partners and customers – Including NRE to build joint product – Great source of quick capital for markeOng or sales collaboraOon
• SBIR Grants – ~$2 Billion department specific funding – 2 or 3 ‘research’ calls from each department each year, must be used for research … then you
commercialize with other funding
• Other government funding, lots of “detailed” sources – Mass Life Science & Sustainable Energy – loans or converOble notes
• Crowdfunding – Pre-‐sales or (coming soon?) equity
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Business Models - Software
Early revenue – usually more capital efficient
• Sokware license
• SaaS
• SubscripOon fees • AcOon or TransacOon fees
Later revenue – usually less capital efficient
• Two-‐sided markets
• “Freemium”
• AdverOsing • Virtual goods
• “Big data”
• “Eyeball plays”
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Business Models - Other
Consumer goods
• Brand building • Manufacturing
• DistribuOon Life sciences
• Healthcare IT • Medical devices • PharmaceuOcals
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High-Growth Funding
• Great team
• Great idea / innovaOon • Large market
• Scalability • Great ROI The choice of funding can be cut two ways:
• Choose your business model based on preferred funding/exit • Choose your funding based on preferred business model
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Stages • Crystal: Think out the issues
– Mostly about the TEAM, how you think, how you act, what you bring to the party
– Mentors / advisors critical: “socialize the company” • Demonstrate Product
– Prototype / MVP – Early customer acceptance / purchase
• Market Entry – Cost metrics – Scalability – Beware the early adopter!
• Growth – Repeatable cost model – “Fuel the fire”
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Funding by Stage
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Stage Crystallize Idea
and Early DemonstraIon
Demonstrate Product & Market Interest
Market Entry and Early Growth
Early Scaling Growth
Repeatable Growth
Capital Source
Founders, Friends, Family,
Grants, Kickstarter, etc.
Accelerators, Individual
Angels, many others now “exploring”
Angel Groups, Angel Group SyndicaOon, Micro-‐Cap Funds
VCs, Angel Group
SyndicaOon, Micro-‐Cap Funds
VCs
Investment $25K -‐ $100K $100K -‐ $500K $500K -‐ $1M $5M – as needed
as needed
These 2 need sophisOcated growth plans
This is the stage where advice can make you eligible for outside
funding later
Accelerators and a few individual angels play
here … unless it is a big idea
This is where Angel
Groups do most 1st
investments….
Gaps
• At each stage you need to identify the gaps that inhibit growth – Product – Personnel – Promotion – Plan – Profits
• A strong investor can help with each of these – Money addresses many problems – Advice and mentorship solve others – Industry connections can be key
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Language
• In order to build your business, you need to speak the language – This is critical in thinking about your business
• Things like margins, CCA, LTV, MVP, viral coefficient • Terms of art from your own industry
– Terms of the investment art • Equity versus Convertible Debt • Valuation • Preference • Governance • Representations • Restrictive Covenants • Cap tables • Etc, etc.
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