Sources of Funding

Steve MorrisOTBCsmorris@otbc.org

Funding ProcessWhat funds do you have?

What milestones can you reach with the $ you have?

Decide on next milestones; Develop slides, exec summary, etc...

Find/pitch/close investors

Meet the milestones

Repeat

No

Does that get you to cash flow positive, or to a fundable event?

Yes

3

Fundable Event

A set of milestones which, when

reached, will let you close enough

funding to reach the next fundable

event until you reach cash-flow

positive or get acquired or go IPO.

4

A Typical Funding Strategy

• $20K of founder savings–Validate the market and create some “slide-ware”

• $150K of Friends/Family –Create rough prototype–Get some customer feedback

• $1 million from angels–Complete a Beta-release product

• $6 million from VCs–Launch/market the product

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Stages & Sources of Funds

Discovery Proof-ofConcept

ProductDesign

ProductDevelopment Revenue

Idea

Venture Funds

Institutional Equity

Bank Loans / Bonds

Angels

Seed Funds

Angel Groups

Friends & Family

SBIR/STTR

SBA Loans

Equipment financing

Venture Banks

Finance Receivables

StrategicInvestors

Mergeror IPO

Customers/Partners

Idea

Gov. Loans/Grants

Micro Loans

Founders

Reasons to Avoid Investors

• You will not spend many, many months of full-time effort raising money

• You will not have to “manage” your investors

• You will not have investors on your Board

• You will not have to give up equity

• You will not have to give up control

• At the beginning, you aren’t investable anyway

Sources: Founder Savings & Credit

• Plan on no salary for (quite) a while (typically 6 months or more)

• Don’t expect back-pay when you eventually get funded

• Do expect to get out-of-pocket expenses reimbursed

Sources: Friends & Family

• Be very careful to set expectations

–Risk is high!

• Loans may be better then selling stock

–Many small shareholders becomes a pain

–Only sell stock to accredited investors

Sources: Customers/Partners

• Revenue is the best source of funds!

• Develop an early product quickly and sell it

• Get customers to pre-pay early orders

• Do consulting work*

• Develop a product under contract with another company*

* But be sure you retain rights to the IP!!!

Sources: SBIR Grants(www.sbirworld.com)

• SBIR: Small Business Innovation Research–Significant percent (2.5% = >$1B) of federal R&D

funds are reserved for small business–Qualifications

• American owned and independently operated• For-profit• Principal researcher employed by business• Company size limited to 500 employees

–Awards granted in 2 phases• Phase 1: up to $100K for feasibility study• Phase 2: up to $750K for R&D

Sources: STTR Grants• Funding for small business partnered with non-profit

research institution (smaller pool than SBIR)• Qualifications

– Small Business

• Similar to SBIR, but

• Principal researcher need not be an employee

• Minimum amount (30%) must be subcontracted to research institution

– Research Institution

• Located in U.S.

• Either College/University, domestic nonprofit research organization, or federally funded R&D center

• Awards granted in 2 phases– Phase 1: up o $100K for feasibility study

– Phase 2: up to $750K for R&D

Sources: SBA Guaranteed Loans

• Basic 7(a) Loan Guaranty

– The loan itself comes from a finance institution, not the SBA

– Available for most business purposes (working capital, equipment, furniture, land, building, etc.)

– 10 to 25 year loan maturity

– Must meet SBA size standards (number of employees; revenue)

– Maximum loan size of $2M (SBA guarantees up to $1.5M of that)

– 2% to 3.75% loan fee (depending on loan size) and 0.545% annual fee

• Microloan 7(m) loan Program

– Loans of up to $35,000

– Generally require collateral and a personal guarantee

Source: Business Oregon

• Entrepreneurial development Loan Fund

–Company < 24 months old; < $100K in revenue

–Virtually any biz purpose; 28% start-ups• Oregon Capital Access Program

–Loan insurance to allow higher risk

• Oregon Business Development Fund–Up to $500K; Long term/working cap.; Job

creation/retention

• Credit Enhancement Fund–Guarantees; Traded sector business; short

term; <$500K

Sources: Regional Investment Funds

• $7 Million in funding state-wide from Oregon Lottery (through Business Oregon)

• Administered by local Regional Investment Boards

• Example: Mt. Hood Economic alliance

–$600K

–Focus: create jobs and leverage additional investments

–Forgivable loans; grants; loans

Sources: City Programs

• Portland (PDC)

–$500K debt fund

–Deferred Loan Program

–Revolving Loan & Real Estate Fund

–Economic Opportunity Fund

–Enterprise Loan Fund

–North/Northeast Business Assistance

–Quality Jobs Program

–Storefront Improvement Program

Sources: Equipment Financing

• Equipment becomes collateral

• Allows you to stretch cash

• … in return for paying some interest

• Worth considering if you’re buying capital assets

• Typical criteria

–Cash flow from operations to service debt, or…

–Sufficient liquidity and likelihood of future liquidity to service debt payments

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Stages & Sources of Funds

Discovery Proof-ofConcept

ProductDesign

ProductDevelopment Revenue

Idea

Venture Funds

Institutional Equity

Bank Loans / Bonds

Angels

Seed Funds

Angel Groups

Friends & Family

SBIR/STTR

SBA Loans

Equipment financing

Venture Banks

Finance Receivables

StrategicInvestors

Mergeror IPO

Customers/Partners

Idea

Gov. Loans/Grants

Micro Loans

Founders

Equity: Common vs. Preferred

• Stock purchased by investors may have special rights

–Preferred shares (vs. Common)

• Examples of special rights

–Board seat

–First in line if an acquisition or IPO occurs

–Dilution protection

–A veto in many major decisions

• When you sell any amount of Preferred equity, you lose a lot of control

Equity: The Exit Strategy

• How will your investors make money?–Someone buys-back their shares (with interest)

–There is an acquisition–There is an IPO

Sources: Angels• High net worth individuals

• Investment may be structured as:

–Loan (probably convertible to Stock)

–Stock purchase

• Must be accredited investor

–$1M net worth or $300K income in the last 2 years

• Typical criteria

–They have to like you and your idea

• Angels invest because they want to

–The beginnings of a team

–Proven technology

Sources: Angel Groups• Two basic types

–Joint due diligence, but invest separately

–Pool money and invest jointly

• Easier to find than individual angels

• Some local examples:

–Portland Angel Network

–Womens Investment Network

–Portland Venture Group

–Oregon Sustainability Angels

–Keiretsu Forum (Portland Chapter)

Sources: Venture Bank Bridge

• Venture banks can provide bridge loan if you’re close to a VC deal

• The bank will talk to your prospective investors; they have to believe the deal will happen

• There will be terms to consider

–Interest rate

–Collateral

–Covenants

–Stock

Sources: Financing Receivables

• If you have receivables, you may be able to get a loan–Customers may not pay you for 60 or 90 days after

they give you an order

• Receivables are the collateral

• You’ll pay interest, but you get cash faster

• Typical criteria–Accounts Receivable due from creditworthy

companies

–You are not in imminent risk of going bankrupt

Sources: VCs• Institutional investors (not individuals)

• They invest other people’s money (unlike angels)

• Typical funding criteria

– Require “home run” potential (10x+ return)

– Market size of several hundred million dollars

– Compelling reason to buy

– Compelling competitive advantage

– Strong team

– Customer references

– Proven technology (no “research” investments)

– Working (early) product is a huge help (may be an absolute requirement)

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Sources: VCs1,000

Plans received

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Get significant due diligence

4 or 5 Investments

Strategic Investors

• Looking for strategic advantage

–May be potential interested in acquisition down the road

• Usually will not be the lead investor

• Can add to your credibility with Vcs

–They (probably) have more domain knowledge than the Vcs

–Especially if they are well-known names!

• Leverage your existing relationships

Sources: Merger/Acquisition

• One reason to get acquired is to get access to cash

• May also be an exit strategy for investors

• But your negotiating position is weak if you’re just about our of cash

Sources: IPO

• Initial Public Offering

–Sell stock on the public market

• Very expensive

–Reporting requirements alone can cast millions of dollars per year

• Requires revenue and established track record of growth

• … and profitability (usually)

Sources vs. How Much

Source Typical Amount

Savings & credit cards $10K - $50K

Friends & family $50K - $200K

Grants (SBIR, STTR) $150K - $1.5M

Angel investments $200K - $2M

VC seed fund $200K - $2M

Venture capital investment $4M - $15M

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Resources• OTBC (otbc.org)

– FastTrac TechVenture

• OregonStartups (oregonstartups.com)

• Oregon Entrepreneurs Network (oen.org)

– Networking events

– Angel Oregon, Venture Northwest

– Executive Series

– Business Concept Reviews

– Business Plan Development Seminar

– Business Plan Reviews

– CEO Bus Tour