What Every Startup Should Know to Avoid Financing Pitfallsncet2.org/images/basn/pitfalls.pdfWhat...

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What Every Startup Should Know to Avoid Financing Pitfalls UNIVERSITY STARTUP DEVELOPMENT WEBINAR SERIES 1

Transcript of What Every Startup Should Know to Avoid Financing Pitfallsncet2.org/images/basn/pitfalls.pdfWhat...

Page 1: What Every Startup Should Know to Avoid Financing Pitfallsncet2.org/images/basn/pitfalls.pdfWhat Every Startup Should Know to Avoid Financing Pitfalls - NCET2 Webinar November 8, 2017

What Every Startup Should Know to Avoid Financing

Pitfalls UNIVERSITY STARTUP DEVELOPMENT

WEBINAR SERIES

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SPEAKERS

Glenn Vonk, PhD Director of Business Development and Alliances Former Director of Advanced Technology, BD Kenneth J. Polk, Esq. NCET2 Startup Development Officer and Innovation Counsel, American Chemical Society

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BACKGROUND ON THE STARTUP DEVELOPMENT PROGRAM

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Commercialization Model Timeline

2015 2016 2017

Congress seeks to understand commercialization of $B137 annual R&D in Fed Labs / Universities

NCET2 Congressional Commercialization Summit – Corporate Sub-committee Formed

First Model Proposed

Model Vetting Roadshows: CA; PA; NY

Congressional Briefs

(Pilot) First Demo Day Second

Demo Day

IP2 Startup Pgm Announced

Startup Development Officers Pgm Announced

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Startup Development Program

•  Congress funds $137 billion in federal funded research at universities and federal labs

•  Excellent opportunity for researchers and entrepreneurs to build a university startup around that IP –  Universities have programs to help you

•  NCET2 Fortune 500 members and SDOs who will partner with university startups to help develop and fund those startups

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Startup Development Program

•  NCET2 Startup Development Officer will also help university entrepreneurs, faculty, researchers, and students create, develop and fund market aligned university startups (http://ncet2.org/sdo)

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SDO SERVICES

•  Early management teams of university entrepreneurs, graduating students, faculty, and researchers

• Business plan • proof-of-concept • prototyping • early product development • SBIR, Angel, and VC funding

–  “Commercialization Experiments” • Get to work with Fortune 500 companies, angels, VCs, and serial entrepreneurs to help commercialize university and Federal Lab technologies

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Benefits

•  Startups/Entrepreneurs/Faculty/Researchers/Students – Access to professional SDO talent to help

create, develop, and fund your startup

•  Universities – Moving IP to market for significant market

impacts – Graduating students into startups and working

with Fortune 500 and SDOs

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Engage with NCET2 and the SDOs 1.  Submit your IP or startups to NCET2

•  The SDOs and Corporates can review your IP or startup to determine if you are a good candidate for the Startup Development Program

•  Email us at [email protected] to request a copy of the sample Application Forms (so you can prepare the information)

2.  Become an NCET2 SDO •  Open to: Ex-Corporates in Open Innovation/Venture Capital, Serial

Entrepreneurs, Active Angel Investors •  Send your CV and with a short note about wanting to know more

about being an SDO to [email protected]

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SPEAKER

Kenneth J. Polk, Esq. NCET2 Startup Development Officer and Innovation Counsel, American Chemical Society

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https://youtu.be/GLS5OvCe_F0

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What Every Startup Should Know to Avoid Financing Pitfalls

Kenneth J. Polk, Esquire November 8, 2017

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q  NCET2’s Startup Development Program is designed to help university entrepreneurs, faculty, researchers, and students create, develop and fund market aligned university startups.

q  As a Startup Development Officer, I’m interested in assisting early management teams with their business planning, prototyping, and efforts to raise funding from sources of private equity.

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q  More than 25 years of legal experience in enterprise formation & technology commercialization

q  Held executive positions in startups and small businesses

q  Holds a Juris Doctorate and 2 Engineering Degrees

q  Licensed as an Attorney and Professional Engineer in the Commonwealth of Pennsylvania since 1988

q  Led and counseled business units during 10 year career at ACS

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Fundraising is Like Landing a Plane – Bigger Runways are Needed for Larger Planes

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q  What is your end game? When do you foresee exiting will help in determining how much money to raise.

q  Perhaps, do don’t need OPM (Other People’s Money) at all

q  Funding is a precious finite resource

q  You are not entitled to external investment, you need to earn it through a compelling value proposition

q  Raise what you need, not what you want

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Avoid Wishful Thinking

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q  Investors are purposefully opaque. Sometimes, their motives are intertwined with testing the veracity of the inexperienced founders

q  These collision of skepticism and optimism often times leads to intense disappointment and resentment

q  Take discussions less personal, be more business-like, and move on when the dialogue isn’t suggesting success

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Don’t Raise Money Until It Wants You

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q  Rapid growth raises money, not valuation

q  Funds become more available when revenue leads the discussion

q  Situations can arise when raising money won’t help

q  Maybe building out your management team might not add the value you anticipate

q  Perhaps, earning a bit more revenue will allow for a larger infusion round

q  If money doesn’t offer rapid growth, think again

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Fundraising is Distracting – Be All In or Not at All

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q  When you fundraising, everything seems to get put on hold – there is an unforeseen opportunity cost here that must be considered

q  Startups generally do not have time to fundraise for long periods of time – establish an investment window

q  Attracting and negotiating with investors is time-consuming. Spend more time negotiating and less attracting.

q  The force of your personality is not enough

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There Is A Competitive Nature to Raising Capital

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q  Considering risk and return with your own money, how are you invested? Not much is different for private investors.

q  Lower risk, less return is perfectly suitable to some

q  Other investors consider Board seats and management implants as a mechanism to help mitigate their risk

q  In the end, it’s a numbers game – ROI, risk, return horizon, stage-gated investments and so on.

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Valuation Is Not a True Measure of Value, Revenue Is

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q  Sometimes valuation is perceived by founders as some badge of honor, like getting good grades

q  What drives valuation more is revenue

q  Revenue, cutting-edge product opportunities, large target markets, and clear customer needs drive valuation more than establishing an 8 figure valuation from a 7 figure one

q  Revenues are the single greatest value creator as they signal customer adoption and working capital

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Avoid Investors Who Don’t Lead

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q  I want to invest in you, but I don't lead," really means that "No, I won’t invest, unless someone else thinks that you will turn out to be a hot deal."

q  And since most investors think that about any startup, they've essentially just told you nothing.

q  You will need to decide whether pursuing such investors is worth your time and energies.

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Plan Your Burn, and Stay Close to It

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q  Burn is read by investors differently than management

q  Burn to investors amounts to when they might need more capital. Investors typically expect a follow-on round

q  Burn to management is all about expenditures which may or may not deliver value

q  Spending close to your projected burn signals to investors that you can manage funds well

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Know Thy Investor – Manage Them Well

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q  Leaving investors in the dark will often reward you with a lawsuit

q  Investors are often an important source of follow-on funds – maintain a good relationship

q  Manage expectations – under promise and over deliver

q  Manage investors in proportion to their investment

q  Inform, but don’t let them run the company

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Watch for the Hidden Costs of Money

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q  Board seats and voting blocks could inhibit your ability to direct your startup

q  Don’t assume that a management implant from an investing group is a good thing.

q  MFN clauses could foreclose your ability to seek higher valuations from follow-on rounds

q  If allowed, may seek to run the company

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What is an “Optimal” Financing Plan

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q  Reasonable Objectives - Raise Amounts, Markets, Expenses

q  Incremental Raises - ‘Significant’ Value-Added Milestones (e.g., Prototype)

q  Founder, Family, & Friends (“3Fs”) – Show ‘Skin’

q  Dilution at Earlier Stages (Tip: Investor Friendly) – Big Stake / Risk

q  Minimize Management’s Efforts – Need to Develop Product Too!

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Have Multiple Plans

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q  Determine what you are raising and tell investors what you're doing.

q  One size doesn’t fit all investors.

q  Provide multiple plans with varying amounts of raise targets to enable investors to better assess their investment risk.

q  Think raise amount that gets you to profitability first, and not just a raise that helps you build out your management team.

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Questions