entrepreneurial financing in the united states · 5 “angel” investment largest source of seed...

Susan Matlock

July 25, 2007

Entrepreneurial Financingin the United States

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Where does a U.S. entrepreneur raise capital?

Bootstrapping Friends & FamilyAngel InvestmentVenture CapitalMezzanine CapitalStrategic Investors

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“Bootstrapping”

Entrepreneur’s own savings, credit cards, second mortgage, personally guaranteed loans, etc.Focus is on business operations

Stretch payables & shrink receivables!

Ideal for a company which will quickly generate positive cash flow

Generally not possible for inventing a new drug or a semiconductor manufacturing enterprise

Entrepreneur maintains ownership & control

Bootstrapping Friends & FamilyAngel investmentVenture CapitalMezzanine CapitalStrategic Investors

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Friends and Family

Good source of seed capitalGenerally fills < $250,000 funding needsVery few strings attachedContribution may take the form of:

Personal loanEquity purchaseLoan guarantees only, enabling bank financing

Lower expectations for both ownership % and returnsLess capacity for further investment, but often the only source of capital available until further development


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“Angel” Investment

Largest source of seed capital in the U.S. (but not readily tracked)Estimated $25.6 billion of angel investment in 2006Estimated 51,000 companies received angel funding in 2006

U.S. Angel investors: Generally wealthy individuals from a variety of professions

Often retired “serial entrepreneurs” or corporate executivesCan offer a great mentor relationship to young entrepreneurs

Often act as a pooled investment group, sharing the responsibilities of opportunity identification and due diligence

“Angel Networks” located throughout the United States10 Angel Networks in 1996, 250+ Angel Networks in 2007


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Angel Investors

Look to investment where $250,000-$1,000,000 of capital is neededExpect the potential for 25% annual return, with realization that 1/3 of their investments will result in substantial capital lossExpect a time horizon of 5-7 years to exitAccept approximately 1 deal for every 10 consideredDubbed “Smart” or “Dumb” Money, depending on expertise and contacts the Angel brings


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Venture Capital

U.S. VC funds generally look for:Equity investments > $1 millionTime horizon of 2-5 years to a realizable exit strategy

Merger / AcquisitionIPO

High growth objective (high risk & reward)VC aims for an average of 30-40% returns per annum upon exit

VCs heavily scrutinize company’s management, growth potential, industry, and valuation

Around 3 in 100 opportunities will get funded


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U.S. Venture Capital Investment Amounts1990-2006

Source: Adapted from MoneyTree Report by PricewaterhouseCoopers and National Venture Capital

$7.4$26,44135912006$7.3$22,61030942004$7.0$22,18531482002

$13.2$106,76381042000$5.8$21,66037361998$4.3$11,66426861996$4.3$4,1699611994$3.5$3,58010171992$2.6$2,78110501990

Average PerCompany

($ mil)InvestmentTotal ($ mil)

# of CompaniesFundedYear


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Top 5 U.S. Regions for VC

12025.9%$9,391,341,2005) Texas

15956.2%$9,954,687,0004) Southeast

15337.7%$12,391,392,7003) NY Metro

278713.2%$21,097,136,3002) New England

606033.9%$54,412,041,4001) Silicon Valley

# of deals$ %2001-07 aggregate $U.S. Region

Source: Adapted from MoneyTree Report database from PriecwaterhouseCoopers

Investment DataSource: The MoneyTree Survey by PricewaterhouseCoopers/Thomson Venture Economics/NVCA


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VC Involvement

What VCs provide:Capital (of course)Strategic direction and contacts

StaffingCustomersSuppliers

What VCs expect:A large ownership position in your company, which will dilute the founders ownership, but increase the overall value long-termPrefer to get their money back at least several times over before sharing profits with other shareholders Seats on the board of directors and special rights that allow them to oversee management An exit strategy that will allow them to cash out of the company within a relatively short period of time (typically two to five years)


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Database Source: VentureXpert database from Thomson Venture Economics

Investment Data Source: The MoneyTree Survey by PricewaterhouseCoopers/Thomson Venture Economics/NVCA

All other data Source: Thomson Venture Economics

US Venture Capital Returns(Annual Returns by Calendar Year)


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U.S. Venture Capital Funds:Number of Funds and Average Size Trends

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Database Source: VentureXpert database from Thomson Venture Economics

Investment Data Source: The MoneyTree Survey by PricewaterhouseCoopers/Thomson Venture Economics/NVCA

All other data Source: Thomson Venture Economics


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Mezzanine Capital

A debt instrument attractive for a later stage venture without sufficient assets to collateralizeAn unsecured loan, therefore lender seeks compensation for the venture’s credit risk:

Around 20-30% interestOR often includes a convertible debt feature to offset issuer’s risk

More expensive financing source than secured or senior debtLess expensive financing source than new equity creation

Because current shareholders achieve less dilution!


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Strategic Investors

Corporate partners investing in businesses usually complementary to their ownCorporations rarely fund early start-ups (too risky)Corporations are increasingly funding later round investments, after potential is demonstrated (at a correspondingly higher price of equity)May lead to a follow-on full acquisition


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Where does a U.S. entrepreneur raise capital?


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Incubators and Raising Capital

Incubators can an take an active role in increasing attractiveness to investors

Business, marketing, and strategic plan development and refinementDedicated on-site marketing support, IT support, and business coach

Provide seminars and workshops to educate owners and employeesHelp in identifying financing sources, including angel and venture investorsAssist companies with the preparation of presentations to investors

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Innovation Depot:Facility

140,000 s.f. Business Incubation Center20,000 s.f. wet lab86,200 s.f. dry lab & office space

Capacity for 60 – 65 CompaniesBiotechnologyLife-SciencesInformation TechnologyLight manufacturingBusiness Service

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Star Tenants and Graduates

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Industry context: 1 of every 20 patients get an infection as a result of hospitalization

Higher hospital costsLonger hospital staysHigher risk of death

MedMined uses patented data-mining techniques to identify, manage, and change processes to prevent future infections

A “smoke detector” for hospital infections

Case Study:

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Case Study:

1994 – Technology developed, research funded by local University2000 – Business incorporated, housed at Incubator

3 founders~$250,000 in friends/family money

2001 – VC placement $2 mil from Southeastern Technology Fund

2003 – MedMined graduates from local University2005 – $9 mil in annual sales / 84 employees / 180 hospital contracts

in 26 states, then…2006 – Acquired by Cardinal Health for an undisclosed amount

Equity transaction estimated at ~$50-100 milCardinal Health is an $8 bil company, employing 55,000 across 6 continents, currently ranked #19 on Fortune 500

Questions?

entrepreneurial financing in the united states · 5 “angel” investment largest source of seed...

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