Financing Your Invention

Curtis V Palmer, President / CEO

TechBirmingham

Thinking About Pursuing VC Funding?

Where Does VC Money Come From?

• Insurance Companies, Educational

Endowments, Pension Funds and Wealthy

Individuals

– VC invests pools of money allocated to “Alternative

Investments”. Perhaps 5% to 10% of the portfolio

might be allocated to Alternative Investments.

– The portfolio owners seek to obtain high returns

from these more risky Alternative Investments.

How are Venture Capital Funds Organized?

• Most VC Funds are Limited Partnerships

Venture Capital Fund

Limited Partners

Pension Funds, Educational Endowments, Foundations, Insurance Companies,

Wealthy Individuals

General Partners

These are the “Venture Capitalists” you will deal with. They may have been Entrepreneurs in a

prior life or they might be financial types.

The General Partners use an Offering Memorandum to raise a fund of a given size from the Limited Partners by convincing them that the

GPs have a unique strategy or expertise in a particular sector or sectors of the market. Fund

raising can take a year or more.

If the GPs are successful they will convince enough Limited Partners to invest enough money to achieve the size fund offered.

When this happens there is a first “close” of the fund.

What Do Venture Capitalists Do?

• GPs have to Source Deals

– Referrals from trusted sources (other funds,

entrepreneurs they have invested in before,

lawyers, accountants etc.)

• Make Investment Decisions

– GPs pick the ones they think will be the “winners”

– They might look at 50 or 100 opportunities for

each one they invest in

Managing the VC Investment

• GP/VCs have a fiduciary duty to the LPs to

“manage” the investment

– This means they usually sit on the Board of

Directors

– Given this time commitment a VC might only be

able to handle 6 to 10 portfolio investment

companies at a time

VCs Want “Exits”

• GP/VCs win only if they can get their money

out of the investment

– Acquisition, IPO, etc.

• Even the most successful funds rarely have

even 1/3 of their portfolio investments

become successful

Fund Investment Cycle

• 10 Year Fund Life

– Funds plan to harvest winners in 5 to 7 years

or less

• Initial Portfolio Investments

– For Early Stage Funds it is typical for the Fund

to invest $1 and keep $2-$3 in “dry powder”

Things For You to Think About

• Does Your Idea Fit the Needs of the VC?

– They need to see Big Returns. If your Plan can

justify this and you need lots of capital to achieve

your Plan then VC may be the way to go.

– You may be able to grow a successful company

and make a lot of money without having to scale

to the size that will interest Venture Capital.

More Things to Think About

• Are You Ready For Venture Capital?

– VCs have a relatively short time fuse to success - a

10 year Fund and the need to show some

“Winners” early in order to raise the Next Fund

– Result: You have to be ready to move quickly,

there will not be much time to recover from errors

in the plan or execution

Even More To Think About

• Prepared to Become a Minority Stockholder?

– In order to generate returns for their Limited

Partners the GP/VCs have to invest a large

amount and this usually means they will obtain a

significant percentage of the company over time

– Having a small piece of a Big Pie can make you

rich but you have to be mentally prepared to

become a Minority Stockholder

So You STILL Want VC Funding?

Making Your VC Pitch

• K.I.S.S ~ *Really* Simple!

• Target Your Audience

• Lowest Common Denominator

• Keep It Short (too!)

• Answer detail/curveballs quickly and move on

• Show commitment and enthusiasm

VC Pitch Pointers

• Use best presenter

• Have egghead in room

• Give firm answers

• Look at everyone in room

• Do your homework

VC Strategy

• Get money when you don’t need it

• Practice and Test your pitch

• PRACTICE and TEST your pitch

• Be “introduced” when possible

• One strike… 15 seconds

• Assume >= 6 months

Questions to Expect from a VC

• Is the IP protected?

• Is team assembled?

• Where do you fit… physically, on food chain

• Customer requirements

• When will you manufacture/develop?

• How much $ will it cost to build it? In volume?

• How much money will you make “us”?

BizPlan As A Financing Document

How a VC Reads your Plan

1. First Reading: Like a Resume

– Make The Cut, So That You Get An Opportunity To Tell Your Story

2. Second Reading: Justify The Investment

3. Third Reading: Commit To A Plan

– That You And The Investors Can Live With.

REMEMBER: If you don’t make the FIRST CUT,

#2 and #3 never happen.

Making the First Cut

• An Idea Too Good To Ignore

• A Financial Promise Too Good To Turn Down

• A Team Good Enough To Believe In

• An Action Plan That’s Credible and Focused

• Format and Style That Show

– Passion

– Sanity

• Details That Give Assurance of Insight, Commitment and Follow Through

Why Plans Fail the First Cut

• Insufficient Market

• Non-Credible Technology

– Too Wild and Blue-Sky (Unproven)

– Not Protectible

– Too Mundane

• Investment Too Large For The Promise

• Failure to Understand The Market

More Reasons Plans Fail

• Action Plan Not Credible

– Too Ambitious / Optimistic

– Not Ambitious Enough

– Naïve About The Hurdles

– Regulatory Barriers Insufficiently Addressed

– Gaps Filled By Handwaving

• Team Not Credible

“Cosmetic” Reasons for Failing

• Filled With Market Or Technology-Specific Jargon

– i.e., WHAT IS THE BUSINESS?

• Naïve Projections

• Misspellings, Poor Grammar, Poor Quality Printing

• Too Long

• “Forget Marketing, My Technology Is Best”

• Poor Grammar, Spelling, or General Writing Style

Valuation as aDriver of Financing

Valuation

• What’s My Invention Really Worth?

• ANSWER:

At Any Given Time

Your Company Is Worth

What Someone Will Pay For It

At That Time

What Determines Valuation

• Supply

• Demand

• When

• Market Liquidity

• Metrics for Valuation

Valuation ~ Macro Drivers

• Which Way Is The Tide Going?

– A Rising Tide Lifts All Boats

– But, A Falling Tide Strands Them

• Overall State of the Economy

– e.g. Purchasing Cycles: Will Customers Purchase

Today?

• Condition of Public Equity Markets

Valuation ~ Positioning

• Negotiation Skill?

– Having or Appearing to Have Alternatives

– Getting A Bidding War Going?

• The Train Is Leaving The Station

• You Are Known By The Company You Keep

– Customers, Partners, Advisors

Other Ways To Achieve Funding

Debt Financing

• SBA Loan

• Home Equity Loan

• Personal Loan

• Export Financing

• Customer Financing

• Supplier Financing

• Equipment Leasing

• Purchase order

financing

• Factoring

• Micro-loans

• Credit Cards

• Seller Financing

• Franchise financing

Equity Financing

• Friends, Family, and other Fools

• Venture Capital

• Strategic Corporate Investors

• Angel Investors

• Strategic Partnership

• Sweat Equity Compensation

Miscellaneous Financing

• Licensing / Royalties

• Barter

• SBIR Grant

• Other Government Grants

• Contests

Inventor’s Funding: Many Options

• Your Personal Funds

• Friends, Family, and other Fools

• Personal Credit Cards, Home Equity Loan,

and/or Other Borrowings

• Business Angels

• Corporate Direct Investment

• Venture Capital

My Way

;-)

Minimize Funding Requirements

• Get paid to build the product

– Easier to start with a service (funding)

– Provisional payments in advance and upon

fulfillment

• You have no funding now, why start with a

strategy that requires something you do

NOT have?

Pull… don’t Push

Customer Need(Demand)

Inventor

Company

Purchases$

Purchases$

Market Pull

Customer Need(Demand)?

Inventor

Company

Invention

Search?

Market Push

Benefits of Customer First

• Free and better market research

– Learn through relationships and services

– Companies know their markets

– Learn through partners and customers

• Develop value on someone else’s nickel

• Built-in market for your invention

Common Sense Approach

• Start with Buyers

– Why? “You can build

solutions but not

buyers…”

• Execution

Intelligence Wins

1. Know the Market

Talk to: potential customers, potential competitors, partners, advisors, investors/creditors, “multipliers”

2. Identify a compelling need

Talk to: potential customers, potential competitors, partners, advisors, investors/creditors, “multipliers”

3. Generate customers

Talk to: potential customers, potential competitors, partners, advisors, investors/creditors, “multipliers”

4. Sell solution

5. Build & deliver solution

Curtis V Palmer

curtis@techbirmingham.com

www.TechBirmingham.com