J U N E 2 0 0 7J U N E 2 0 0 7

B O B H I G G I N SB O B H I G G I N S

Managing General PartnerManaging General Partner

Financing Options for Start-UpsFinancing Options for Start-Ups

S U M M E R @ H I G H L A N D P R O G R A M

22

AgendaAgenda

» IntroductionIntroduction

» Sources of CapitalSources of Capital

» What are VCs looking for?What are VCs looking for?

» Q&AQ&A

Sources of CapitalSources of Capital

44

Sources of CapitalSources of Capital

» GrantsGrants

» Self-FundingSelf-Funding

» Angel InvestorsAngel Investors

» Venture CapitalVenture Capital

» Corporate Venture CapitalCorporate Venture Capital

» Strategic InvestorsStrategic Investors(Customers, Suppliers, Distributors)(Customers, Suppliers, Distributors)

» Private Equity / Hedge FundsPrivate Equity / Hedge Funds

SOURCES OF CAPITAL

55

GrantsGrants

» Many companies start with technology that Many companies start with technology that was grant-fundedwas grant-funded

» Grant funding for companies:Grant funding for companies:» Federal GovernmentFederal Government

NIH, NSF, SBIR, DOE, and DARPA

» State GovernmentState Government

CA and MA stem cell research funding

» Private FoundationsPrivate Foundations

Howard Hughes Medical Institute

» Disease-Specific SocietiesDisease-Specific Societies

American Cancer Society and Cystic Fibrosis Foundation

SOURCES OF CAPITAL

66

GrantsGrants

» Advantages:Advantages: Limited or no dilution

No board requirement

Prestige

» Disadvantages:Disadvantages: Rules and guidelines

Not long-term

Inflexibility

SOURCES OF CAPITAL

77

Self-FundingSelf-Funding

» For companies with smaller growth For companies with smaller growth potential or lower initial cash needspotential or lower initial cash needs

» Advantages:Advantages: Ownership and valuation

Decision-making and flexibility

Potential for a family business (Jim Sharpe)

» Disadvantages:Disadvantages: Growth because of limited capital

Risk concentration

Lack of assistance

SOURCES OF CAPITAL

88

Angel InvestorsAngel Investors

» Entrepreneurs, professionals, B-School Entrepreneurs, professionals, B-School professorsprofessors

» Seed stage funding for promising ideasSeed stage funding for promising ideas

» Advantages:Advantages: Similar to VC, but less focused on valuation

Can be a good source of advice

» Disadvantages:Disadvantages: Usually only “one shot”

Does not confer same legitimacy as other financing sources

Possible investor impatience

Potential issues in raising follow-on rounds

SOURCES OF CAPITAL

99

Venture CapitalVenture Capital

» For start-ups with growth potential and For start-ups with growth potential and significant cash needssignificant cash needs

» Advantages:Advantages: Potential value-add – Help with recruiting, financing,

customers, and strategy

Long-term partners (multiple rounds)

Deep pockets

» Disadvantages:Disadvantages: More valuation-sensitive: dilution

Loss of control

“The Lemming Effect”

SOURCES OF CAPITAL

1010

Corporate Venture CapitalCorporate Venture Capital

» For companies with strategic valueFor companies with strategic value

» Advantages:Advantages: Can lend credibility

Less valuation sensitive

Usually passive

» Disadvantages:Disadvantages: Uncertainty for follow-on rounds

“Right of first refusal” issues

“Camel’s nose under the tent”

SOURCES OF CAPITAL

1111

Strategic InvestorsStrategic Investors

» Customers, suppliers, and distributorsCustomers, suppliers, and distributors

» For companies seeking capital and For companies seeking capital and relationshipsrelationships

» Advantages:Advantages: Less-dilutive

Frequently up-front payments in exchange for future royalties

Provide early credibility

» Disadvantages:Disadvantages: Smaller source of capital

Selling company’s future? Limiting options?

Potentially time-consuming

SOURCES OF CAPITAL

1212

Private Equity / Hedge FundsPrivate Equity / Hedge Funds

» Usually for later-stage companiesUsually for later-stage companies

» Advantages:Advantages: Understand growth issues

Willing to consider re-caps and turnarounds

Potentially helpful at exit (IPO)

» Disadvantages:Disadvantages: Not comfortable with start-ups

Often not a long-term partner

Limited value-add

Pressure for liquidity

SOURCES OF CAPITAL

1313

Financing Should Fit:Financing Should Fit:

» the company

» its stage

» its management, and

» its history

Finding the right investor can be critical to a company’s long-term health…

…much like selecting a medical specialist.

SOURCES OF CAPITAL

What are VCs Looking For?What are VCs Looking For?

1515

Evaluating Opportunities: VC CriteriaEvaluating Opportunities: VC Criteria

» PeoplePeople

» MarketMarket

» Technology / Product / ServiceTechnology / Product / Service

» DealDeal

1616

People (Founders & Management)People (Founders & Management)

» Leading researchersLeading researchers

» Serial entrepreneursSerial entrepreneurs

» Ability to attract other world-class peopleAbility to attract other world-class people

CEO, Board of Directors, SAB, and investors

» Self-awareness: “Scientific Entrepreneurs” Self-awareness: “Scientific Entrepreneurs” v. “Entrepreneurial Managers”v. “Entrepreneurial Managers”

VC CRITERIA

1717

MarketMarket

» Multi-billion dollar potentialMulti-billion dollar potential

» Rapid adopter customersRapid adopter customers

» Known acquirersKnown acquirers

» Wall Street interestWall Street interest

» Probable government approvalProbable government approval

FDA, CMS, FCC, EPA

VC CRITERIA

1818

Technology / Product / ServicesTechnology / Product / Services

» ““Breakthrough” ideas with clear value Breakthrough” ideas with clear value propositionspropositions

» Platform technologiesPlatform technologies

» Strong IP positionStrong IP position

» Follow-on potentialFollow-on potential

VC CRITERIA

1919

DealDeal

» ValuationValuation

» ExitExit

» Terms: licensing fees and royaltiesTerms: licensing fees and royalties

» Option poolOption pool

» MilestonesMilestones

» Co-investorsCo-investors

VC CRITERIA

Q & AQ & A