sources of funding steve morris otbc [email protected]
TRANSCRIPT
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.
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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)
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