Today

Funding your venture (45’)

Work Session- Financing proposal, overall plan preparation (60’)

Mon- 3/2

• Work Session- Preparation of Commercialization Plan Presentation (60’)

• Paul Gulick “Lessons Learned from Serial Entrepreneur” (60’)

Reminders: 1) Review your plan with mentor and inventor2) Invite your mentor and inventor to class presentations- next Wed 3/5

What’s Next????

The home stretch…

Wed- 3/4In class presentations of Commercialization Plans (~ 12 min each + questions)

Mentors and Inventors Invited

Mon- 3/9Work Session- Revision of Commercialization Plan based on Feedback

Wed- 3/11 (5:00-7:00 pm)Judged Competition- Portland Business Roundtable

Where do I find money?

You need to know where to look!

You need to pick the right source for your point in the funding life cycle.

Capital Sources for Formation and GrowthFrom Bill Newman, NTV

R&D

Gov’t, Industry, Academic

Ongoing Growth

Public Markets

Formation

The “3 F’s” (friends, family, & fools)

Angel Institutional

Angel Investors - “early and often” - Individuals, unorganized,

limited follow-on - 2003: $18.1 billion

invested, 42,000 deals

Venture Capital funds - Home run mentality - Significant investment $$;

governance and oversight - 2003: 915 funds, $18.2 billon

invested, 2,700 deals

“Private Equity”

Commercialization Grants - SBIR/STTR, SBA - OSU venture fund - NEC

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Startup Capital Sources

• Government & Incentive – SBIR/STTR, OSU venture fund, ONAMI gap, etc

• The “3 F’s” (friends, family, & fools)

• Angel Investors– “early and often”– Individuals, unorganized, limited follow-on

• Venture Capital funds– Home run mentality– Significant investment $$; governance and oversight

Obvious

Often Overlooked Sources

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• Organic growth (bootstrap)

• Consulting-based funding

• Customer deals (NRE)

• Strategic partner deals

Government: SBIR and STTR • The Small Business Innovative Research Grants (SBIR) and Small

Business Technology Transfer (STTR) can be good sources of start up funds

• SBIR created in 1982

• Requires 2.5% of all “extra-mural” research funds must be set aside for small business development ($2B in 2005)

• Many government agencies participate: DOD, NIH, NASA, DOE, NSF, DOC, DoAg, EPA, DOE, DOT. Each agency has structured their program differently

• There are some differences in SBIR and STTR with respect to required partnerships and percentage of total funds allocated

• This a grant, NOT a loan. The small business is not required to repay. Also, the company can allocate up to 7% of the grant to profit.

SBIR/STTR Funding

• Structured around a 3 phase process– Phase 1- feasibility ($50K-$100K, 6 mo)– Phase 2- prototype ($500K-$750K, 2 yr)– Phase 3- commercialization (not funded by

government directly)

• Can be either a grant or contract– Grant- no expectation of a product that funding

agency will buy– Contract- expectation that in Phase 3 that agency will

be a customer

SBIR/STTR Funding

• Success rates vary among agencies– NIH: Funds 1 out of 3 proposals– NSF: Funds 1 out of 13 proposals

• Most require a PI (principal investigator) with a good academic track record

• 41% of SBIR awardees are 2-9 employees

• 33% of SBIR awardees are new

• More information is available at the website: http://www.sbirworld.com,

OSU Venture Fund

• The State of Oregon passed a bill in 2005 for the purpose of “facilitating the commercialization of university R&D”

• This fund is to provide – Capital for university entrepreneurial programs– Opportunities for students to gain experience in applying research to

commercial activities– Proof-of-concept funding– Entrepreneurial opportunities for those wishing to convert research into

commercial enterprises

• It is funded by credits applied to state income taxes on a voluntary basis-

• OSU received $5.3M last year

Other OSU Specific Funding

• OSU Venture Fund ($5.3M last year’s total) http://campaignforosu.org/venturefund/

• ONAMI Gap Funding (individual grants up to $250K)

• New Enterprise Challenge (AEP- $17 K total)

• OSU Foundation Grants (College of Science- $5K each)

Funding Cycles and Timing

• Investor funding typically occurs in “rounds” of increasing amount– First, second, mezzanine, etc– Subsequent rounds of funding can dilute the value of initial

investors

• Tie funding to specific milestones- – e.g. Prototype complete, beta testing complete– investors like to feel privy to new information to maximize their

benefit and minimize risk

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Typical Investment and Valuation, by Stage

Stage Objective Revenue Valuation Investment

SeedProof of concept

0Below $5M

$1M or less

EarlyProduct

validation<$1M $5 – 10M $5M

GrowthBusiness validation

<$10M $10 – 15M $5 – 10M

Later Expansion $10M up $15M up $10M up

Raising Money From Angels• Characteristics of a Likely Angel

– High Net Worth– Recent Liquidity Event– Industry Knowledge– Relationship Oriented

• Lead Versus Followers– Target and Negotiate the Investment with a Few Lead Investors

• Angel Networks (OEN, WIN, WVN)

• Only Take Money from Accredited Investors

• Current Climate

Local Angel Networks

There are MANY local groups of investors and forums who would like to hear about your ideas…

• SWOT (monthly Corvallis group of business leaders)

• Willamette Valley Investors Network (WVIN)- May 14th conference ($150K+) at CH2M Hill Alumni center

• Oregon Entrepreneurs Network- March 15th Annual Meeting in Portland ($250K+)– http://www.oen.org/events_ao.aspx

• Portland Angel Network (PAN)

• Women’s Investment Network (WIN)

Venture Capital• What is a Venture Capital Fund?

– “Mutual fund” for private, illiquid securities with 10 year life (in general); generally unproven businesses

• Who are investors in a VC partnership?– Who has a 10-year investment horizon and can lose 100% of

capital?• Pension funds, foundations, endowments, trusts, banks, insurance

companies, “some” high net worth individuals, corporations

• Venture Capital– Specialized: <2% of businesses formed (SBA)– Geographic concentration: 33% Silicon Valley, 50% California,

67% California and New England (role of research institution)– VC $$: metro=99.2%; non-metro=0.8%; rural=0% (infrastructure)– Home run mentality: 10% = 10x, 30-50% = write-off– Investment characteristics: high growth potential, capital efficiency,

exit potential– Significant investment $$; governance and oversight

Good and Bad Venture Deals• “faster, better, cheaper”

– if so, look for 10X; “move to the next curve”• “brave new world”

– not just new, but necessary• “are the dogs eating the dog food”

– do customers want your product?

• “science projects” (also known as ratholes)– is there a product and market in the foreseeable future?

• “putting lipstick on the pig”– no, really, this is a great deal!

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Industry Structure MatrixB

arri

ers

to E

ntry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits-Operating systems, Jet Engines, Life Sciences

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items-Airlines, auto, resource…

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items

-Fragmented industry-Growth via consolidation-Services

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items

-Fragmented industry-Growth via consolidation

-Price parity-Intense competition-Margin pressure-Internet

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Raising Institutional Capital: Overview of the Process

• Preparing the business plan– A “business plan” or a plan for the business?

• Presenting the business plan– Initial screening/filtering: status and fit

• Due diligence process– Validation; based on interviews, research, expert opinion– Market, need, defensibility, management

• Valuation– A negotiation

• Term sheet• Ongoing relationship

– Board of Directors, introductions, strategic advice• Exit strategy

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Investment Evaluation: Key Issues• Filtering process

– 100:10:1– invention : product : business : platform : investment

• Validation– Attractive Market Opportunity

• size … growth … competition– Compelling Need

• breakthrough solution– Proprietary Position

• technology … product … market– Management

• visionary, committed, market-oriented

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TOP 10: What VCs Don’t Want to Hear

1. Our projections are conservative2. Our market is $$$ billion and we only need 0.00001%

of it to succeed3. We are in final negotiations with a large partner4. We will sell only common stock to investors5. We have no competition6. Our technology cannot be duplicated7. “XYZ Co.” (a Fortune 100) is too slow moving8. We are creating / changing the market and our

product will become the standard9. We have first mover advantage10. Our goal is to attain 2% market share

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New Markets are Hard to Gauge

• "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is, inherently, of no value."– Western Union internal memo, 1876.

• "The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?"– RCA: David Sarnoff's associates in response to his

urgings for investment in the radio in the 1920s

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New Markets are Hard to Gauge

• "I think there is a world market for, maybe, five computers."– Thomas Watson, chairman of IBM, 1943

• "There is no reason anyone would want a computer in their home."– Ken Olson, Digital Equipment Corp.,1977

• "640K ought to be enough memory for anybody."– Bill Gates, 1981

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The Second Mouse Gets the Cheese

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Selling is What It’s All About

“Don't worry about people stealing your ideas. If your ideas are any good, you'll

have to ram them down people's throats.”

Howard Aiken Computer Pioneer

OSU Ideas on their way…

• “Nuke in a box” (recently received VC investment- ‘06 MBA project)

• Nanobits, Inc (received 2007 ONAMI gap funding-evolved from ‘06 undergrad class)

• I5 Logic, Inc (recently received large VC investment- from ‘06 undergrad class)

• Printable electronics (received 2008 OSU Venture Grant- from ‘07 undergrad class)