Funding Options for Early Stage Companies

March 10, 2015

Today’s Panel

• The Angel –Jean Hammond, Launchpad Venture Group

• Entrepernuer –Monica

• Agenda:1. The Story

2. The deck to provide a quick “complete” view

3. Q&A

2

3

Breaking Out

Story of founding and funding ListenCurrent

• Found family funding

• Contributed own money

• Quit my job

• Got my story in place in order to apply for LearnLaunch Accelerator

• Met the company• Seemed really fun, Monica is fun

– Monica sort of thought she had it nailed

• Entrepreneur had never sold things … just ideas• Opportunity size seemed small• Described as a “Supplemental” Product

– Back of envelope showed either the price per student needed to be as high as a core curriculum product

– Or we needed incredible penetration

• Needed business expertise– Financial Model

• Needed industry specific expertise

Jean- First Look

5

• LLX Demo Day - Presented in front of 150+ investors

• Felt proud of my presentation

• Collected a lot of cards

• Set up Follow-up Appointments and Deep Dives

Ready for Funding…Not Really…

• Angels liked the story

• Pitches were set up– Monica can pitch

• Deep dives (first part of diligence) were set up– Most did not go great

– Example of a question that was asked“the number of students in year 2 is really high … how do you do that?”

– Answer .. “LA has almost a ½ that many”

• Needed business expertise– Financial Model

• Needed industry specific expertise

Jean- Not Prime Time Yet

7

REALLY Ready for Funding

• Hired COO Karen Gage

• Reworked Financials

• Created Strategy documents

• Increased Sales

• Hit the funding road!

• Company was now traction– Investors want to hear about traction

– Teachers love product use pattern is high

– Districts are buying

• Team is a team– When Monica doesn’t know … Karen does

• Seems real

• Opportunity size is still small for venture

– But the “new products” feel real and value creating

Jean- We can see lift off

9

• Success…

• Secured Term Sheet with Launchpad Venture Group

• Raised $950,000 in a price round that included Launchpad, NewSchools Venture Fund and Investors Circle

Entrepreneurship comes in many forms

NORMAL GROWTHCOMPANY

HIGHGROWTHCOMPANY

EXTREMEHIGH GROWTH

COMPANY

SOCIAL VENTURECOMPANY

• Includes all service businesses

• Exploiting a local market need

• Team has ‘great jobs’

• Growth by adding resources one by one

• Exit will be based on value of cash flow (mature biz.)

• Growth profile ultra-scalable

• Team focus is exit

• Revenue $40M+ with lots of room for growth (5 yr.)

• Based on $20M+ investment

• Exit targeted to IPO or by ‘large’ M&A event

• Goal is to fulfill a social need

• Has mission orientation

• Team needs to support mission

• Growth profile often one resource at a time

• Exit …much harder to find fit

• Company can grow fast (on-line) or has a scalable system

• Team often motivated by exit

• $7-10M revenue in 5 yrs & market size allows significant additional growth

• Capital efficient total investment$2-4M

• Exit by M&A10

What Type of Company Are You?

• In many cases the nature of the business decides the type of company …

• In others, changing how you bring the product to market can really affect the cost of scaling and the funding requirements• Example: license new battery technology to existing

players vs build a battery company with outsource manufacturing or build a manufacturer

• Every company’s financing path is unique

• Funding comes in distinct flavors; all financial partners are specialists

11

Match Funding Sources

NORMAL GROWTHCOMPANY

HIGHGROWTHCOMPANY

EXTREMEHIGH GROWTH

COMPANY

SOCIAL VENTURECOMPANY**

• Friends, family, founders

• Debt, Bank, and other

• (Future) Crowd funding (portal style)

Early on

• Accelerators

• Individual Angels

• Micro Cap VCs

• Seed from VC

Later stages

• Venture Funds

• Strategic VCs

• Angel Syndication

• Friends family, founders

• Charity$$

• Crowd funding (Kickstarter, etc)

• Impact Angels

• (Future) Crowd funding (portal style)

** Funding similar to solo practitioners

• Angels

• Angel Groups

• Angel Group Syndication

• Angel List

• Micro-cap Funds

• (Future) Crowd funding (portal style)

• Increasingly Strategic Corporate VCs

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Capital Sources: Size & Cost

Investment Size

Investment

“Cost”

Traditional VCMicro VC

Equipment Financing

Angel GroupsAngels

Angel List, etcCorporate / Strategic

Venture

Customers

Jobs Bill Portal

Vendors

Founder

Friends & Family

Crowdfunding: etc.

Grants

Venture Debt

Bank

Loans

Personal

Loans

Private Equity

B’Plan Competition

Accelerators &

Contests

13

Alternative Sources of Capital

• Business Plan Competitions and Accelerators• Many firms gain enough for some product completion steps

• Revenue – Best of all (Bootstrapping)• Revenue history opens more types of debts• Pre-payments, etc.

• Vendors, partners and customers• Including NRE to build joint product• Great source of quick capital for marketing or sales collaboration

• SBIR Grants• ~$2 Billion department specific funding

• 2 or 3 ‘research’ calls from each department each year, must be used for research … then you commercialize with other funding

• Other government funding, lots of “detailed” sources• Mass Life Science & Sustainable Energy –loans or convertible notes

14

Debt Capital: RepaymentDebt Capital

– Funding based on a set schedule of principal and interest payments that provide a fixed return for the lender. Availability may be based on asset value or cash flow or personal guarantee

– Sources:• Personal Loans – Friends/Family

• Bank Loans

• SBA Loans

• Expect debt classes from Jobs Bill crowd funding portals

• Credit Cards

15

Equity Capital: Shared Upside (VC / Angels)

• Equity Capital requires an exit:– IPO & Private Equity

– M&A (most)

• VCs invest other people’s money (from pension funds etc.)– Returns are measured on a per fund basis– Focus find the best & adding resources to aid success– ~$33.2B annually, over 3,000 new investments 2014

• Angels invest own personal funds– Prefer capital efficient / early exit opportunities– ~$24.8B annually, ~ 71,000 new investments 2014

• Individual Angels• Angel Groups• Syndicates of Angels• Micro-VCs

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What do Angels Fund?• Early stage, high growth companies

– $10 - $15 million in revenue in five years

• Mostly products not services

– Food and fashion generally not suitable for angel groups

• Companies with an opportunity to exit within 5-7 years generally through M&A

• Capital requirements: $100K to $10 million

– Unless good things are happening

• There is increasing mix of sources so be aware of the moving ecosystem

17

Finding the Right Angel Group

• 26+ Groups in New England– www.angelcapitalassociation.org

• Important to find the right fit– A long term relationship

• Do your homework! – Target those angels that fit your profile

– Find a champion who

• Knows the social rules of the road

• Will sponsor you in to the group

• Engage early and informally– Leverage networking events in

town

• Why …. Because you can find them

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Are you Ready for Funding?

• Stage of development

• Concept (probably friends and family, maybe an individual angel)

• Prototype (some angel group interest)

• First revenues (lots of angel group interest)

• Team in place or identified

• Clear understanding of your capital requirements

• In depth understanding of your financials

• Executive summary and investor pitch ready

• References and diligence materials lined up

19

What Investors Want to Know 5 P’s of investment

• Product – both differentiated technology or service and the market need and size

• Promotion – market entry plan and cost of marketing

• Profits – a business model that has margins and distributions costs that are profitable

• People – a team to meet the needs of the business

• Plan – good idea of the steps needed to create a repeatable business model

Key concepts to convey:

• What our potential customers are saying to us

• How we plan to run a series of market entry tests

• How the team matches the needs of the business

• How we will scale against a repeatable business model

First Time Entrepreneurs

• Without a startup track record, funding can be a challenge

– Later stage because of risk

• Moving from negative to positive

– Communicate relevant experience

– Hire a compelling management team

– Surround yourself with experts

– Show us some milestone accomplishments

• Don’t ask us to take a leap of faith – show us how you are going to be successful

21

What Do We Mean By “Risk?”

Examples of things that make a company risky to a financial partner:

• Your company is early stage• You need more money, now or down the road• You are a new entrepreneur• You have unproven technology• You need to raise equity instead of asset backed debt

with obligation to repay• You are chasing a new unproven market• You have less IP or defensibility• Your business does not have high growth• You have a longer path to exit• You have fewer exit options

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Compare what makes it and what doesn’t

Factors Companies getting angel

investment

Companies that don’t

CEO Some experience or

‘coachable’ wants listen

CEO talks about him or her

‘expertise’ forever

Team Enthusiastic! pretty good

match to required skills

One person, says no one will

work without $$

Unique A neat idea, could be big Seems ‘me too’

Stage Lots done, working code, just

needs mkt. entry $$

Idea and ppt., or a complex

science project, or “old”

Market

size, str.

Market is big and can be

reached

Market is huge or

Market extremely fragmented

Total investment

Cashflow breakeven known,

Can use more $$

Needs $10-20M more after this

round

Valuation Willing discuss a range of

values & funding strategies

Is fixated on a very unrealistic

high value

What are the Initial Materials You Need?

•Business Summary: 2 to 5 pages with financial summary

•12 to 20 slide pitch deck with a backup side for every serious question

•5 to 8 page market (size and structure) summary

• Integrated financial model

•30 second elevator pitch

•1-2 minute tell me more / meeting request pitch

(write a business plan for yourself)

Your Path is Likely Personal

Investment Size

Investment

“Cost”

Traditional VCMicro VC

Equipment Financing

Angel GroupsAngels

Angel List, etcCorporate / Strategic

Venture

Customers

Jobs Bill Portal

Vendors

Founder

Friends & Family

Crowdfunding: etc.

Grants

Venture Debt

Bank

Loans

Personal

Loans

Private Equity

B’Plan Competition

Accelerators &

Contests

25

Closing Thoughts…

26

Leverage the Entrepreneurial Community in Boston!

-Greenhorn Connect

-The Capital Network (TCN)

-Etc.

-FIND A CHAMPION!!!!!!!!