BOOTSTRAPPING STRATEGIES

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BOOTSTRAPPING STRATEGIES

• Randy Harmon,
• NJ Small Business Development
• Centers of Rutgers Business School

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DONT COUNT VENTURE CAPITALCOMING OUT OF THE GATE

• Raising debt and equity financing is all about
  perceptions of risk and opportunity
• Early stage and pre-sales companies are generally
  perceived as too risky
• The further along you can develop the venture
  before formal financing, the better your chances
  are of survival and ultimately raising financing

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BOOBOOTSTRAPPING

• - 4 Fs
• Friends
• Family
• Founders
• Fools
• - Everything else beyond the pursuit of formal
  debt and equity financing that an entrepreneur
  does to both raise and minimize the resources
  needed to launch their business and carry it
  through its early stages

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BOOTSTRAPPING

• Cleaning out your personal savings or retirement
  accounts
• Home equity loans and second mortgages
• Credit cards
• Friends family plan
• Research and development grants
• Strategic alliances
• Outsourcing activities requiring large up-front
  investments
• Purchasing used equipment
• Bartering your product/service for someone elses
• Advances from professional service providers
• Suppliers
• Advance payments from customers
• DOWNSIDE- There is often a trade-off between time
  and money and the delay can sometimes be
  detrimental or fatal

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SMALL BUSINESS INNOVATIONRESEARCH PROGRAM (SBIR)

• Best source of risk capital
• Largest Federal RD grants program targeted to
  small business-nearly 2 billion annually
• All Federal agencies with large external RD
  budgets participate
• Three phase competitive program

• Dept. of Agriculture
• Dept. of Commerce
• Dept. of Defense
• Dept. of Education
• Dept. of Energy
• Dept. of Health and Human Services (NIH)
• Dept. of Transportation
• Environmental Protection Agency
• Homeland Security
• NASA
• Nat. Science Foundation

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THREE PHASE PROGRAM

• Typically annual solicitations in which agencies
  define areas in which they are interested in
  sponsoring research
• Phase I- up to 100,000, runs 6 months
• Demonstrate technical feasibility
• Phase II- up to 750,000, runs 2 years
• Proof of concept
• Development of a prototype
• Phase III- no new funding
• Commercialization of the technology

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SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR)

• Younger, poorer sister of SBIR program
• 5 largest Federal Agencies participate
• Department of Defense
• NASA
• Department of Energy
• National Science Foundation
• Department of Health Human Services
• Less than 10 of the funding of SBIR
• 3 Phase program
• Requires 30 of contract to go to a collaboration
  with a nonprofit research organization

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CLOSEST THING TO ENTREPRENEURS HOLY GRAIL OF
FREE MONEY

• No loans, no equity
• Entrepreneur maintains ownership of the
  technology
• Good odds
• 1 in 10 Phase I proposals are funded
• Presently better under STTR
• 2 in 5 Phase II proposals are funded

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PATH TO EQUITY FINANCING

• SBIR/STTR provides up to 850,000 in financing
  over a 3 year period to develop a technology and
  remove much of its risk.
• Vulnerability of technology entrepreneurs to
  focus almost exclusively on the technology
• If the company simultaneously works to reduce
  market and business risk it can become a prospect
  for equity financing.

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ADVANCED TECHNOLOGY PROGRAM (ATP)

• National Institutes of Standards and Technology
  (NIST)
• Invests in development of innovative high
  risk/high potential economic impact technologies
• Aims for grand slam home runs
• Research priorities set by industry based on
  their understanding of marketplace
• Cost sharing-at a minimum small companies pay all
  indirect costs
• Rigorous pear reviewed competitions
• 2 million over three years
• Approximately 60 million available

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STRATEGIC ALLIANCES

• BUSINESS PARTNERSHIPS
• You partner with another company to gain access
  to resources that you need but dont have
• For most young businesses this typically means
  partnering with a larger, more established
  business
• More important than ever given current risk
  adverse venture capital environment
• SPEED ENTRY TO MARKETPLACE AND MINIMIZE THE
  REQUIRED FINANCING
• Loss of control
• Alliances come in several flavors
• Financing
• Marketing and sales
• Manufacturing
• Licensing

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FINANCING

• Large companies may invest in smaller
  entrepreneurial ventures to supplement or
  substitute for their own RD
• Less risky and more cost effective means of
  accessing cutting edge technology
• Strategic partners most likely to understand and
  appreciate value
• Potentially more favorable terms of investment

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MARKETING AND SALES

• Partner with a company that has an established
  sales force that is selling similar but non
  competing products to your prospective customers
• The value to the larger company is that your
  product may fill a gap in or extend their product
  line
• No marketing/sales employees to recruit, hire and
  train no payroll
• Access to partners network of customer contacts
• Downside Less control, lower priority

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MANUFACTURING

• Identify regional manufacturer
• Eliminates or defers costly equipment purchases
• No manufacturing employees to recruit, hire and
  train no payroll
• Speeds market entry
• Often referred to outsourcing
• Downside Less control

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LICENSING

• Transfer of rights to commercialize a technology,
  or an application of a technology to another
  company in return for financial consideration
• Typically some combination of up front cash,
  consulting contract and longer term royalty
  payments
• Use cash and validation generated from the
  license to commercialize other applications and
  build a company
• Particularly useful for first application of a
  platform technology or the first technology of a
  company with multiple technologies
• There is typically a tradeoff between upfront
  money and royalty payments
• Downside Lower rate of return, loss of control,
  time lag before royalty payments flow

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CASE STUDYINMAT, INC.

• Nanocomposite coating to improve air retention in
  rubber
• Initial product Air D-Fense 2000 utilized in
  premium Wilson tennis balls, official ball of
  Davis Cup
• Ultimate market is truck and car tires, at least
  several years away
• Client for 4 years, recipient of guidance and
  help in financing and building business including
  assistance in pursuing Springboard and Seed
  Capital loans and identifying an angel investor
• Lack of success in raising venture capital
  because investors wanted to see second near term
  commercial product
• Unsuccessful SBIR proposal in 2001, topic
  returned
• Attended first annual NJ SBIR conference in
  December 2001
• Was assigned a consultant who spent 12 hours
  reviewing critiquing and helping to strengthen
  proposal
• Received Phase I award to explore application of
  coating to rubber gloves for treating hazardous
  chemicals
• Strategic alliance with major glove contractor
• Assisted InMat with Phase II proposal and
  commercialization plan
• Invited to negotiate Phase II contract in
  December 2002
• Bolstered by increased probably of second
  product, company closed on 1.5 million in
  venture capital in April 2003

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NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC)OF
RUTGERS BUSINESS SCHOOL

• Part of a national public, private and academic
  partnership
• Free business counseling, consulting, and
  affordable business training
• Funded in part by the U.S. Small Business
  Administration and the NJ Commerce and Economic
  Growth Commission
• 11 regional centers and 18 satellite offices
  across NJ
• More than 250,000 small business owners,
  prospective entrepreneurs and business
  professionals served since 1979
• Serve businesses from pre-startup stage to those
  with 500 employees
• Specialty programs in international trade,
  government procurement, E-business, technology
  commercialization

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NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC)

• Services include help with
• Business plans
• Marketing plans
• Financial statements
• Loan packages
• Record keeping
• Taxes
• E-commerce
• NJSBDC Web Site www.NJSBDC.com
• SBA Web site www.sba.gov

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NJSBDC TECHNOLOGY COMMERCIALIZATION CENTER

• MISSION Assist New Jersey science and
  technology entrepreneurs in commercializing their
  new technologies, financing and building their
  businesses.
• TECHNOLOGY HELP DESK- 1-800-432-1TEC(832)
• Telephone counseling throughout the
  commercialization process, from startup to market
  entry and equity financing
• SBIR/STTR TRAINING AND PROPOSAL ASSISTANCE
• Conferences, seminars and workshops
• Assistance in identifying suitable topics
• Consultants to guide entrepreneurs through the
  proposal development process and to review,
  critique and strengthen draft proposals
• HELPED ENTREPRENEURS WIN 2.4 MILLION IN 2003

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NJSBDC TECHNOLOGY COMMERCIALIZATION CENTER

• TECHNOLOGY COMMERCIALIZATION CONSULTING
• Targeted to SBIR and STTR award winners. Help
  with
• Business models and plans
• Marketing plans
• Financial projections
• Financing strategy
• Approaching equity investors
• Strategic business partnering
• Assisted entrepreneurs in raising 1.8 million in
  equity financing during 2003
• www.NJSBDC.com/SciTech

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LESSONS LEARNED

• Market entry takes more time and costs more than
  entrepreneurs most conservative estimates
• The better and more comprehensive your planning,
  the better your chances for success, minimize
  your surprises
• Reader should know after the first sentence what
  the company does.
• Laymans terms, Dont make reader work hard to
  understand the technology and the business
  opportunity
• A great technology may not be good enough, Thou
  shalt know thy markets and customers and their
  needs
• Differentiate yourself from your competitors in a
  way that provides the perception of value to your
  prospective customers, and that you can sustain
  over time

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LESSONS LEARNED

• Management, management, management
• First business hire or advisor should usually be
  a marketing and sales professional who knows your
  markets
• Venture capitalists will expect you to understand
  your markets and customers at least as well as
  anyone
• Validate market demand before approaching venture
  capitalists
• Develop a bootstrapping strategy which you can
  fall back on
• Develop your venture as far as you can before
  quitting day job
• Network
• If the reader is not EXCITED by the end of the
  executive summary, you have lost them