Developing a Funding Plan

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Developing aFunding Plan

• Bill Newman
• Northwest Technology Ventures
• Steve Morris
• Open Technology Business Center

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Northwest Technology Ventures

• William H. Newman
• May 2006
• William H. Newman (whn_at_nwtechventures.com)
• Gordon B. Hoffman (ghoffman_at_nwtechventures.com)
• www.nwtechventures.com

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Northwest Technology Ventures

• NTV 14 million seed and pre-seed venture fund
• Focus Technology-centric, RD commercialization
• High-value, high-leverage, pre-seed and seed
  financing
• Emphasis on technology commercialization from
  Oregons universities, research institutions,
  corporate research
• Management
• William Newman, PhD - 10 years venture
  experience MIT research faculty (biomedical)
  founded MIT spin-out Ph.D. in ME MBA, Sloan
• Gordon Hoffman - serial entrepreneur
  (semiconductors/EDA software) angel investor
  created OGI Technology Commercialization Office
  MSEE Stanford

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NTV Technology Transfer FocusBusiness Creation
via Targeted Technology Transfer Investment

• Phase I University TTO
• - Education of faculty, staff
• Consultative assistance to TTO
• - Prospecting, screening, due diligence

• Phase II NTV
• Recruit management, define business concept,
  develop business plan
• Commercial validation of technology
• Seed investment to 500,000

• Phase III NTV VC partner
• Mandatory private sector participation
• NTV match to 1M

Capital Gap
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OTBC Open Technology Business Center

• An incubator for high-tech startups
• Services
• Office infrastructure
• Office space, furniture, Internet access,
  conference rooms, reception area, etc.
• Coaching/advising
• Business plan development Marketing/Sales
  strategy Legal issues Angel and VC fund raising
• Networking
• 35 person advisory board
• Introductions for angel VC fund raising

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Are You OTBC a fit?

• A technology angle (software or hardware)
• Scalable business model
• Large potential market (200M )
• Competitive advantage
• Typically 1-4 people
• Intent to grow
• Location Beaverton
• To apply www.opentechcenter.com

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No cash game over!
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The Funding Plan

• Consider Milestones (past and planned)
• Consider all possible Sources of Funds
• Understand How Much is typically available
• Determine your company's Cash Requirements
• Choose the appropriate Source of Funds
• Create the required Sales Tools
• Now you're ready to start!

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Milestones

• You have an idea
• First consideration strength of the team
• Funding received to-date
• Market validation customer references
• Prototype Customer feedback
• Beta test Customer feedback
• Revenue Customer references
• Key partnerships

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Sources of funds

• Savings credit cards (and no salaries)
• Friends family
• Bootstrap (consulting, contract work, etc.)
• Grants (SBIR, STTR)
• SBA Guaranteed Loans
• OECDD
• Regional Government Programs
• City Programs
• Equipment financing
• Financing receivables
• Angels
• Venture bank bridge loan
• Venture capital firms
• Merger/acquisition
• Initial Public Offering (IPO)

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Sources Savings Credit

• Plan on no salary for (quite) a while (typically
  6 months or more)
• Dont expect back-pay when you eventually get
  funded
• Do expect to get out-of-pocket expenses reimbursed

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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
• Dont sell big chunk of company early
• Only sell stock to accredited investors

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Sources Bootstrap

• 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 to another
  company

But be sure you retain rights to the IP!!!
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Why Bootstrap?

• Youll learn a lot about customers
• Youll develop customer relationships
• Youll learn a lot about what it takes to build
  the product
• Youll learn a lot about what it takes to sell
  the product
• Youll increase your credibility
• You will not have to sell a piece of your company
  to investors
• You will not have to give up control to investors
• You must bootstrap to get far enough to be
  fundable

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Sources SBIR Grants (www.sbirworld.com)

• SBIR Small Business Innovation Research
• Significant percent (2.5 gt1B) of federal RD
  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 RD

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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 RD
  center
• Awards granted in 2 phases
• Phase 1 up o 100K for feasibility study
• Phase 2 up to 750K for RD

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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

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Source OECDD

• Entrepreneurial development Loan Fund
• Company lt 24 months old lt 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
  lt500K

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Sources Regional Investment Funds

• 7 Million in funding state-wide from Oregon
  Lottery (through OECDD)
• Administered by local Regional Investment Boards
• Example Mt. Hood Economic alliance
• 600K available (as of May 31, 2006)
• Focus create jobs and leverage additional
  investments
• Forgivable loans grants loans

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Sources City Programs

• Portland (PDC)
• Direct TIF (also known as Deferred Loan Program)
• Revolving Loan Real Estate Fund (Economic
  Development Administration)
• Economic Opportunity Fund (EOF)
• Enterprise Loan Fund
• North/Northeast Business Assistance (also known
  as Hatfield)
• Quality Jobs Program (QJP)
• Seismic Loan Program
• Storefront Improvement Program

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Sources Equipment Financing

• Equipment becomes collateral
• Allows you to stretch cash
• in return for paying some interest
• Worth considering if youre 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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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
• Youll pay interest, but you get cash faster
• Typical criteria
• Accounts Receivable due from creditworthy
  companies
• You are not in imminent risk of going bankrupt

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Sources Angels

• High net worth individuals
• May be structured as
• Loan (probably convertible to Common or Preferred
  Stock)
• Stock purchase
• Must be accredited investor
• 1M net worth or 200K 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

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Equity Common vs. Preferred

• The stock purchased by the investor typically has
  special rights
• Preferred shares (vs. Common)
• Examples of special rights
• Board observer rights or a full board seat
• The right to be first in line if an acquisition
  or IPO occurs (and perhaps receive more than
  their investment before Common shareholders see
  anything)
• The right do have dilution protection
• A veto in many major decisions
• When you sell any amount of Preferred equity, you
  lose a lot of control

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Due Diligence
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Equity The Exit Strategy

• An investor sees no return until there is an
  exit event such as
• Someone buys-back their shares
• There is an acquisition
• There is an IPO

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Sources Venture Bank Bridge

• Venture banks can provide bridge loan if youre
  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

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Sources VCs

• Institutional investors (not individuals)
• They invest other peoples 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)

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...and VCs are results oriented
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Only 10 of investments are home runs
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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 youre
  just about our of cash

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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)

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Sources vs. How Much
Source Typical Amount Savings credit cards
(and no salaries) 10K - 20K Friends
family 50K - 100K Bootstrap Product
revenue Varies Consulting
Varies Contract work Varies Grants
(SBIR, STTR) 100K - 1.5M SBA Guaranteed
Loans Varies Equipment leasing
Varies Angel investments
500K - 2M Financing receivables
Varies Venture bank bridge loan
Varies Venture capital investment 2M -
15M Credit line with a bank
Varies Merger/acquisition
Varies Initial Public Offering (IPO)
30M - ?
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The Funding Plan

• Consider Milestones (past and planned)
• Consider all possible Sources of Funds
• Understand How Much is typically available
• Determine your company's Cash Requirements
• Choose the appropriate Source of Funds
• Create the required Sales Tools
• Now you're ready to start!

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Cash Requirements

• What are your startup costs?
• Equipment software furniture lease down
  payment IP licensing IT infrastructure
  manufacturing builds
• When will you hire people?
• What will you pay?
• What other expenses?
• Utilities travel shipping IT trade shows PR
  merchandising taxes

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Items that are Often Understated

• What ongoing investment is required in RD
• What investment is required in Marketing?
• What investment is required in Sales?
• As you scale the business, what new expenses will
  you incur?
• How long will it take to close the next source of
  funding?
• Youll need enough money to last through the next
  fund-raising

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Cash Requirements Forecast

• Create a 5-year budget
• Monthly for year 1
• Quarterly for year 2
• Annual for years 3-5
• Include
• Starting cash
• Cash uses (in detail)
• Cash sources
• Ending cash
• Remember budgeting is milestone driven

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Financial Projection Spreadsheet

• Example Excel spreadsheet prepared by Brian
  Goncher (Deloitte Touche) for producing 5-year
  projections of
• Balance sheet
• Income statement
• Cash flow statement

http//www.oregonstartups.com/tools/financial-proj
ections.xls
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Financial Projection - Example
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Choose the Right Source
Milestones Sources

• Concept
• Brief-version plan
• Customer research/validation
• Product Research
• Product Development Prototyping
• Product Development Product release
• Product roll-out
• Growth
• Expansion

• Savings/Credit cards
• Friends family
• Friends family
• SBIR, STTR, Bootstrap
• Angel, Bridge Loan, Leasing, Early-Stage VC
• Early/Mid Stage VC, SBA loans, Finance
  Receivables
• VC, Credit Line
• Late-stage VC
• Private equity, acquisition, IPO

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Test the Plan

• Is your timing of stages realistic?
• (Everything always takes longer than you think)
• Have you allocated time for fund raising?
• (It takes longer too)

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VC Fund Raising Sales Process

• Sales Tools
• Exec Summ. Biz Plan Elevator Pitch Slides
  Patents Customer Industry Guru references
  Team Advisors
• Understand what VCs need
• Qualify (fund size, stage, industry,
  lead/follower,)
• Find a champion inside the firm
• Trial close (what more do you need to see)
• Manage the funnel (plan to track 40 firms)
• Negotiate terms (Win-Win)
• Valuing the company, terms, amount of investment,
  syndication
• Determine Their Value-Add

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The Funding Plan

• Consider Milestones (past and planned)
• Consider all possible Sources of Funds
• Understand How Much is typically available
• Determine your company's Cash Requirements
• Choose the appropriate Source of Funds
• Create the required Sales Tools
• Now you're ready to start!

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Developing aFunding Plan

• Bill Newman
• Northwest Technology Ventures
• Steve Morris
• Open Technology Business Center