Financing Options for
Entrepreneurs
Chad Barden
Discussion Overview
• Available Options
Venture Capital
Private Equity (Angels)
Grants
Strategic Partners
• Choosing an Option
Exit Strategy
Returns and Timing
Financing Sources – Private Equity
•
Candidates:
Friends, Family & Fools
Indiana Angels through Tax Credit
Private Equity Raise from a Firm like Crown or Perriculum
•
Pros:
Friendly terms to existing investors
Relatively passive investors
•
Cons:
Fund raising is time consuming
Relatively passive investors
•
Risks:
Raising enough money to get to a milestone
VC’s sometimes will shy away from a deal with lots of angel investors
•
Mitigation:
Set an escrow level that gets you 2 months past the milestone, then keep raising to get the
company 6 months past the milestone
Group angels into LLC’s so that a subset of them control the votes of all the investors
Financing Sources – VC’s
• Pros:
Industry connections & credibility
One stop shopping…maybe
Industry terms are improving in the Bay Area (Fenwick & West)
IFF pressure is increasing
• Cons:
Due diligence time period
Adverse terms for existing investors
Typically later stage investors
Coastal money may involve a move of the company
• Risks:
Timing, given length of due diligence
• Mitigation:
Identify milestones you can achieve and that add real value
Reducing uncertainty about market, technology, or exit
Financing Sources – Grants
• Candidates:
21st Century Fund
SBIR / STTR
• Pros:
Cheap money…Free
• Cons:
SBIR / STTR’s are based on specific programs
• Not necessarily in concert with your development plans
Reporting obligations can be time consuming
Timing – process can be lengthy
• Risks:
Time invested may yield no results, requires technical time away from
product development
• Mitigation:
Hire a grant writer
Funding Sources – Strategic
Partners
• Pros:
Validates market need for VC’s
Can create more favorable investment terms from VC’s
• Cons:
Expensive money in business deal associated with investment
• Risks:
Partnering usually occurs when funding risk is mitigated, asking
for funding complicates the negotiation
• Mitigation:
Secure partner traction first, then pursue investment as part of
negotiations
Choosing an Option
DON’T CHOOSE…
…PURSUE THEM ALL!!!!
Available Exit Strategies
1) Technology Acquisition
Industry leader acquires technology based on DISRUPTIVE
potential
2) Business Acquisition
Typically requires achievement of $10M - $30M annual sales
Requires dilutive financing for achieving revenue AND growth
3) IPO
Could be a viable option, but timing will likely be the same as
Business Acquisition
Much more expensive and painful than pre-Enron days
Technology Acquisition
• Risks:
M&A discussions can disrupt your ability to
get a viable business deal established with a
partner...needed for VC funding
• Mitigation:
Engage a limited set of potential partners
outside of a technology acquisition process
ALWAYS Manage to
Exit Options 2 & 3
• Need to plan to raise all money needed to get to
cash flow positive
Sources:
•
•
•
•
Private Equity
Grants (21st Century, SBIR)
VC’s
Strategic Partners
• Identify key milestones that increase the
certainty around your exit strategy
Plan funding rounds about 6 months after each
significant milestone
Why Angels Invest
• The Person
Familiarity with the integrity and abilities of the management team
OR
Friends, Family & Fools
• The “Cause”
The company is doing something that contributes to a social cause that
is meaningful to the angel…
• Curing cancer, improving the environment
The company is targeting a market segment in which the angel has
experience and insight
• Perceived BIG opportunity
The Angel perceives the technology to be disruptive and does some
cursory due diligence that confirms his / her suspicions
What a VC Looks for in a Deal
SEED
Developing
product
Series A
Revenue - paying
Customers
250K-$1M
IRR 70+%
Need 10X in 5
years
$1- $3M
IRR 50%
Need 5 X in 3-4
years
Series B
Sales Expansion
$3- 10M
IRR 40%
Need 3X in 2-3
years
Late Stage
Mature Business
$15-50M
IRR 25%
Need 1.25X in
12 mos
What a VC Looks for in a Seed Deal
• Technology that is proven to work
At least proof of concept, if not a prototype
• Validated market
Someone credible will validate the pain that the
product or service is solving
That company is perceived to be indicative of a larger
market opportunity
• Validated exit strategy
Comparable deals that have exited for a value that
yields requisite returns
• Management team