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Financing Options for Entrepreneurs

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

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Financing Options for Entrepreneurs

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  1. Financing Options for Entrepreneurs Chad Barden

  2. Discussion Overview • Available Options • Venture Capital • Private Equity (Angels) • Grants • Strategic Partners • Choosing an Option • Exit Strategy • Returns and Timing

  3. 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

  4. 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

  5. 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

  6. 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

  7. Choosing an Option DON’T CHOOSE… …PURSUE THEM ALL!!!!

  8. Available Exit Strategies • Technology Acquisition • Industry leader acquires technology based on DISRUPTIVE potential • Business Acquisition • Typically requires achievement of $10M - $30M annual sales • Requires dilutive financing for achieving revenue AND growth • 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

  9. 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

  10. 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

  11. 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

  12. What a VC Looks for in a Deal

  13. 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

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