Funding Strategies for Tech Innovators

1. Presents: Start Up Boot Camp for University TTO Professionals and Inventors Session 4: Funding Options and Opportunities www.technologytransfertactics.com - 877-729-0959

2. In Partnership With: www.technologytransfertactics.com - 877-729-0959

3. Your Panel of Presenters Moderator: Gerard Eldering is Founder and President of InnovateTech Ventures, specializing in venture creation based on inventions licensed from universities and research institutions. Since the company’s founding in 2007, InnovateTech has supported numerous mid-Atlantic universities and co-founded three start-up companies including AlphaDetect and Trilumen. Gerard has been working in the technology transfer community for more than a decade and is passionate about the creation of professionally managed and funded start-up companies. Prior to launching InnovateTech, he founded and served as Director of the Technology Transfer Office at The MITRE Corporation. He is an MBA and a registered patent agent. Presenters:Kef Kasdin is a general partner of Battelle Ventures and Innovation Valley Partners. Kef focuses on investments in cleantech and communication technologies, working closely with the national laboratories that sole limited partner Battelle Memorial Institute manages or co-manages for the U.S. Department of Energy around the country. Kef currently serves on the Boards of Directors of Aldis, Inc.; Ampulse Corp.; Planar Energy; and Rajant Corp. She also is an ImageTree Corp. board observer. Active in the venture community, she sits on the Board of Directors of the National Association of Seed and Venture Funds and is a coauthor of Inside the Minds: Green Venture Capital (Aspatore Books, Nov. 1, 2009). Kef has been involved in developing and executing strategy for high-technology companies for more than 20 years, including Sarnoff Corp. and 3Com Corp., where she was the company’s first Executive in Residence, Office of the Chairman. She became a technology start-up consultant in the late 1990s, a venture capitalist in 2000, and a founding member of the management team forming Battelle Ventures in 2003. Kef holds a B.S.E degree in operations research from Princeton University and an MBA from the Graduate School of Business, Stanford University. Robert Okabe’s first involvement with startup ventures was as an angel investor. He has made 13 investments of his own funds since 1995, with one major liquidity event and three other positive returns of capital. He is also a co-founder of an angel group, helped organize an angel capital fund, and serves as a Director of the Angel Capital Education Foundation. During a 12 year career as an investment banker he completed over $25 billion in debt offerings, 7 equity IPOs, and participated in mergers and acquisitions with aggregate asset values over $14 billion while at BancAmerica Robertson Stephens, Lehman Brothers, and Kidder, Peabody. He is a co-founder of RPX Group, a firm focused on building startup companies from university innovations and has led many of the firm’s most successful engagements. Bob holds a Bachelor of Science in Finance and Organizational Behavior from the Boston University School of Management and has been a guest speaker on startups at the University of Chicago Booth School of Business, Kellogg School of Management at Northwestern University, MaRS Centre in Toronto and for the Organisation for Economic Cooperation and Development. www.technologytransfertactics.com - 877-729-0959

4. Your Panel of Presenters Legal Expert: Adam Klotz, heads GTC Law Group’s Los Angeles affiliate office (formerly Lenard & Klotz LLP) and specializes in business transactions, with a particular focus on mergers and acquisitions, venture capital and private equity financings and the structuring, formation and financing of complex joint ventures, partnerships and limited liability companies. He has extensive experience handling these and other types of complex transactions for entertainment and technology clients. Previously, Adam practiced at Riordan & McKinzie (now Bingham McCutcheon LLP) and Paul, Hastings, Janofsky & Walker LLP. Adam holds a B.A. from Columbia College in the City of New York and a J.D. from the University of Virginia School of Law. www.technologytransfertactics.com - 877-729-0959

5. Attracting and Seeking Out the Right Investors Know where you are in the process • Stage of product/service development • (R&D, beta, shipping product, expansion) • Initially, rely on self funding or friends & family • Plan to raise angel or institutional funds a year before needed • Efficiently use capital: outsource, use consultants Identify what level of funding you require • What needs to be financed • Equipment, salaries, receivables • Milestones that can be reached • Is the request appropriate for the investor type? • Both for now and for future If only $1M over investment life, angel funds may suffice If $10M or more, prepare for the VC track In between, consider a smaller VC or a large angel group • Other private/public sources (e.g., grants;details later)

6. Attracting and Seeking Out the Right Investors (cont’d) Pitfalls to avoid • Targeting investors without track record in your sector/current stage • Providing too much info at first meeting Investor turn ons • Executive summary or pitch addressing all key areas: —Market pain and your solution —Technology, barriers to entry (patents, IP) — Management team/relevant industry experience — Market opportunity and competitive landscape — Business model, revenue stream(s) — Go-to-market strategy, market adoption — Use of proceeds/funds • Breakthrough technology that meets unfulfilled need(s) • Product/service likely to achieve market adoption • Focus on a single market www.technologytransfertactics.com - 877-729-0959

7. Attracting and Seeking Out the Right Investors (cont’d) Investor turn offs • Hype rather than solid proof points • Claim of “no competitors” • Claim of “multiple markets” for product/service • Unrealistic funding process expectations — Time — Valuation • Weak/unproven management team Common terms to be aware of • Pre-Money and Post-Money Valuation • Dilution www.technologytransfertactics.com - 877-729-0959

8. When to Seek Translational Research Funding What is translational research funding? • Money advanced to move a technology from the laboratory to a point where a product can be more easily visualized • Funding to “de-risk” a technology to make the related startup more attractive • Sometimes described as proof-of-concept funding How to obtain translational research funding • Depends on the nature of the source. Some are like applying for grants, others have a process very close to the investment process Pros and cons Investor turn-ons and turn-offs• Translational research often comes from parties that are NOT financial investors such as internal R&D sources, government, etc. Common terms to be aware of Pitfalls to avoid

9. When to Seek Seed Funding • What is seed funding? • Small amounts (typically under $1m) to fund proof of concept • Typically for development-stage, pre-revenue companies • Pros and cons • Pros: staged funding to prove out business concept • Cons: usually not enough to be self-sustaining; structure of seed financing important for later stages of investment • How to obtain seed funding • Angels • Regional economic development public/private partnerships • Select venture funds who invest in seed stage (sometimes in the form of feeder funds) www.technologytransfertactics.com - 877-729-0959

10. When to Seek Seed Funding (cont.) • Investor turn ons • Capital efficiency to key development milestones • Reasonable development timeframe • Investor turn offs • Too much money or too much time for development www.technologytransfertactics.com - 877-729-0959

11. When to Seek Angel Capital What is angel funding?Angel Capital is: • Individuals (“Accredited Investors”) • Not working at the new venture • Putting in their own money • To acquire equity ownership in a startup The Angel Capital “Market” in 2009 • Estimated at $17.6 billion • 57,000 funded companies • Over 250,000 individual angels www.technologytransfertactics.com - 877-729-0959

12. Angel Funding- Pro and Cons • Patient Money • Often Knowledgeable • Willing to Mentor • More than just ROI • Great local networks Advantages • Shallower Pockets • Many individuals vs. one or two funds • Experience not always relevant • Limited national networks Challenges www.technologytransfertactics.com - 877-729-0959

13. Finding Angels Connect with angel investors through: • Formal angel groups, often affiliated with a university • Professional service providers (lawyers, CPAs) • Economic development organizations Do NOT use: • Brokers • Matching websites Have the Right Collateral: • Executive Summary (2 pages or less) • Business Plan • Presentation Deck (maximum 20 minutes) • Financial Model www.technologytransfertactics.com - 877-729-0959

14. Angel Investor Perspective • Strong market opportunity • Unique technology • Flexible exclusive license • Fragmented competition • Clear path to exit • Entrepreneur willing to listen Likes • Poorly thought out business models • Complicated, restrictive licenses • Arrogant entrepreneurs Dislikes www.technologytransfertactics.com - 877-729-0959

15. Working with Angels • Talking to angels • Experienced angels use the same language and terminology as VCs • Have reasonable expectations for terms & conditions, valuation • Things to avoid • Making a fixed offer via a PPM • Pressing for a fast close • Valuation that is too-high, especially if not the final funding www.technologytransfertactics.com - 877-729-0959

16. When to Seek VC Funding What is VC funding? • Capital invested in new and/or rapidly growing companies from: university endowments, pension funds, banks, corporations or high-net-worth individuals • Cash in exchange for ownership • High risk taken with expectation of high return www.technologytransfertactics.com - 877-729-0959

17. When to Seek VC Funding (cont’d) Pros • Besides funds, VCs provide: — Experience guiding young companies: — Financial, strategic and operating advice (at board meetings and through ongoing communications) — Connections to potential strategic partners and potential customers — Assistance in recruitment for management team • Future funding — Follow-on funds — Syndication contacts www.technologytransfertactics.com - 877-729-0959

18. When to Seek VC Funding (cont’d) Cons • VCs are not passive investors • VCs expect to receive board positions: director, observer • VCs expect to have information rights • Terms protect them, as well • Terms spell out investor payment schedule/priority www.technologytransfertactics.com - 877-729-0959

19. VCs- How to Obtain Funding • Focus on VCs whose interests are aligned with yours • Research targets and how to reach them — Identify VCs that invest in your sector — Determine those that make seed- or other early-stage investments — Many VCs do not invest in pre-revenue businesses • Identify events where your targets will be — Conferences, trade shows, networking events — Check venture and industry organizations’ Web sites for open-to- public events; attend events or seek to present, as appropriate • Venture process begins before in-person meeting — Send business plan or exec. summary to VC — If there is interest  initial phone call — If interest continues, VC conducts due diligence — Information makes an informed decision easier for VC — Further interest  face-to-face meeting www.technologytransfertactics.com - 877-729-0959

20. VCs- Investor Turn-Ons • Executive summary or pitch addressing all key areas: —Market pain and your solution —Technology, barriers to entry (patents, IP) — Management team/relevant industry experience — Market opportunity and competitive landscape — Business model, revenue stream(s) — Go-to-market strategy, market adoption — Use of proceeds/funds • Breakthrough technology that meets unfulfilled need(s) • Product/service likely to achieve market adoption • Focus on a single market www.technologytransfertactics.com - 877-729-0959

21. VCs- Investor Turn-Offs Investor turn offs • Hype rather than solid proof points • Claim of “no competitors” • Claim of “multiple markets” for product/service • Unrealistic funding process expectations — Time — Valuation • Weak/unproven management team Common terms to be aware of • Liquidation preference • Participating preferred • Anti-dilution www.technologytransfertactics.com - 877-729-0959

22. VCs- Pitfalls to Avoid • Stating you only need 1% of huge market • Not knowing your customer targets • Not recognizing competition, even if only “perceived” or alternative of status quo • Not enough focus on management team/relevant experience • Not enough proactive pitch or reactive response preparation • Not acknowledging weaknesses • Unrealistic expectations of funding process • Not understanding VC perspective and role • Term-sheet mistakes — Not willing to be flexible, especially re valuation — Not using an experienced lawyer to negotiate terms — Focusing only on valuation and not on other aspects of the agreements www.technologytransfertactics.com - 877-729-0959

23. When to Seek Lines of Credit Why a line of credit may be useful What will banks finance: • Capital Equipment • Receivables (with history) • Purchase Orders (Fortune 100) • Working Capital (profitable companies only) Available lending products: • Term Loans • Leases • Lines of Credit www.technologytransfertactics.com - 877-729-0959

24. Bank Financing- Pro and Con • No dilution of equity upside • Low cost of capital • Many potential providers • Easy to compare terms Advantages • Impatient- must be paid back • Ties up assets • Covenants can restrict operations • Stringent bank rules • Ongoing cost • Paid back first with interest Challenges www.technologytransfertactics.com - 877-729-0959

25. Bank Credit Approval Process Connect with bankers through: • Current relationships (business & personal checking accounts) • Civic groups (Chamber of Commerce, Rotary) • Economic development organizations Expect to provide: • Full access to financial records • Business plan & financial model The process can be slow: • Multiple levels of approval are typical, especially as $$ amount rises • Documentation can be copious www.technologytransfertactics.com - 877-729-0959

26. Banker Perspectives • Hard assets that can be sold if necessary • Positive cash flow • No other senior creditors • Guarantees (SBA or personal) • Low leverage Likes • Intangible assets • Negative cash flow • Sloppy financial statements • Poor financial controls • Weak personal credit history of principals Dislikes www.technologytransfertactics.com - 877-729-0959

27. Working with Bankers • Talking to bankers: • Ask about the approval process, learn timing and documentation requirements • Keep an active dialogue with your relationship manager • Develop knowledge of liens and covenants • Things to avoid: • Discussion of equity upside and exits (they are evaluating the ongoing business) • Taking the first deal instead of the best one www.technologytransfertactics.com - 877-729-0959

28. Government Funding/SBIR/Grants What programs are available? • Federal—DOE — Seed investments through National Labs — Renewable Energy Grants/ARPA-E — Loan guarantee program • Federal— SBA programs ($2B available) — Small Business Innovation Research (SBIR) grants (generally smaller than ARPA-E). —Small Business Tech Transfer (STTR) Program • State economic development authority programs • Public-sector incubators www.technologytransfertactics.com - 877-729-0959

29. Government Funding/SBIR/Grants Pros of these types of funding • Often substantial amounts available (ARPA-E) • Non-dilutive: no ownership impact Cons of these types of funding • Opportunities are narrowly focused • Application process often lengthy, intensive • Government funds = more rules and oversight • Company information becomes public Common terms to be aware of Pitfalls to avoid • Government oversight could increase personnel needs and mean higher burn rate www.technologytransfertactics.com - 877-729-0959

30. Government Funding/SBIR/Grants (cont’d) Major issues as they relate to IP • Generally, with gov’t funding, no IP risk to company • CRADA with government—IP rights jointly owned • Possible risk because funded-program applications become public information — Have IP counsel review grant submission, include disclaimer — File invention disclosure or provisional patent when application is funded www.technologytransfertactics.com - 877-729-0959

31. Understanding and Living with Dilution Have reasonable expectations when accepting capital Added value of investor involvement increases chances of success, offsetting reduced ownership www.technologytransfertactics.com - 877-729-0959

32. Current Investment Landscape and Forecast for 2011 Not out of the woods yet • Improving, 2010 has been better than 2009, but most VC funding is going for follow-ons, not new investments • NASVF-Temple Univ. study found: • 40% increase over 2009 in venture and angel funds focused on investing in seed stage companies • 51% of the funds plan to invest more money in companies over last year www.technologytransfertactics.com - 877-729-0959 32

33. Current Investment Landscape and Forecast for 2011 (cont’d) Angel Investment in 2009 • Total investments were $17.6B, a decrease of 8.3% over 2008 • 57,225 entrepreneurial ventures received angel funding in 2009, 3.1% increase from 2008 • Number of active investors in 2009 was virtually unchanged from 2008 • The small decline in total dollars, coupled with the increase in investments resulted in a smaller deal size for 2009 (down 11.1% from 2008) www.technologytransfertactics.com - 877-729-0959

34. Q&A Utilize the chat box to the bottom left of your screen to submit a question to the panel. Please address your question to a specific presenter. Or Press * 1 on your touchtone phone and this will place you into the phone queue. www.technologytransfertactics.com - 877-729-0959

35. Introduction to Session Five (July 1, 2010) Pitching Techniques • Preparation strategies - Timing, legal ramifications, NDA, confidentiality agreements, trade secrets, etc. • Content • How venue should impact the pitch • What investors are looking for • Key topics, words, and phrases – and common blunders • Delivery techniques • Striking the right balance between too much information, and too little • Getting results – closing and follow-up www.technologytransfertactics.com - 877-729-0959