Sources of Funding

1. Sources of Funding Steve Morris OTBC smorris@otbc.org

2. Funding Process What funds do you have? What milestones can you reach with the $ you have? Does that get you to cash flow positive, or to a fundable event? No Yes Meet the milestones Decide on next milestones; Develop slides, exec summary, etc... Find/pitch/close investors Repeat

3. Fundable Event A set of milestones which, when reached, will let you close enough funding to reach the next fundable event until you reach cash-flow positive or get acquired or go IPO.

4. A Typical Funding Strategy • $20K of founder savings • Validate the market and create some “slide-ware” • $150K of Friends/Family • Create rough prototype • Get some customer feedback • $1 million from angels • Complete a Beta-release product • $6 million from VCs • Launch/market the product

5. Equipment financing Strategic Investors Bank Loans / Bonds Friends&Family Seed Funds Gov. Loans/Grants SBA Loans SBIR/STTR Micro Loans Venture Funds Angel Groups Customers/Partners Finance Receivables Angels Merger or IPO Institutional Equity Founders Venture Banks Stages & Sources of Funds Proof-of Concept Product Development Product Design Discovery Idea Revenue Idea

6. Reasons to Avoid Investors • You will not spend many, many months of full-time effort raising money • You will not have to “manage” your investors • You will not have investors on your Board • You will not have to give up equity • You will not have to give up control • At the beginning, you aren’t investable anyway

7. Sources: Founder Savings & Credit • Plan on no salary for (quite) a while (typically 6 months or more) • Don’t expect back-pay when you eventually get funded • Do expect to get out-of-pocket expenses reimbursed

8. 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 • Only sell stock to accredited investors

9. Sources: Customers/Partners • 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 with another company* * But be sure you retain rights to the IP!!!

10. Sources: SBIR Grants(www.sbirworld.com) • SBIR: Small Business Innovation Research • Significant percent (2.5% = >$1B) of federal R&D 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 R&D

11. 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 R&D center • Awards granted in 2 phases • Phase 1: up o $100K for feasibility study • Phase 2: up to $750K for R&D

12. 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

13. Source: Business Oregon • Entrepreneurial development Loan Fund • Company < 24 months old; < $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; <$500K

14. Sources: Regional Investment Funds • $7 Million in funding state-wide from Oregon Lottery (through Business Oregon) • Administered by local Regional Investment Boards • Example: Mt. Hood Economic alliance • $600K • Focus: create jobs and leverage additional investments • Forgivable loans; grants; loans

15. Sources: City Programs • Portland (PDC) • $500K debt fund • Deferred Loan Program • Revolving Loan & Real Estate Fund • Economic Opportunity Fund • Enterprise Loan Fund • North/Northeast Business Assistance • Quality Jobs Program • Storefront Improvement Program

16. Sources: Equipment Financing • Equipment becomes collateral • Allows you to stretch cash • … in return for paying some interest • Worth considering if you’re buying capital assets • Typical criteria • Cash flow from operations to service debt, or… • Sufficient liquidity and likelihood of future liquidity to service debt payments

17. Equipment financing Strategic Investors Bank Loans / Bonds Friends&Family Seed Funds Gov. Loans/Grants SBA Loans SBIR/STTR Micro Loans Venture Funds Angel Groups Customers/Partners Finance Receivables Angels Merger or IPO Institutional Equity Founders Venture Banks Stages & Sources of Funds Proof-of Concept Product Development Product Design Discovery Idea Revenue Idea

18. Equity: Common vs. Preferred • Stock purchased by investors may have special rights • Preferred shares (vs. Common) • Examples of special rights • Board seat • First in line if an acquisition or IPO occurs • Dilution protection • A veto in many major decisions • When you sell any amount of Preferred equity, you lose a lot of control

19. Equity: The Exit Strategy • How will your investors make money? • Someone buys-back their shares (with interest) • There is an acquisition • There is an IPO

20. Sources: Angels • High net worth individuals • Investment may be structured as: • Loan (probably convertible to Stock) • Stock purchase • Must be accredited investor • $1M net worth or $300K 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

21. Sources: Angel Groups • Two basic types • Joint due diligence, but invest separately • Pool money and invest jointly • Easier to find than individual angels • Some local examples: • Portland Angel Network • Womens Investment Network • Portland Venture Group • Oregon Sustainability Angels • Keiretsu Forum (Portland Chapter)

22. Sources: Venture Bank Bridge • Venture banks can provide bridge loan if you’re 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

23. 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 • You’ll pay interest, but you get cash faster • Typical criteria • Accounts Receivable due from creditworthy companies • You are not in imminent risk of going bankrupt

24. Sources: VCs • Institutional investors (not individuals) • They invest other people’s 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)

25. 1,000 20 Get significant due diligence Plans received Sources: VCs 4 or 5 Investments

26. Strategic Investors • Looking for strategic advantage • May be potential interested in acquisition down the road • Usually will not be the lead investor • Can add to your credibility with Vcs • They (probably) have more domain knowledge than the Vcs • Especially if they are well-known names! • Leverage your existing relationships

27. 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 you’re just about our of cash

28. 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)

29. Sources vs. How Much Source Typical Amount Savings & credit cards $10K - $50K Friends & family $50K - $200K Grants (SBIR, STTR) $150K - $1.5M Angel investments $200K - $2M VC seed fund $200K - $2M Venture capital investment $4M - $15M

30. Resources • OTBC (otbc.org) • FastTrac TechVenture • OregonStartups (oregonstartups.com) • Oregon Entrepreneurs Network (oen.org) • Networking events • Angel Oregon, Venture Northwest • Executive Series • Business Concept Reviews • Business Plan Development Seminar • Business Plan Reviews • CEO Bus Tour