Financing Fast-Growth BusinessesInnovation Ventures, LP + Delaware Innovation Fund: Financing Fast-Growth Businesses Innovation Ventures, LP + Delaware Innovation Fund Presented to: In cooperation with... Sponsored By: 1


Agenda : Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC Agenda 2


Growth Requires Capital: Growth Requires Capital 3


Think about the sources of funding across the life of your business: Think about the sources of funding across the life of your business 4


Slide5: Capital sources vary according to where you are in the “Valley of Death” Product Lifecycle 5 Source: DOE


Slide6: Debt and Equity are very different 6


Agenda : Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC Agenda 7


Slide8: Is there such a thing as free money? Outright grant money is very rare, but... FEDERAL STATE SBIR/STTR Special Grants Tax Incentives Low-Interest Loans Convertible Debt 8


Slide9: Federal SBIR/STTR programs Funding for small business research Restrictions Apply Phase I (<$150K), Phase II (<$750K), plus Phase II adds Contact SBA or specific agency 9


Slide10: US Small Business Administration (SBA) An agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. 10 SCORE, SBDC, WBC Capital Equity (through leveraged SBIC’s) Grants (to supporting organizations) Loans (guaranteed, through local lender) Numerous other services www.sba.gov


Slide11: The SBDC and DCED OUR MISSION The mission of the network of Pennsylvania Small Business Development Centers is to grow the economy of Pennsylvania by providing entrepreneurs with the education, information and tools necessary to build successful businesses. 11 THE GOAL of the Department of Community and Economic Development (DCED) is to foster opportunities for businesses and communities to succeed and thrive in a global economy . Small Business Development Center (SBDC) www.pasbdc.org Dept. of Community and Economic Development www.newpa.org


Slide12: Ben Franklin Technology Partners Northeast PA www.sep.benfranklin.org Southeast PA www.nep.benfranklin.org Central and Northern PA www.cnp.benfranklin.org Southwestern PA www.innovationworks.org 12 Four regional organizations for business development: invest risk capital offer business expertise deliver customized solutions


Agenda : Agenda Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC 13


Slide14: In the Beginning... A company’s financial support often starts with one of the four F’s Founders Friends Family Fools DON’T OVERVALUE YOUR STARTUP! 14


Slide15: The front line of investing: Angels 15 Equity Convertible Debt Interest Loan $10K to $250K Range


Slide16: Regional Angel networks Collaboration: Deal Size Deal Flow Due Diligence SYNDICAT ION ?? 16


Slide17: Regional Angel networks Examples: See www.paangelnetwork.com for information Mid-Atlantic Angel Group, Philadelphia Minority Angel Investor Network, Philadelphia Northeastern PA Angel Network, Bethlehem Private Investors Forum, Jenkintown Robin Hood Ventures, Philadelphia Southwest PA Angel Venture Network, Pittsburgh Susquehanna Investment Network, Lewisburg Winners Investors Network, Altoona York Angel Network, Wrightsville Berks Angel Network, Reading Blue Tree Allied Angels, Wexford Delaware Crossing Investor Group, Doylestown Erie Angel Network, Erie Great Valley PA Angel Network, Scranton Indiana County Angel Network, Indiana Investment Circle of York, York Lancaster Angel Network, Mount Joy LORE, Philadelphia 17


Slide18: Not all angels are the same 18


Agenda : Agenda Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC 19


A VC fund is accountable, too...: A VC fund is accountable, too... 20


Slide21: Venture capital managers must plan for losses as well as gains 21


Slide22: The VC or angel group process involves several distinct stages 22


Slide23: Breaking down business risk 23


Slide24: VC’s assess your business’ situation against the ideal – due diligence 24


Slide25: Stage risk overlays weighted business risk 25


Slide26: Reward follows risk Risk 26


Slide27: It’s all about the exit You are not a lifestyle business! Must achieve significant growth and value-added Investors look for 8X – 10X return Exit by buyout or IPO * Looking for founders with the same goal * 27


Agenda : Agenda Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC 28


Slide29: The term sheet Pre-money valuation Amount of investment General time frame Key terms and provisions Exclusivity and confidentiality Non-binding on either party 29


Slide30: Participating Preferred VC investors expect Preferred Stock Claims on assets ahead of Common Equity Payout ahead of Common Equity (1X – 3X) Annual dividend (8 – 12%) Founders and prior investors to Common Participating Preferred After initial payout, Preferred converts to Common and participates in remaining payout along with Common on proportional basis 30


Slide31: Valuation Early-stage VC investors are looking for a 8X -10X return in 3 to 5 years. They ask: Will this company sell for 8-10 times the post-money in five years? Will this company sell for 8-10 times the post-money in five years? What multiples of revenue or EBITDA are typical for this industry? What revenues or EBITDA are required to support this price? Do all factors support the required revenues or EBITDA? 31


Slide32: Board of Directors / Voting Rights The Preferred shareholders will expect a strong say in guiding the company: Certain rights preserved for the Preferred shareholders as a voting class At least two of five board seats, with a third seat for an independent director 32


Slide33: Dilution: the issuance of equity that reduces the percentage ownership of current shareholders Anti-dilution Anti-dilution provisions are invoked if company issues lower-priced stock. Founders/Common shareholders absorb all dilution Weighted Average Full Rachet 33


Slide34: Founders’ vesting Founders’ stock and options will re-vest 25% to 50% immediately Balance over 2 to 4 years Monthly, Quarterly, or Annually Commits the Founders to the company’s success Founders may forfeit or be forced to sell unvested stock if they are separated from company 34


Agenda : Agenda Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital Understanding venture money and the investment process Key Issues of Venture Financing Expectations in the term sheet Innovation Capital Advisors LLC 35


Slide36: Innovation Capital Advisors LLC Delaware Innovation Fund (DIF) www.difonline.com Innovation Ventures, LP www.innovationventures.com Early Stage East www.earlystageeast.org 36


Slide37: Delaware Innovation Fund Open-ended non-profit entity Originally funded by the State of Delaware and regional banks Early-stage investing $25K up to $100K Debt, equity, or royalty financing Mostly (but not strictly) a Delaware focus Broad areas of investment interest 37


Slide38: Innovation Ventures, LP Ten-year limited partnership Small Business Investment Company (SBIC) LPs include Commonwealth of Pennsylvania, State of Delaware, regional banks Rohm and Haas – strategic investor Early-stage equity up to $500K first round Mid-Atlantic Region Software/IT for Financial Services, Specialty Materials, and Advanced Technologies for Electronics/Medical Devices 38


Slide39: Credits and Thanks Mike Gurau, CEI Community Ventures Mark Blanchard, Vermont SBDC Innovation to Invention, DOE 39


Slide40: Contact Information David J. Freschman Patrick J. Foley, Jr., Ph.D. Walter A. Chiquoine Innovation Capital Advisors, LLC Three Mill Road, Suite 201 Wilmington, DE 19806 (302)777-1616 info@innovationcapital.com Innovation Ventures, LP 40