Boston Entrepreneurs Network: Bootstrapping and Fundraising Basics October 2, 2018 Tibor Toth Managing Director of Investments ttoth@masscec.com
About Me Over 20 years of experience in VC & PE and as an entrepreneur • ➢ Invested over $250M across dozens of companies in transactions totaling over $1B ▪ Including 25 new investments & over 50 rounds of financing since 2013 @ MassCEC ➢ Technology and manufacturing; clean energy focus since 2010 Current board role at 6 MassCEC portfolio companies • Adjunct Professor, M&A, Brandeis International Business School • Commercial Reviewer, National Science Foundation • Education: •
MassCEC Funding Programs for Startups Venture Debt $100K - $1M Debt Investment Equity Investments ~$500K Equity Investment 1-3 Deals / Year AccelerateMass InnovateMass Investment Size DeployMass $150K Convertible Up to $250K Grant Note Project-dependent AmplifyMass <10 Awards / Year <5 Awards / Year Project Cost Share Up to $500K Grant Catalyst Program Up to $65K Grant <14 Grants / Year Workforce Development Programs Research & Prototyping Demonstration & Acceleration Commercialization & Growth Company Stage Investment Grant
Massachusetts Cleantech Startup Ecosystem Un Universities Research Cen enters Acc ccelerators Inc ncubators Ang ngels + + ear early ly stag age Later-stage VCs s + + St Strategics VCs
MassCEC Portfolio Companies
Fundraising Considerations • How much capital do you need? o How do you determine need (use of proceeds, runway, milestones)? o Financial sensitivity • When should you raise capital? • Where can AND should you get it from? • What do you have to watch out for? • What are capital providers looking for? 6
The Business Plan What exactly is it that you do? Mark rket So Solu lutio ion Team o Problem o Tech o echnology/IP Current Cu o Siz ize o Valu o lue proposit ition Futu ture o Dr Driv ivers o Co Competit ition • How are you going make money/profits and be sustainable? • How are you going to scale this into a big business? 7
Sources of Financing Operatio ions Grants In Investment o Government o Reven o enues Equit ity o Part o Fou o rtners oundation / / Debt De Non onprofit Who cares (or should/will care) about your problem and solution? 8
Operations • Revenues ➢ Products ➢ Services ➢ One-time, recurring, repeat • Partners ➢ Vendors / suppliers / contract manufacturers ➢ (Prospective) customers ➢ Channel partners ➢ Strategic partners – JDA / JV / NRE / Investment 9
Grants • Government ➢ Federal (DOE, DOD, NSF, SBIRs, etc.) ➢ State (DOER, NYSERDA, MassCE sCEC, MassVentures, CT Innovations, California Energy Commission, etc.) ➢ Municipal • Accelerators / Competitions ➢ MassChallenge, Cleantech Open ➢ Universities (MIT Clean Energy Prize) • Foundation / Nonprofit • Don’t get distracted! 10
National Science Foundation (NSF) SBIR • Funds the development of groundbreaking, high-impact, high-risk technology, transforming scientific discovery into products and services with commercial and societal potential • Evaluation criteria ➢ Intellectual (technical) merit ➢ Broader (societal) impacts ➢ Commercial impact (potential) ➢ For Phase II awards, success with Phase I grant project • For US-based and owned, for-profit small businesses 11
National Science Foundation (NSF) SBIR • Phase I ➢ Up to $225,000, non-dilutive grant to last 6 – 12 months ➢ Proof-of-concept/feasibility • Phase II ➢ Up to $750,000, non-dilutive 2-year grant ➢ Helps commercialize high-risk technology innovations ➢ Must have previously received a Phase I grant • Phase II B ➢ Up to $500,000, 50% matching grant on revenues or investment 12
Investment • Equity (ownership, voting rights, upside value, dilutive) ➢ Convertible Notes ➢ Common Stock ➢ Preferred Stock • Debt (obligation to repay, interest expense, collateral) ➢ Venture Debt ➢ Asset-Based Loans ➢ Cash Flow Loans ➢ Project Financing 13
Types of Investors • Founders • Friends & family • Angels • Venture capital funds • Growth equity funds • Strategic/corporate partners/investors • Other investors (impact investors, government, family offices ) • Other funders – grants, competitions (governments, foundations, universities, accelerators) 14
Investor Considerations • Investment round (seed, Series A, Series B+, bridge, etc.) • Company stage (concept, proof of concept, pilot, commercial, etc.) • Amount funded • Lead or follow • Market focus • Technology focus • Experience / fit • Motivation / strategy 15
Drivers of Company Value • Market size • Magnitude of problem (mission critical) • Predictability of revenues and earnings (recurring/repeat; validated market, pipeline, and costs) • Scalability of solution and team • Growth rate / velocity • Sustainable competitive advantage • Innovative and defensible IP • Team track record and capability 16
Risk Management Exp xpectatio ions Vali lidatio ion Mil ilestones o Reasonable le o Tangi o Tech echnical gible ach chie ievements o Ach chievable o Co Commercia ial o De o Never r Deris iskin ing/ / o Thir ird party ty ove verp rpromise! unlo lockin ing 17
Know Your Customer Proce ocess ss Rese Re searc arch Motiv Mo ivatio ation Dec ecision sion o o Web / Market et o Goals ls (ST T & LT) makers rs / champions ions o Word d of mouth th o Missi sion on critica tical l Timing ng o needs Budget o Know your competition too!! 18
Thank you! Questions??
Appendix
Types of f In Investors 21
Friends & Family • Small dollars • High risk stage • Unsophisticated investors • Lower bar / faster for approval 22
Angels • Seed to Series A stages • Concept to commercialization • $10K to $1MM+ • Individuals or groups/networks • Generally follow, but larger groups can lead • Seasoned entrepreneurs • CEVG, Launchpad, TiE Angels, Walnut Ventures, Golden Seeds, etc. 23
Venture Capital • Series A, B, C+ (some seed) • Post-revenue (some pilot/demonstration stage) • $2 - $15MM • Lead / co-lead • Focused by markets and/or technologies • Highly returns focused • Interest and experience can vary widely by partner within firms • Rigorous due diligence process – significant time to close 24
Growth Equity • Series B, C+ • Commercial scale-up ($5MM+ revenues) • $5 - $50MM • Lead / co-lead • Focused by markets and/or technologies • Highly returns focused, but lower expectations than early stage with reduced risk • Interest and experience can vary widely by partner within firms 25
Strategic/Corporate Investors • Seed to Series C+ • Pilot / demonstration to commercial scale-up • $250K - $15MM • Lead or follow • Must demonstrate strategic fit with current or future business imperative • Financial return required but secondary focus • May be combined with commercial partnership • May request special rights (IP, license, exclusivity) 26
Others • Impact investors (Investors Circle) • Family offices (CREO, BMGI) • Quasi-governmental (MassCEC) • Foreign governmental (China, Middle East) • Philanthropic investors (PRIME) • Programs/accelerators (TechStars, Y-Combinator) 27
Types of f In Investment 28
Equity Key Investment Terms • Pre-money valuation (price per share) • Offering size • Type of security (convertible preferred stock) • Liquidation preference • Dividends (0 – 8% accruing) • Voting rights, Board rights, pre-emptive rights • Protective provisions • NVCA Template Documents 29
Convertible Notes Key Investment Terms • Offering size • Type of security (convertible notes) • Maturity date (6 – 24 months) • Automatic conversion into “qualified equity financing” • Value in a liquidity event (1 – 3x liquidation preference or conversion) • Interest rate accrual (5 – 8%) • Conversion discount (20 – 30%) • Conversion cap ($1 - $10 million; sometimes none) • Warrants (0 – 25% of offering amount) 30
Debt Key Investment Terms • Loan size • Type of security (senior or subordinated loan) • Maturity date (1 – 5 years) and principal repayment schedule • Interest rate (5 - 15%) • Warrants (0 – 10% of loan size) • Collateral (security interest in assets, shareholder guaranty) • Financial covenants 31
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