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Higgins Financing Options For Start Ups

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Information about Higgins Financing Options For Start Ups
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Published on August 17, 2007

Author: mgaiss

Source: slideshare.net

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J U N E 2 0 0 7 Financing Options for Start-Ups B O B H I G G I N S Managing General Partner S U M M E R @ H I G H L A N D P R O G R A M

Agenda Introduction Sources of Capital What are VCs looking for? Q&A

Introduction

Sources of Capital

What are VCs looking for?

Q&A

Sources of Capital

Sources of Capital Grants Self-Funding Angel Investors Venture Capital Corporate Venture Capital Strategic Investors (Customers, Suppliers, Distributors) Private Equity / Hedge Funds SOURCES OF CAPITAL

Grants

Self-Funding

Angel Investors

Venture Capital

Corporate Venture Capital

Strategic Investors

(Customers, Suppliers, Distributors)

Private Equity / Hedge Funds

Grants Many companies start with technology that was grant-funded Grant funding for companies: Federal Government NIH, NSF, SBIR, DOE, and DARPA State Government CA and MA stem cell research funding Private Foundations Howard Hughes Medical Institute Disease-Specific Societies American Cancer Society and Cystic Fibrosis Foundation SOURCES OF CAPITAL

Many companies start with technology that was grant-funded

Grant funding for companies:

Federal Government

NIH, NSF, SBIR, DOE, and DARPA

State Government

CA and MA stem cell research funding

Private Foundations

Howard Hughes Medical Institute

Disease-Specific Societies

American Cancer Society and Cystic Fibrosis Foundation

Grants Advantages: Limited or no dilution No board requirement Prestige Disadvantages: Rules and guidelines Not long-term Inflexibility SOURCES OF CAPITAL

Advantages:

Limited or no dilution

No board requirement

Prestige

Disadvantages:

Rules and guidelines

Not long-term

Inflexibility

Self-Funding For companies with smaller growth potential or lower initial cash needs Advantages: Ownership and valuation Decision-making and flexibility Potential for a family business (Jim Sharpe) Disadvantages: Growth because of limited capital Risk concentration Lack of assistance SOURCES OF CAPITAL

For companies with smaller growth potential or lower initial cash needs

Advantages:

Ownership and valuation

Decision-making and flexibility

Potential for a family business (Jim Sharpe)

Disadvantages:

Growth because of limited capital

Risk concentration

Lack of assistance

Angel Investors Entrepreneurs, professionals, B-School professors Seed stage funding for promising ideas Advantages: Similar to VC, but less focused on valuation Can be a good source of advice Disadvantages: Usually only “one shot” Does not confer same legitimacy as other financing sources Possible investor impatience Potential issues in raising follow-on rounds SOURCES OF CAPITAL

Entrepreneurs, professionals, B-School professors

Seed stage funding for promising ideas

Advantages:

Similar to VC, but less focused on valuation

Can be a good source of advice

Disadvantages:

Usually only “one shot”

Does not confer same legitimacy as other financing sources

Possible investor impatience

Potential issues in raising follow-on rounds

Venture Capital For start-ups with growth potential and significant cash needs Advantages: Potential value-add – Help with recruiting, financing, customers, and strategy Long-term partners (multiple rounds) Deep pockets Disadvantages: More valuation-sensitive: dilution Loss of control “ The Lemming Effect” SOURCES OF CAPITAL

For start-ups with growth potential and significant cash needs

Advantages:

Potential value-add – Help with recruiting, financing, customers, and strategy

Long-term partners (multiple rounds)

Deep pockets

Disadvantages:

More valuation-sensitive: dilution

Loss of control

“ The Lemming Effect”

Corporate Venture Capital For companies with strategic value Advantages: Can lend credibility Less valuation sensitive Usually passive Disadvantages: Uncertainty for follow-on rounds “ Right of first refusal” issues “ Camel’s nose under the tent” SOURCES OF CAPITAL

For companies with strategic value

Advantages:

Can lend credibility

Less valuation sensitive

Usually passive

Disadvantages:

Uncertainty for follow-on rounds

“ Right of first refusal” issues

“ Camel’s nose under the tent”

Strategic Investors Customers, suppliers, and distributors For companies seeking capital and relationships Advantages: Less-dilutive Frequently up-front payments in exchange for future royalties Provide early credibility Disadvantages: Smaller source of capital Selling company’s future? Limiting options? Potentially time-consuming SOURCES OF CAPITAL

Customers, suppliers, and distributors

For companies seeking capital and relationships

Advantages:

Less-dilutive

Frequently up-front payments in exchange for future royalties

Provide early credibility

Disadvantages:

Smaller source of capital

Selling company’s future? Limiting options?

Potentially time-consuming

Private Equity / Hedge Funds Usually for later-stage companies Advantages: Understand growth issues Willing to consider re-caps and turnarounds Potentially helpful at exit (IPO) Disadvantages: Not comfortable with start-ups Often not a long-term partner Limited value-add Pressure for liquidity SOURCES OF CAPITAL

Usually for later-stage companies

Advantages:

Understand growth issues

Willing to consider re-caps and turnarounds

Potentially helpful at exit (IPO)

Disadvantages:

Not comfortable with start-ups

Often not a long-term partner

Limited value-add

Pressure for liquidity

Financing Should Fit: the company its stage its management, and its history Finding the right investor can be critical to a company’s long-term health… … much like selecting a medical specialist. SOURCES OF CAPITAL

the company

its stage

its management, and

its history

Finding the right investor can be critical to a company’s long-term health…

… much like selecting a medical specialist.

What are VCs Looking For?

Evaluating Opportunities: VC Criteria People Market Technology / Product / Service Deal

People

Market

Technology / Product / Service

Deal

People (Founders & Management) Leading researchers Serial entrepreneurs Ability to attract other world-class people CEO, Board of Directors, SAB, and investors Self-awareness: “Scientific Entrepreneurs” v. “Entrepreneurial Managers” VC CRITERIA

Leading researchers

Serial entrepreneurs

Ability to attract other world-class people

CEO, Board of Directors, SAB, and investors

Self-awareness: “Scientific Entrepreneurs” v. “Entrepreneurial Managers”

Market Multi-billion dollar potential Rapid adopter customers Known acquirers Wall Street interest Probable government approval FDA, CMS, FCC, EPA VC CRITERIA

Multi-billion dollar potential

Rapid adopter customers

Known acquirers

Wall Street interest

Probable government approval

FDA, CMS, FCC, EPA

Technology / Product / Services “ Breakthrough” ideas with clear value propositions Platform technologies Strong IP position Follow-on potential VC CRITERIA

“ Breakthrough” ideas with clear value propositions

Platform technologies

Strong IP position

Follow-on potential

Deal Valuation Exit Terms: licensing fees and royalties Option pool Milestones Co-investors VC CRITERIA

Valuation

Exit

Terms: licensing fees and royalties

Option pool

Milestones

Co-investors

Q & A

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