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The Role of Funding Sources and the Business Plan

in Technology Entrepreneurship &

Commercialization

William Newman

Northwest Technology Ventures

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Northwest Technology Ventures• Seed venture capital fund, $14M

– Founded in June 2002– Oregon companies exclusively

• Focus: R&D commercialization– Seed capital to found businesses to commercialize

technology and research– Sweet spot: research sector spinouts aka “tech

transfer”• Principals

• Bill Newman, Ph.D. - academic experience, biomedical university-based startup, venture capital

• Gordon Hoffman - serial entrepreneur (semiconductors, EDA software), angel investor

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Capital Sources for Formation and Growth

R&D

Gov’t, Industry - discovery

Ongoing Growth

Public Markets

Formation

The “3 F’s” (friends, family, & fools) - “just the basics”

Don’t overlook non-equity capital - Grants (SBIR, STTR), foundations, other? - Customer NRE - Strategic relationships (access, credibility, risk reduction / loss of freedom, …)

Angel Institutional

Angel Investors - “early and often” - Individuals, unorganized, limited follow-on - 2003: $18.1 billion invested, 42,000 deals

Venture Capital funds - Home run mentality - Significant investment $$; governance and oversight - 2003: 915 funds, $18.2 billon invested, 2,700 deals

“Private Equity”

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Early-Stage Capital Sources

• The “3 F’s” (friends, family, & fools)– “just the basics”

• Angel Investors– “early and often”– Individuals, unorganized,

limited follow-on

• Venture Capital funds– Home run mentality– Significant investment $$;

governance and oversight

• Organic growth (bootstrap)

• Consulting-based funding• SBA loans/grants• Customer deals (NRE)• Strategic partner deals

Obvious Often Overlooked

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Raising Money From Angels• Characteristics of a Likely Angel

– High Net Worth– Recent Liquidity Event– Industry Knowledge– Relationship Oriented

• Lead Versus Followers– Target and Negotiate the Investment with a Few Lead Investors

• Minimum/Maximum Angel Rounds• Angel Networks (PVG, PAN, WIN)• Only Take Money from Accredited Investors• Current Climate

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Venture Capital• What is a Venture Capital Fund?

– “Mutual fund” for private, illiquid securities with 10 year life (in general); generally unproven businesses

• Who are investors in a VC partnership?– Who has a 10-year investment horizon and can lose 100% of

capital?• Pension funds, foundations, endowments, trusts, banks, insurance

companies, “some” high net worth individuals, corporations

• Venture Capital– Specialized: <2% of businesses formed (SBA)– Geographic concentration: 33% Silicon Valley, 50% California,

67% California and New England (role of research institution)– VC $$: metro=99.2%; non-metro=0.8%; rural=0% (infrastructure)– Home run mentality: 10% = 10x, 30-50% = write-off– Investment characteristics: high growth potential, capital efficiency,

exit potential– Significant investment $$; governance and oversight

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What VCs Look For

• Attractive Market Opportunity– size … growth … competitive structure

• Compelling Need– breakthrough solution, validated

• Proprietary Position– technology … product … market … regulatory

• Management– visionary, committed, market-oriented, nimble

• Financial Perspective– Management & employees understand that early cash

flow is “king”

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Characteristics of the Venture Deal

• “faster, better, cheaper”– if so, look for 10X; “move to the next curve”

• “brave new world”– not just new, but necessary

• “are the dogs eating the dog food”– do customers want your product?

• “science projects” (also known as ratholes)– is there a product and market in the foreseeable future?

• “putting lipstick on the pig”– no, really, this is a great deal!

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What kind of $$$? What kind of Business?• Service

– Personal expertise• Issues: scalability, marketing, expansion capability

– $$: are they required?

• Sole Proprietorship / Closely-held– Typical small business

• Successful, lucrative, sole proprietor• Exit strategy not relevant

– $$: “bootstrap”, “customer financing”, loans, private equity

• Venture– High growth potential

• Large market; compelling need; breakthrough & proprietary technology; exit potential mandatory

• Highly concentrated & specialized: geographic, industry sectors• $$: pre-VC: Angels (=5-10x venture), non-equity sources (ie

SBIR, DARPA, …)

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Industry Structure MatrixB

arri

ers

to E

ntry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits-Operating systems, Jet Engines, Life Sciences

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items-Airlines, auto, resource…

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items

-Fragmented industry-Growth via consolidation-Services

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Industry Structure Matrix

-Monopoly / oligopoly-Excess profits

-Intense competition-Concentrated industry-Low profitability / collusion-Commodity items

-Fragmented industry-Growth via consolidation

-Price parity-Intense competition-Margin pressure-Internet

Bar

rier

s to

Ent

ry High

Low

Switching CostsHigh Low

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Raising Institutional Capital: Overview of the Process

• Preparing the business plan– A “business plan” or a plan for the business?

• Presenting the business plan– Initial screening/filtering: status and fit

• Due diligence process– Validation; based on interviews, research, expert opinion– Market, need, defensibility, management

• Valuation– A negotiation

• Term sheet• Ongoing relationship

– Board of Directors, introductions, strategic advice• Exit strategy

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The Business Plan: What is is; What it isn’t

• Is it a “Business Plan” … or a plan for the Business?

• Is your goal to “Sell the Plan”? … or build a business?

• Key value:– Clarity of thought and critical thinking– Working document for continued strategy

review and measurement of progress

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Investment Evaluation: Key Issues• Filtering process

– 100:10:1– invention : product : business : platform : investment

• Validation– Attractive Market Opportunity

• size … growth … competition– Compelling Need

• breakthrough solution– Proprietary Position

• technology … product … market– Management

• visionary, committed, market-oriented

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Business Plan Outline• Executive Summary• Background: Mission, Vision, Corporate Summary

– Company & Technology Description• Market Opportunity & Need

– Customers & Market• Product Plan• Technology & Confirmation• Operations• Marketing, Sales, & Distribution• Competition• Management• Financial Projections

– Profit & Loss, Cash Flow, Balance Sheet• Financing Needs and Uses of Funds

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Workplan

What is the Company’s strategy, and what objectives need to be accomplished to achieve it?

• Objectives– strategic and tactical

• Workplan– credible– technology, product, operations, marketing

• Milestones– performance standards; measurable criteria

• Resources– time, people, equipment, money

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Executive Summary

1. Mission2. Market opportunity (size, growth; compelling need)3. Description of product/service (innovation/uniqueness)4. Marketing and product development strategy5. Development status/near term objectives6. Management qualifications7. Capsule summary: key historical and forecasted

financial data8. Funding requirements and uses of funds

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Investment and Valuation, by Stage

Stage Objective Revenue Valuation Investment

SeedProof of concept

0Below $5M

$1-2M

EarlyProduct

validation<$1M $5 – 10M $5M

GrowthBusiness validation

<$10M $10 – 15M $5 – 10M

Later Expansion $10M up $15M up $10M up

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What VCs Don’t Want to Hear1. Our projections are conservative2. Our market is $$$ billion and we only need 0.00001%

of it to succeed3. We are in final negotiations with a large partner4. We will sell only common stock to investors5. We have no competition6. Our technology cannot be duplicated7. “XYZ Co.” (a Fortune 100) is too slow moving8. We are creating / changing the market and our

product will become the standard9. We have first mover advantage10. Our goal is to attain 2% market share

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New Markets are Hard to Gauge

• "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is, inherently, of no value."– Western Union internal memo, 1876.

• "The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?"– RCA: David Sarnoff's associates in response to his

urgings for investment in the radio in the 1920s

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New Markets are Hard to Gauge

• "I think there is a world market for, maybe, five computers."– Thomas Watson, chairman of IBM, 1943

• "There is no reason anyone would want a computer in their home."– Ken Olson, Digital Equipment Corp.,1977

• "640K ought to be enough memory for anybody."– Bill Gates, 1981

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The Second Mouse Gets the Cheese

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Selling is What It’s All About

“Don't worry about people stealing your ideas. If your ideas are any good, you'll

have to ram them down people's throats.”

Howard Aiken Computer Pioneer