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Financing Growth U.S. DEPARTMENT OF ENERGY OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org www.build4scale.org Sustaining Quality and Warranty Module 7D Financing Growth

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Page 1: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org www.build4scale.org

SustainingQualityandWarrantyModule7DFinancingGrowth

Page 2: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

2

o Manyhardware-basedstart-upsexcelatearly-stagefundingtohelplaunchthebusinessanddevelopprototypes,buttheystrugglewiththenextstageofdevelopment,whichrequiresaheavycapitalliAandacreaBveapproachtofinancinggrowth

o AnewperspecBveonfinancingstrategiesforhardware-basedcompaniescanhelpentrepreneursavoiddelaysinBme-to-marketandpiFallssuchaslosingtheinterestofexisBnginvestorsandkeystakeholders

Whyisthismoduleimportant?

Mo2va2on

Page 3: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

3

o LimiBnggrowth-relatedfinancingopBonstoventurecapitalo SpendingtoomuchBmeaJempBngtofinanceconBnuoustechnologydevelopmentandnotfinancinggrowthofcurrentlyviableproducts

o UnderesBmaBngthemagnitudeofinvestmentneededforscalingupamanufacturingoperaBon

o AligningfinancingneedsinconsistentlywiththecommercializaBonBmeline

Commonmistakesandmisconcep6ons

Mo2va2on

Page 4: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

4

FinancingGrowthWheredoesthisfitintothedevelopmentcycle?

Conceptand

FeasibilityDefini2on

ProductandProcessDesign

Implementand

Validate

Produc2onandStock

Launchand

Closure

Pre-alpha Alpha Beta Pilot Ramp Scale

PHAS

ES

BUILDS

EngineeringValida6on

DesignValida,on

ProcessValida,on

ConceptValida6on

PRODUCTDESIGNOBJECTIVESMarketResearch

DesignResearchFeasibility

DevelopmentQualifica2on

FieldReadinessLaunch

ManufacturingCapacity

MANUFACTURINGREADINESSLEVELSLevels: 109987654321

ManufacturingDevelopmentManufacturingResearch

Mfg.Capability

Produc2on

Page 5: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

5

(MRL)ManufacturingReadinessLevels

MaterialSolu2onsAnalysis TechnologyDevelopment EngineeringandManufacturingDevelopment

Produc2onandDeployment

Opera2onsandSupport

BasicmanufacturingimplicaBonsidenBfied

ManufacturingconceptsidenBfied

Manufacturingproofofconcept

developed

Capabilitytoproducethetechnologyinalaboratoryenvironment

Capabilitytoproduceprototype

componentsinaproducBon-

relevantenvironment

Capabilitytoproducea

prototypesystemorsubsystemina

producBon-relevant

environment

Capabilitytoproducesystems,

subsystems,orcomponentsinaproduc2on-

relevantenvironment

Pilotlinecapability

demonstrated.Readytobegin

low-rateproduc2on

Low-rateproduc2on

demonstrated.Capabilityinplacetobeginfull-rate

produc2on

Full-rateproduc2on

demonstratedandleanproduc2on

prac2cesinplace

1 2 3 4 5 6 7 8 9 10

Thismodule’scontentisrelevantattheseMRLs

Pre-alpha Alphaprototypes Beta

prototypes Pilotprototypes

Page 6: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

6

o LO1.Howtodefinecurrentcostcenterso LO2.Therolecostcentersplayinfuturegrowthandmanufacturing

o LO3.TheopBonsforfinancingresearchanddevelopment(R&D),growth,andmanufacturing

LearningObjec2ves

Page 7: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

7

o Whatdoesittaketofinanceahardwareproduct?o WhyisitdifferentfromfinancingasoAwareorservicecompany?

o WhatamIfinancingnow?o WhataremyexisBngandexpectedfuturecostcenters?o Whatisworkingcapitalandwhyisitsoimportant?o HowdoIassessmygrowth-financingopBons?

WhatThisModuleAddresses

Page 8: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

Hardwareo Heavycapitalexpenseo Manyyearstoreturnoninvestment(ROI)

o Lowermarginso Hardertoscaleo Higherrisk

8

Hardwarevs.soDwareFinancingProducts

So^wareo Lowcapitalexpenseo FewyearstoROIo Largemarginso Easiertoscaleo Lowerrisk

Page 9: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

9

Basicterminology:o Retailprice:thetargetpriceofsaletotheulBmateuseroftheproduct

o Wholesaleprice:thepriceatwhichyourcompanysellstheproduct

o Costofgoodssold(COGS):expensesdirectlyaJributedtoproducBon(i.e.,rawmaterials,processing,assembly,factoryfacility,andequipment)

o Opera2ngexpenses(OpEx):expensesnotdirectlyrelatedtotheproduct(i.e.,administraBvepayrollandofficespace)

o Interestandtaxes(I&T):federal,state,local,andpayrolltaxes;plusbusinessloaninterestexpenses

Hardwareproductproduc6onFinancialConsidera2ons

Page 10: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

10

Basicterminology:(cont.)o Revenue:totalincomereceivedthroughsaleofproductsandservices

o Netprofit:revenueminusCOGS,OpEx,andI&T(thisisyourboJomline)

o Netprofitmargin:revenuedividedbynetprofito Workingcapital:product-relatedassetsandliabiliBeso Workingcapitalcycle:BmeittakestoturnproductassetsandliabiliBesintocash

Hardwareproductproduc6on(cont.)FinancialConsidera2ons

Page 11: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

11

Typicalvalues:o TheretailpricemustbefourBmestheCOGSinordertosupportallotherexpensestodeliverandselltheproduct.Thiscanbeevenhigher[10x]formanufacturingcompanies.ItiscriBcaltoconfirmcoststructuresinthespecificcaseofyourcompany.ThismustincludetheeffectofyourdistribuBonnetworkonyourpricingstructure.

o Netprofitmargincanvaryfrommorethan20%forlargedrugmanufacturersto1.7%forprintedcircuitboards

Hardwareproductproduc6on(cont.)FinancialConsidera2ons

Page 12: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

12

o Netprofitmarginsvarybyindustrysector,asshownbelow:

NetProfitMargins

Drugmanufacturers(major) 21.4%Beverages(brewers) 18.0%Electronicequipment 16.3%Network/communicaBon 12.3%Beverages(soAdrinks) 11.2%ResidenBalconstrucBon 8.6%

Toysandgames 7.8%Industrialelectronicequipment 7.6%Wholesaleautoparts 5.3%Automanufacturer(major) 5.0%Electronicwholesale 2.3%Printedcircuitboards 1.7%

Hardwaremanufacturersdomanagetosurviveandthriveonlowprofitmargins

Page 13: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

13

Hardwarevs.soDwareProfitMargins

Page 14: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

14

Hardwarecompaniescansurviveandthriveonlowmargins(butwhatdoesthismeanforhardwarestart-ups?)o ProducBonoperaBonsmustbelean;eliminateorreducewasteinmaterials,Bme,andscrapproduct

o GrowthmustbemanagedmeBculouslytoensurescalinginvestmentsareinlinewithproduct-demandprojecBons

o Overborrowingandundersellingtheproductmustbeavoidedo CapitalinvestmentinfaciliBes,equipment,andtoolingneedtobeBmely

o Businessplanningisadailyexercisetoensuregrowthinvestmentsarestagedtoreducethecostofsecuringmoney(i.e.,loaninterest)

HardwareBusinessMargins

Page 15: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

15

o FaciliBeso Capitalequipmento Toolingo Materialso Designandengineeringo TesBngo ValidaBono Productinventoryo DistribuBono LogisBcso Laborandhumancapital

Checklist–Exis6ngcostsWhatAmIFinancingNow?

Page 16: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

16

o FaciliBeso Producto R&Do OperaBonso Channel/saleso CustomerrelaBonshipso Laborheadcounto Intellectualproperty(IP)

Checklist–Exis6ngandprojectedfuturecostsWhatAreMyCostCenters?

Page 17: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

17

Exercise–Exis6ngandexpectedCalcula2ngCostCenters

FinancingGrowth Year1 Year2 Year3

WhereisinvestmentexpectedbasedonprojectscalingacBviBes?

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FaciliBes

Product

R&D

OperaBons

Channel/sales

CustomerrelaBonships

Laborheadcount

IP

Page 18: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

18

Whyit’simportantformanufacturers

o Workingcapitalisneededbyallbusinessestofundthenecessaryinvestmentininventoryandaccountsreceivabletoallownormalday-to-daytradingtoconBnue

o Whilethisformulaappliestoanybusiness,foramanufacturerinventoryismorecomplicatedandismadeupofthreecomponents:— Rawmaterials— Workinprogress(WIP)— Finishedgoods

WorkingCapital

AccountsPayable

AccountsReceivableInventoryWorking

Capital

Page 19: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

19

Whyit’simportantformanufacturers(cont.)

o Themanufacturerhastopurchaseandholdaninventoryofrawmaterials,issuethematerialsintoWIP,andapplydirectlaborandoverheadtoconverttherawmaterialsintofinishedgoods

o TheworkingcapitalrequirementsequaBoncanbeadaptedforamanufacturerandbewriJenasfollows:

WorkingCapital

AccountsReceivable

AccountsPayable

FinishedGoodsWIPRaw

MaterialsWorkingCapital

Page 20: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

20

Financialandproduc2on2meassump2ons:o Perunit— COGS:$5— Retailprice:$20— Wholesaleprice:$15— Netprofitmargin:8%— Netprofit:$1.20

Example–Toymanufacturingstart-upWorkingCapitalRequirements

o ProducBon— TimeinproducBon:2months— DeliveryBmetopointofsale:1month— Retailerpaymentperiod:3months— Workingcapitalcycle:6months— IniBaldemand:250,000units/quarter— Demandgrowth:25%/quarter

Page 21: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

21

Example–Toymanufacturingstart-up(cont.)WorkingCapitalWorksheet

Produc2onandSalesPeriod

Opera2ngAssump2ons

Seenextpagefor

explana6on

COGSUnitCost 5

RetailPrice 20

WholesalePrice 15

NetProfitMargin 8%

ProducBonBme 2mo

DeliveryTime 1mo

PaymentBme 3mo

GrowthTargetperperiod 25%

IniBalOrderQty 250,000

Year1 Year2

PeriodGrowth Q1 Q2 Q3 Q4 Q1 Q2

COGS/order $1,250,000 $1,562,500 $1,953,125 $2,441,406 $3,051,758 $3,814,697

NetProfit $300,000 $375,000 $468,750 $585,938

WorkingCapitalRequired $1,250,000 $2,812,500 $3,515,625 $4,394,531 $5,493,164 $6,866,455

Order(units) 250,000 312,500 390,625 488,281 610,352 762,939

COGS/unit $5.00 $5.00 $5.00 $5.00 $5.00 $5.00

Revenue $3,750,000 $4,687,500 $5,859,375 $7,324,219

Page 22: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

22

Example–Toymanufacturingstart-up(cont.)

o TheCOGSUnitCostexampleaboveshowsaconsistentpriceoverBme.Typically,COGSdecreaseswithvolume;companiesusuallyplanfora5%–10%COGSreducBonyear-on-year.COGSUnitCostdependsonvolume,priceofcommodiBesoverBme,andsupplyversusdemanddynamics.ItisalsodrivenbytherequirementofaddiBonalcapitalinvestmentstoscale-up,whichisbakedintotheCOGS.CompaniesshouldperformCOGSassessmentsregularlytoensureaccuracyofworkingcapital.

WorkingCapitalWorksheet

Seepriorpageforenlargedimage

Page 23: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

Nogrowthprojec2on:

23

Example–Toymanufacturingstart-up(cont.)WorkingCapitalRequirements

COGS/Order NetProfit WorkingCapitalRequired

Page 24: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

10%quarterlygrowthprojec2on:

24

Example– Toymanufacturingstart-up(cont.)WorkingCapitalRequirements

COGS/Order NetProfit WorkingCapitalRequired

Page 25: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

25%quarterlygrowthprojec2on:

25

Example– Toymanufacturingstart-up(cont.)WorkingCapitalRequirements

COGS/Order NetProfit WorkingCapitalRequired

Page 26: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

26

o ReduceworkingcapitalcycleBmeo ReducedeliveryBmeo ReducecustomerpaymentBmeo ReduceproducBonBmeo Reduceinventorycarryingcosto Arrangeforlonger-termcontractswithsupplierso Buildcost-of-suppliertoolingintothelong-termpiecepriceofrawmaterialswithcontractedsupplypartners

o SpreadoutpaymentstosuppliersoverlongerperiodsofBme

Techniquesforminimiza6onWorkingCapitalRequirements

Page 27: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

27

Firstask:o AmIfinancingR&D?OpBonsincludethefollowing:— Grants,loans— Accelerators,businessplancompeBBons— Angelinvestors,venturecapital— Strategicpartners(equityshare,debtorexclusivityinexchangeforresources)

— Corporateventures

Assessalterna6vegrowth-financingop6onsFinancingGrowth

Page 28: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

28

Or:o AmIfinancingproductmanufacturing?OpBonsincludethefollowing:— Sales–ShouldbeyourfirstopBon,ifpossible!— Debtfinancing— Venturecapitalandcorporateventures— Privateequity— Strategicpartners— Licensing,royalBes— Preorders,condiBonalorders— Crowdfunding— Gopublicusinganini2alpublicoffering(IPO)

Assessalterna6vegrowth-financingop6ons(cont.)FinancingGrowth

Page 29: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

29

AppropriatefinancingmethodforproductstageFinancingTimeline

Source:ModifiedfromWikimediaCommons:StartupFinancingCycle.png

MissionBased:*Co-Founders*FederalorStateR&DFFF

TechValida2on

MarketValida2on

ScaleValida2on

*Accelerators*Angels

*VCs.CorporateVenturesA&M,StrategicAlliances

EarlyStageSeedCapitalFF

LaterStage

EquityCrowdfunding&CrowdLending

DebtIPO

PublicMarket

SecondaryOfferings

ValleyofDeath TIME

REVE

NUE

Mezzanine

3rd

2nd

1stChannelValida2on

Breakeven

Productscalingcanbefinancedinmanyways!

Page 30: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

30

Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

DOEProgramR&D

StateandMissionEntrepreneurialSupportFunding

Page 31: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

31

o Basicinvestmentinstrumentso Mission-basedorganizaBons— Federalfunding— Stateandlocalfunding— Accelerators— PhilanthropicorganizaBons

o Crowdfundingo Angelinvestorso VentureCapitalo Corporatestrategicinvestmento Banks,investmentbankingfirms

Op6onsScaleFinancing

Page 32: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

32

Therearemanyequityinvestment“instruments.”Here’saquicksummaryofthemostfrequentlyused:o Commonstock:investorsbuythesamestockasfoundersandgetnospecialprivileges(usuallyforfriendsandfamilyandveryearlyangels)

o Conver2blenote:frequentlyusedbyangelinvestors;thinkofitas“debtwanBngtobeequity.”ItforestallsthevaluaBondiscussionunBlthenextroundoffinancing.Itsitsonthebalancesheetasdebt,hasamodestinterestrate,andconvertsintoequityaccordingtocertaintermsandcondiBonsandatadiscount.

BasicsInvestmentInstruments

Page 33: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

33

o SAFE:aninvenBonoftheacceleratorYCombinator,aSAFEisa"simpleagreementforfutureequity"thatisarighttoconvertintoafutureroundofequity(ithasasimilarfuncBontoaconverBblenote,butitisequityintheformofaspecialconverBblesecurityandnotintheformofdebt)

o Conver2blepreferredstock:uponaliquidaBonevent—likethesaleofacompany—thestockconvertsintocommonstockunlesstheliquidaBonvalueofitsproporBonalshareintheconversiontocommonislessthanthevalueoftheinvestment(inthatcase,itgetsprincipalanddividends[typically8%]beforecommonstock)

o Par2cipa2ngpreferredstock:favoredbyventurecapitalfirms,thisstock“doubledips”uponliquidaBon.HoldersbothgettheirprincipaloutandparBcipateinthereturnsasiftheyheldcommonstock.Thestockalsoaccumulatesdividends.

Basics(cont.)InvestmentInstruments

Page 34: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

34

o Grants— Don’tbefooledbygrantsposingas“freemoney”— Nopaybacknecessary,butstringsareaJached:programreviewrequirements,auditrequirements,reporBngrequirements,andtheneedtoalignwithmission

o Loans— Needtopaybackprincipalandinterest— NoequitydiluBon— Needtoprovecashflowand/orpathwaytocustomerorders

Op6onsScaleFinancing

Page 35: Sustaining Quality and Warranty - Build4Scale · pricing structure. o Net profit margin can vary from more than 20% for large drug manufacturers to 1.7% for printed circuit boards

FinancingGrowthU.S. DEPARTMENT OF ENERGY • OFFICE OF ENERGY EFFICIENCY & RENEWABLE ENERGY www.build4scale.org

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o Equity— Exchangeforownershipstake— Needtodemonstrategrowthopportunity

o FactoringReceivables— Paymentisatadiscount

Op6ons(cont.)ScaleFinancing

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FederalGovernment:o Mission:supportadvancedtechnologytoensurenaBonhasleadingtechnology

o GrantsandloansExamples:DOEEERE,DOEVTO,ARPA-EStateandLocalGovernment:o Mission:regionaleconomicdevelopment;createjobsandinvestinregion

o GrantsandloansExamples:stateeconomicdevelopmentcorporaBons(EDCs),county/cityEDCs,incubators

Mission-basedorganiza6onsScaleFinancing

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PhilanthropicOrganiza2ons:o Mission:solveaproblem(e.g.,climatechange)orhelpaspecificregion

o GrantsExamples:Kresge,NewEconomyIniBaBve,WellsFargo,PRIMECoaliBonAcceleratorsandBusinessPlanCompe22ons:o Missionvaries,usuallyeconomicdevelopmentdriveno Grants,someBmesconverBblenotesExamples:CleantechOpen,TechStars,MakeinLA,AccelerateMichigan

Mission-basedorganiza6ons(cont.)

ScaleFinancing

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

DOEProgramR&D

StateandMissionEntrepreneurialSupportFunding

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DepartmentofEnergy(DOE)hJps://energy.gov/

EnergyEfficiency&RenewableEnergy(EERE)hJps://www.energy.gov/eere/office-energy-efficiency-renewable-energy

AdvancedResearchProjectsAgency-Energy(ARPA-E)hJps://arpa-e.energy.gov/

DepartmentofDefense(DoD)hJps://www.defense.gov/Na2onalScienceFounda2on(NSF)hJps://www.nsf.gov/DepartmentofTransporta2on(DOT)hJps://www.transportaBon.gov/

FederalR&DfundingScaleFinancing

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Objec2ve:broadindustryadop2ono GoalisdomesBcIP,jobso Year-roundsolicitaBonscheduleo Fundingvaries(≤$1Mto$10M)o Fundingopportunityannouncementsdifferbetweeneachtechnologyoffice

o EachofficeisfocusedonR&D,withsomeprototyping,manufacturing,demonstraBon,anddeployment

o BecomefamiliarwithR&Droadmaps 40

EnergyEfficiencyandRenewableEnergy(EERE)HowDOEWorks

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Usingfederalprojectstosecureacustomerpartnero DeveloperofbaJeryweldinspecBonsystemspursuingDOE/EEREVehiclesTechnologiesOffice(VTO)grant

o SecuredcustomerpartnertovalidateclaimsintheirproducBonoperaBonsbyincludingcustomerinprojectinavalidaBonroleoftheircommercialdemonstraBon

CaseStudy1ScalingYourBusiness

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Usingfederalprojectstosecureasupplychainpartnero Hybridvehiclecomponentdeveloperwithexportpowero SecuredbaJery,powerelectronics,andvehicleintegraBonsuppliersasprojectpartnerstosupportthedevelopmentoftheirtechnologyatscale

CaseStudy2ScalingYourBusiness

GenerateElectric

WorkElectric

DriveElectric

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Usingfederalprojectstosecureadownstreamstrategicmarketchannelpartnero Custommanufacturingequipmentdevelopinguniquemachiningprocessforhigh-volumeproducBonofwindturbinehubsandblades

o Securedcontractmanufacturingasprojectpartnercostshareinhigh-volumescaledemonstraBoninexchangeforincludingexclusivelicensetoequipmentwithroyalBesbacktotheequipmentcompanyonaper-machined-unitbasis

CaseStudy3ScalingYourBusiness

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o EDC— Jobscreated— InvestmentaJracted— IPdeveloped— Newcompaniesformed

o Stateoffices:Energy— Energyoffice— Reducingenergywaste— Reducingelectricitycosts

o Stateoffices:DOT— Reducingemissionsfromvehicles— Reducingfueluse,congesBon

Stategovernmentop6onsScaleFinancing

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o MarketResearchGrants— Grantsthatoffsetcostformarketresearch

o FirstCustomerAssistancePrograms— Grantsthatoffsetcostforcustomerresearch,idenBficaBon,andacquisiBon

o ExpertinResidencePrograms— FundingthatoffsetscostforcontracBngmanagementteamandconsultants

ExamplesStateGovernmentFinancing

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o MicroloansandSeedFunding— Low-interestloansandsmall-stakeequityinvestmentsthatsupporttechnical-andbusiness-scalingmilestones

o SBIRandOtherFederalR&DFundingMatchingFunds— Fundingputupasamatchtosupportfederalprojectproposals

o VentureMatchPrograms— EquityinvestmentsthatprovidematchmoneytohelpaJractventurecapitalinvestments

Examples(cont.)StateGovernmentFinancing

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

FamilyandFriends,Loans,Crowdfunding

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

StateandMissionEntrepreneurialSupportFunding

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IncubatorsScaleFinancing

o Typicallyprovidebusinesssupportserviceso Usuallydedicatedtosupportstart-upsandearly-stagecompanies

o OAenprovidephysicalofficeorlabspace,sharedservicesforcompanies

o OAenconnectedtoauniversityornaBonallabtosupportspinoffcompanies

o Usuallydonotprovidedirectfinancialinvestmentbutmaycarryequityincompaniestheysupport

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o Goalistogrowearly-stagebusinesseso Typicallytechnologyspecificandsupportedbyindustryo Companiestypicallyrequiredtosuccessfullycompletecoachingortrainingcurriculum

o FundsareusuallyequitystakeorconverBblenoteo Typicalinvestment:$20k–$100kforupto10%ofcompany

AcceleratorsScaleFinancing

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ExamplesIncubatorsAndAccelerators

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o Goalistoawardmostpromisingcompanieso Regionornetworkspecifico Colleges,states/ciBes,etc.o Grants,usually$5k–$50k(AMIC$25k–$500k)

Businessplancompe66onsScaleFinancing

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o ACTION(NewEngland)www.acBonnewengland.orgo ACRE/UrbanFutureLab/Powerbridge(NY)hJp://ufl.nyc/o AusBnTechnologyIncubator(TX)hJp://aB.utexas.edu/o CleanEnergyTrust(Chicago,IL)hJp://cleanenergytrust.org/o CleantechSanDiego(CA)hJp://cleantechsandiego.org/o CLTJoules(CharloJe,SC)hJp://cltjoules.com/o ColoradoRenewableEnergyCollaboratoryhJp://www.coloradocollaboratory.org/

o GreentownLabs(Boston,MA)hJp://greentownlabs.como GreenTechEndeavors(Miami,FL)www.greentechendeavors.como HawaiiEnergyExeleratorhJp://energyexcelerator.com/

CleantechandhardwareSelectedIncubators

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o LosAngelesCleantechIncubatorhJp://laincubator.org/o MichiganAlternaBveandRenewableEnergyCenterhJp://www.gvsu.edu/mihub/

o MidwestEnergyResearchConsorBum(WI)hJp://m-werc.org/o NewEnglandCleanEnergyCouncilhJp://www.necec.org/o NextEnergy(MI)www.nextenergy.orgo NortheastOhioEconomicDevelopmentCouncil(Cleveland,OH)hJp://www.teamneo.org/

o OregonBESThJp://oregonbest.org/o PecanStreetProject(AusBn,TX)hJp://www.pecanstreet.org/o ProspectSiliconValley(SanJose,CA)hJp://prospectsv.org/

Cleantechandhardware(cont.)SelectedIncubators

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o IncubatenergyNetworkhJps://incubatenergy.org/

TheIncubatenergyNetworkisacceleraBngthetransiBontoasustainableeconomythroughnaBonalcoordinaBonofincubatorresourcessupporBngentrepreneursfocusedoncleanenergyinnovaBonanddeployment.Thenetworkhassupportedmorethan500companiestodateandhasasignificantpipeline.o EnergyNexushJps://www.energynexus.co/accelerators/

NewEnergyNexussupportsclean,smart,anddistributedenergystart-upsworldwide,facilitaBngcollaboraBonandinnovaBonamongtheaccelerators,start-ups,companies,andinvestors

CleantechandhardwareSelectedIncubatorResources

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NorthAmericao AlphalabGear(PiJsburgh,PA)hJp://www.alphalabgear.org/o Bolt(Boston,MA)hJps://www.bolt.io/o FirstBatchhJp://www.firstbatch.orgo GreentownLabshJp://greentownlabs.como HaxhJps://hax.co/about/o Highway1poweredbyPCH(SanFrancisco,CA)hJp://highway1.io/o IncubatEnergyNetworkhJps://incubatenergy.org/o Invent@NMU(MI)hJp://www.nmu.edu/invent/homeo LabiXpoweredbyFlextronics(SanJose,CA)hJp://www.labix.io/

CleantechandhardwareSelectedAccelerators

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o LemnosLabs(SanFrancisco,CA)hJp://LemnosLabs.como MakeinLA(LosAngeles,CA)hJp://makeinla.com/o NextEnergywww.nextenergy.orgo RGApoweredbyTechstars(NewYork,NY)hJp://rgaaccelerator.com/connecteddevices/

o QualcommRoboBcspoweredbyTechstars(SanDiego,CA)hJp://qualcommaccelerator.com/

o TandemCapital(Burlingame,CA)hJp://tandemcap.com/

Cleantechandhardware(cont.)SelectedAccelerators

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o ZahnInnovaBonCenterKylieHardwareAwards(NY)hJp://www.zahncenternyc.com/

o TechCrunchHardwareBaJlefield(LasVegas,NV)hJps://techcrunch.com/events/hardware-baJlefield-2015/event-home/

Cleantechandhardware

SelectedBusinessPlanContests

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o PRIMEFounda2onFundingOpportunity— UBlizingprogram-relatedinvestments— TechnologycompaniesconsideredforinvestmentmusttargetsocialcauseofclimatechangemiBgaBonhJps://docs.google.com/a/nextenergy.org/forms/d/1R7cil0n3JwgMet6lHIpe6PwCGyTJmmNhaPyWc9UUC8w/viewform

Philanthropicfounda6onfundingScaleFinancing

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o WellsFargoCleantechInnova2onIncubator— $10milliongrantforcleantechnologystart-uptechnologyvalidaBon

— Co-administeredbytheNaBonalRenewableEnergyLaboratory(NREL)

— Upto$250,000researchandtesBngsupportatNREL’sworld-classfacilityinGolden,CO

— Technologyfocus:lighBng,sensorsandcontrols,spaceheaBngandcooling,windows,energymodeling,plugloads,andbuildingenvelopehJps://www.wellsfargo.com/about/press/2014/cleantech-innovaBon-incubator_1028

Philanthropicfounda6onfunding(cont.)ScaleFinancing

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

FamilyandFriends,Loans,Crowdfunding

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

StateandMissionEntrepreneurialSupportFunding

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o Short-termbankloansandoverdraAsaresuitableonlyforshort-termplanning

o Long-termbankloansfromhigh-streetbanksareanopBontoconsider;however,theyareanexpensivewayofacquiringfunding

o Youmustbudgetfortheregularrepaymentsyouhavetomakeo DebtfinancingusuallyrequiresmulBpleyearsofbalancesheetsandposiBverevenueandconfirmaBonofprojectedsales

Debtfinance

GrowthFinancingOp2ons

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o Alessknownformofdebtfinanceis“factoring,”whichisaloanagainstreceivables(foracompanythathasconsistentsalesandneedsworkingcapitalfromsalesbeforecustomersarewillingtopay,thismayprovideshort-termfinancing,butbewareofthecosts)

o Youmayalsohearabout“revenue-share”or“royalty”financinginwhichyoupayoutashareofyourrevenuesunBlthelenderreceives2–3xtheirmoney(thisisabitin-betweendebtandequity,butitistreatedasdebt)

Debtfinance(cont.)

GrowthFinancingOp2ons

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o Interestpaidondebtistax-deducBble,soyou'renotspendingasmuchasyouthink

o ItallowsyoutoretainequityinexchangeforborrowingmoneyandthecostofloaninterestoverBme

o Debtfinanceissubjecttorisinginterestrateso Itcanbedifficulttosecure,parBcularlyifyourbusinessispre-revenue,R&Dheavy

o Youmayberequiredtoofferpersonalguarantees(e.g.,collateral)

DebtfinanceprosandconsGrowthFinancingOp2ons

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o InvestorswillgetinvolvediftheybelieveyouareabusinesswiththepotenBalforsignificantgrowth

o Businessangelsarewealthyindividualswhoinvesttheirownfundsinyourbusinessforequity.Theyalsooffermentoringandadvice.TheytendtoinvestsmallersumsandtakelessBmetocompleteadealthanventurecapitalistfirms.

EquityfinanceGrowthFinancingOp2ons

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o Venturecapitalistfirmslooktobuyaminoritystakeinyourbusiness.Theyofferunsecuredfinance,managementexperBse,increasedcredibility,andbusinesscontacts.Youhavetogiveuppartofyourbusiness,andthefirmwillexpecttoplaceamemberonyourboard.

o Banksalsoofferdirectequityinvestmentswiththepromiseofnoninterferencewithday-to-dayoperaBons

o PrivateequityfirmsareanotheropBonbutaremorelikelytowantachangeinmanagementandoperaBonalcontrol

Equityfinance(cont.)GrowthFinancingOp2ons

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o NoteverybusinesswillaJractequityfinance;onlyhigh-growthbusinesseswithaJracBveprospectscansecurethiskindofinvestment

o YouwillhavetogiveupaporBonofthebusinessandyoumustgrowandoperatetoafixedschedule

o EquityisbeJerrespectedthandebtandcanconferacertaincredibilityandpresBgeonyourcompany

o EquityinvestorscanoAenadvancebusinessthroughindustryknowledgeandstrategicconnecBons

o SecuringprivateequityisBme-consuming;itcantake12–18monthstopitchandsecureinvestment

EquityfinanceprosandconsGrowthFinancingOp2ons

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Manyentrepreneursseecrowdfundingasanop6ontoformalangelorventurecapitalfundingTherearetwotypesofcrowdfunding:o Pre-salesfunding(likeKickstarter):thisisforconsumerproductscompaniesandnotindustrialproductofferings

o Equitycrowdfunding:todate,thishasbeenoflimitedvaluetohigh-growthpotenBalstart-ups(the2012“JOBSAct”openedthedoortoawiderrangeofequityfundingopBonsfromindividualinvestors,notjust“accredited”[wealthy]individuals)

BasicsCrowdfunding

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o Historically,companiesraisingequityfinancingreliedonarulecalled“506”thatisanexempBonfromtherulesaroundpublicstockofferingsunderwhichmostangelandventurefundingexists

o ThisisnowmodifiedasSECRule506b,whichrequiresyoutokeepyourequityofferingstrictlyprivate,onlydisclosabletoaccreditedinvestors

Example:noneedtoreferencethefactthatyou’reraisingmoneywhenpitchingatapublicbusinessplancompeBBon!

U.S.Securi6esandExchangeCommission(SEC)rules

Crowdfunding

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o AsdirectedbytheJOBSAct,theSECcreatedseveralnewpathwaystofunding

o Thefollowingtwoareofnote:— SECRule506callowsyoutomorebroadlyspeakaboutyourinvestmentoffering,butsBll,youcanonlytakeinmoneyfromaccreditedinvestors.Inexchangeforallowingyoutopublicizeyouroffering,therearemorereporBngrequirements.PlaFormslikeAngelListrelyonthisrule.

— CrowdfundingviaapprovedInternetplaFormsallowsyoutoraiseupto$1,000,000ina12-monthperiodfromunaccreditedinvestors.Challenge:lotsofsmallinvestorstodistractyou!

MakesureyouconsultalawyerwhohasalotofexperiencewithSECregula6on!

SECrules(cont.)Crowdfunding

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

FamilyandFriends,Loans,Crowdfunding

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

StateandMissionEntrepreneurialSupportFunding

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o Howdotheywork?— High-net-worthindividualsorgroupsinvesBngpersonalmoneytogetreturns

— Lookingtoget2–10xreturnfromtheirinvestments— Typicallyinvest$50k–$250kfor10%–20%ofcompany— OAenBmesformerentrepreneurswhohavesuccessfullygrownandsoldcompanies

o Whatdotheycareabout?— BeJerreturnsthantypicalconservaBveinvestmentstheymake

— Usuallyfirstmoneyin— Tendtofocusonlocalentrepreneursandlocaleconomicdevelopment

— InvestinareasofpersonalexperBseandinterest

BasicsAngelInvestors

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o Pointstoconsider— Canbesmartmoneyifangelsbringmorethanmoney(e.g.,connecBons,strategy)

— Duediligenceonangelgroups:checkbackgroundonangels(isthereafitwithyourtechnology,industry?)

— InvestmenttermsarecriBcalandcanoAenaJractorscareawayfutureinvestors

o Methodsofapproach— WarmintroducBonsalwaysbest:usenetworks/incubators/accelerators/mentorstoidenBfy,recommend,andconnect

— Regionallyfocusedangelsandgroupsusuallyhavewebsitesandpostinvestmentpitchdays

— Resources:AngeList(amgel.co),SeedInvest.com,AngelCapitalAssociaBon(hJp://www.angelcapitalassociaBon.org),NaBonalAngelSummit

Basics(cont.)AngelInvestors

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ExamplesAngelInvestors

CapitalCommunity

Angels

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

FamilyandFriends,Loans,Crowdfunding

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

StateandMissionEntrepreneurialSupportFunding

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o Howdotheywork?— Moneymanagersmanaginginvestorstakeholders’money— Investinthe$500k–$10MrangeforSeriesA–C— Typicallyrequiremajoritystakeincompany

o Whatdotheycareabout?— LookingforsignificantmarketpotenBal($1B+)— Needtoget10xporFolioreturntotheirstakeholdersinabout7years

— RiskmiBgaBon(abilitytopivot,mulBplemarketapplicaBons)— Needtoprovethatthereissignificantlymoredemandforyourproductorservicethanwhatyourcurrentresourcescanfill

— ScalabilityandBmetomarket

BasicsVentureCapitalists

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o Pointstoconsider— Duediligence:evaluateexisBngporFolioandinvestorstakeholders

— Arethereconflictsorsynergies?— ArethereporFoliocompaniesthatcouldbecustomers,suppliers,channelpartners?

— WouldtheirinvestorspotenBallyacquiremycompany?— Typicallyrequireboardpresenceanddecision-makingauthority

o Youareontheclock!— Methodsofapproach— Cleantechinvestorforums:NREL,CleanEnergyTrust,CleantechGroup

Basics(cont.)VentureCapitalists

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ExamplesVentureCapitalists

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Bytechnologyreadinesslevel(TRL)InvestorInterest

VentureCapital

CorporateStrategic

BasicPrinciplesObserved

andReported

TechnologyConceptand/or

ApplicaBonFormulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlabenvm’t

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

FullScaleprototypeverifiedinoperaBngenvm’t

ActualSystemcomplete

andfuncBoninginoperaBng

envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

BasicTechResearch FeasibilityResearch TechDevelopment TechDemonstra2on System

Commissioning SystemOpera2on

FamilyandFriends,Loans,Crowdfunding

ARPA-E

AngelInvestorsandPre-Seed

DOESBIR/STTR

Basicprinciplesobserved

andreported

Technologyconceptand/or

applicaBonformulated

Proofofconcept

analyzedandexperimented

on

Componentorsystem

validaBoninlab

environment

SystemvalidaBon,tesBnginoperaBng

environment

Prototype/pilotsystemverificaBoninoperaBng

environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

StateandMissionEntrepreneurialSupportFunding

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o Howdotheywork?— Tech-scouBngunitofalargecorporaBoninterestedinnewtechnologythatsupportstheirproductdevelopmentandcorporatestrategy

— UseinvestmentarmasawaytocomplementinternalR&D— InvestmentsalignwithcorporateobjecBvesandbuyintocompaniestheywillhelpgrow

— Typicallylaterstage(SeriesB+),typicallylessthanmajorityshare,andnotalwaysboardseat

o Whatdotheycareabout?— Improvinginternalprocessesandefficiencies— AdvancinginternalproductdevelopmentBmeline— Advantagetosellmoreoftheirproduct— CompeBBvetechnologicaladvantage,productdifferenBaBon

BasicsCorporateStrategicInvestment

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o Pointstoconsider— CanleadtosalesandsupplychainrelaBonshipsinaddiBontoinvestment

— Lengthyprocess;requiresmanylevelsofapprovalwithinbigcorporaBon

— TermstypicallyrequireindustryexclusivityonIP

o Methodsofapproach— WarmintroducBonsthroughpartners(incubators)— Corporate-start-upmatchmaking:NextEnergy,CleanEnergyTrust

— OpeninnovaBonplaForms:NineSigmawww.ninesigma.com;NextChallenge

— Corporateventuresites:www.cleantech.com/;www.cbinsights.com/CorporateVC

Basics(cont.)CorporateStrategicInvestors

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ExamplesCorporateStrategicInvestors

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Por^oliosCorporateStrategicInvestors

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o Firstpriority…financeyourgrowththroughsaleswheneverpossible

o Secondpriority…financeyourgrowththroughprojectedsalesthatwillallowyoutosecurelow-costdebt(e.g.,loans)

o Onlytakethemoneyyouneed…avoidrackingupdebtandbelean…forceyourselftobesmartwithyourfinances

o Takinginvestmentintheformof“equity”canprovetobeeitherlowriskorexpensiveforacompany(seeaddiBonalexplanaBononthenextslide)

TipsFinancingGrowth

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o Givingupequityatanearlystagemaymeanyoudonotneedtopayitbackifyoufail,butifyouprovidetoomuchequitytoothersitcanprohibitthelossofrevenuesforeverifyourventureprovessuccessful

o Whentakingonequitypartners,alwaysaJempttoaJract“smartmoney”…investorsthatofferotherwaystoacceleratethecommercializaBonandgrowthofthecompany(e.g.,connecBons,industryknowledge,accesstomarkets,managementsupport)

o Reduceyourcostofmanagementwhenpossiblebyprovidingequitytohigh-impactindividualswhocanserveasadvisorstothecompanyanddirectlyinfluencegrowth(e.g.,reBredgeneralwhohelpsyousecurebusinessindefenseindustry)

Tips(cont.)FinancingGrowth

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Glossary

Module 7D

Process Validation is the analysis of data gathered throughout the design and manufacturing of

a product in order to confirm that the process can reliably output products of a determined

standard.

Hardware is the collection of all the parts you can physically touch while software is a set of

digital instructions to perform specific operations.

Return on Investment (ROI) is the benefit to an investor resulting from an investment of some

resource. A high ROI means the investment's gains compare favorably to its cost.

Software is a part of a computer system that consists of data or computer instructions, in

contrast to the physical hardware from which the system is built.

Retail Price also referred to at times as list price or manufacturer’s suggested retail

price (MSRP), recommended retail price (RRP), or suggested retail price (SRP), of a product is

the price at which the manufacturer sells to or recommends sale to the end user.

Wholesale Price is the price charged for a product as sold in bulk to large trade or distributor

groups as opposed to what is charged to consumers.

Work in Process (WIP) is a company's partially finished goods waiting for completion and

eventual sale or the value of these items. These items are either just being fabricated or

waiting for further processing in a queue or a buffer storage. The term is used in production

and supply chain management.

Factoring is a financial transaction and a type of debtor finance in which a business sells its

accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.

Cost of Goods Sold (COGS) are expenses directly attributed to production (i.e., raw materials,

processing, assembly, factory facility, and equipment)

Operating Expenses (OpEx) are expenses not directly related to the product (i.e., administrative

payroll and office space)

Interest and Taxes (I&T) includes federal, state, local, and payroll taxes; plus business loan

interest expenses. When you deduct the interest and taxes from Income from Operations, you

get to the final number on the P&L, called Net Income.

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Revenue is the total income received through sale of products and services

Net Profit is revenue minus COGS, OpEx, and I&T (This is your bottom line)

Net Profit Margin is revenue divided by net profit

Working Capital is product-related assets and liabilities

Working capital cycle is the time it takes to turn product assets and liabilities into cash

Intellectual Property (IP) refers to creations of the intellect for which a monopoly is assigned to

designated owners by law.

COGS Unit Cost is the total expenditure incurred by a company to produce, store and sell one

unit of a particular product or service.

Initial Public Offering (IPO) is a type of public offering in which shares of a company usually are

sold to institutional investors that in turn, sell to the general public, on a securities exchange,

for the first time.

Venture Capital (VC) is a type of private equity financing that is provided by firms or funds to

small, early-stage, emerging firms that are deemed to have high growth potential, or which

have demonstrated high growth (in terms of number of employees, annual revenue, or both).

Common Stock is stock offered to investors that is the same in all ways as the stock received by

the founders. There are no special limitations of privileges (Usually for friends and family and

very early angels)

Convertible Note is frequently used by angel investors. Think of it as “debt wanting to be

equity.” It forestalls the valuation discussion until the next round of financing. Sits on the

balance sheet as debt, has a modest interest rate, and converts into equity according to certain

terms and conditions and at a discount.

SAFE is an invention of the accelerator Y Combinator, a SAFE is a "simple agreement for future

equity," that is a right to convert into a future round of equity (It has a similar function to a

Convertible Note but it is equity in the form of a special convertible security not in the form of

debt)

Convertible Preferred Stock, upon a liquidation event like sale of the company, converts into

common stock unless the liquidation value of its proportional share in the conversion to

Common is less than the value of the investment (in that case it gets principal and dividends

(typically 8%) before common stock)

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Participating Preferred Stock is favored by VCs, this stock “double dips” upon liquidation.

Holders both get their principal out AND participate in the returns as if they held Common

Stock. Also accumulates dividends

Simple Agreement for Future Equity is an agreement between an investor and a company that

provides rights to the investor for equity in the company similar to a warrant, except without

determining a specific price per share.

Venture Capitalist (VC) firms look to buy a minority stake in your business. They offer

unsecured finance, management expertise, increased credibility and business contacts. You

have to give up part of your business and the VCs will expect to place a member on your board.