sustaining quality and warranty - build4scale · pricing structure. o net proﬁt margin can vary...

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

SustainingQualityandWarrantyModule7DFinancingGrowth

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


3

o LimiBnggrowth-relatedfinancingopBonstoventurecapitalo SpendingtoomuchBmeaJempBngtofinanceconBnuoustechnologydevelopmentandnotfinancinggrowthofcurrentlyviableproducts

o UnderesBmaBngthemagnitudeofinvestmentneededforscalingupamanufacturingoperaBon

o AligningfinancingneedsinconsistentlywiththecommercializaBonBmeline

Commonmistakesandmisconcep6ons

Mo2va2on


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


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


6

o LO1.Howtodefinecurrentcostcenterso LO2.Therolecostcentersplayinfuturegrowthandmanufacturing

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

LearningObjec2ves


7

o Whatdoesittaketofinanceahardwareproduct?o WhyisitdifferentfromfinancingasoAwareorservicecompany?

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

WhatThisModuleAddresses


Hardwareo Heavycapitalexpenseo Manyyearstoreturnoninvestment(ROI)

o Lowermarginso Hardertoscaleo Higherrisk

8

Hardwarevs.soDwareFinancingProducts

So^wareo Lowcapitalexpenseo FewyearstoROIo Largemarginso Easiertoscaleo Lowerrisk


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


10

Basicterminology:(cont.)o Revenue:totalincomereceivedthroughsaleofproductsandservices

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

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

Hardwareproductproduc6on(cont.)FinancialConsidera2ons


11

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

o Netprofitmargincanvaryfrommorethan20%forlargedrugmanufacturersto1.7%forprintedcircuitboards

Hardwareproductproduc6on(cont.)FinancialConsidera2ons


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


13

Hardwarevs.soDwareProfitMargins


14

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

o GrowthmustbemanagedmeBculouslytoensurescalinginvestmentsareinlinewithproduct-demandprojecBons

o Overborrowingandundersellingtheproductmustbeavoidedo CapitalinvestmentinfaciliBes,equipment,andtoolingneedtobeBmely

o Businessplanningisadailyexercisetoensuregrowthinvestmentsarestagedtoreducethecostofsecuringmoney(i.e.,loaninterest)

HardwareBusinessMargins


15

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

Checklist–Exis6ngcostsWhatAmIFinancingNow?


16

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

Checklist–Exis6ngandprojectedfuturecostsWhatAreMyCostCenters?


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


18

Whyit’simportantformanufacturers

o Workingcapitalisneededbyallbusinessestofundthenecessaryinvestmentininventoryandaccountsreceivabletoallownormalday-to-daytradingtoconBnue

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

WorkingCapital

AccountsPayable

AccountsReceivableInventoryWorking

Capital


19

Whyit’simportantformanufacturers(cont.)

o Themanufacturerhastopurchaseandholdaninventoryofrawmaterials,issuethematerialsintoWIP,andapplydirectlaborandoverheadtoconverttherawmaterialsintofinishedgoods

o TheworkingcapitalrequirementsequaBoncanbeadaptedforamanufacturerandbewriJenasfollows:

WorkingCapital

AccountsReceivable

AccountsPayable

FinishedGoodsWIPRaw

MaterialsWorkingCapital


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


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


22

Example–Toymanufacturingstart-up(cont.)

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

WorkingCapitalWorksheet

Seepriorpageforenlargedimage


Nogrowthprojec2on:

23

Example–Toymanufacturingstart-up(cont.)WorkingCapitalRequirements

COGS/Order NetProfit WorkingCapitalRequired


10%quarterlygrowthprojec2on:

24

Example– Toymanufacturingstart-up(cont.)WorkingCapitalRequirements



25%quarterlygrowthprojec2on:

25

Example– Toymanufacturingstart-up(cont.)WorkingCapitalRequirements



26

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

o SpreadoutpaymentstosuppliersoverlongerperiodsofBme

Techniquesforminimiza6onWorkingCapitalRequirements


27

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

— Corporateventures

Assessalterna6vegrowth-financingop6onsFinancingGrowth


28

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

Assessalterna6vegrowth-financingop6ons(cont.)FinancingGrowth


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!


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


on

Componentorsystem

validaBoninlab

environment


environment


environment

Full-scaleprototypeverifiedinoperaBng

environment

Actualsystemcomplete

andfuncBoninginoperaBngenviron.

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

DOEProgramR&D

StateandMissionEntrepreneurialSupportFunding


31

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

o Crowdfundingo Angelinvestorso VentureCapitalo Corporatestrategicinvestmento Banks,investmentbankingfirms

Op6onsScaleFinancing


32

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

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

BasicsInvestmentInstruments


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


34

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

o Loans— Needtopaybackprincipalandinterest— NoequitydiluBon— Needtoprovecashflowand/orpathwaytocustomerorders

Op6onsScaleFinancing


35

o Equity— Exchangeforownershipstake— Needtodemonstrategrowthopportunity

o FactoringReceivables— Paymentisatadiscount

Op6ons(cont.)ScaleFinancing


36

FederalGovernment:o Mission:supportadvancedtechnologytoensurenaBonhasleadingtechnology

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

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

Mission-basedorganiza6onsScaleFinancing


37

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


38


VentureCapital

CorporateStrategic


andReported



Proofofconcept


on

Componentorsystem



environment


environment




envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9



ARPA-E


DOESBIR/STTR


andreported



Proofofconcept


on

Componentorsystem

validaBoninlab

environment


environment


environment


environment



Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9

DOEProgramR&D



39

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


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


41

Usingfederalprojectstosecureacustomerpartnero DeveloperofbaJeryweldinspecBonsystemspursuingDOE/EEREVehiclesTechnologiesOffice(VTO)grant

o SecuredcustomerpartnertovalidateclaimsintheirproducBonoperaBonsbyincludingcustomerinprojectinavalidaBonroleoftheircommercialdemonstraBon

CaseStudy1ScalingYourBusiness


42

Usingfederalprojectstosecureasupplychainpartnero Hybridvehiclecomponentdeveloperwithexportpowero SecuredbaJery,powerelectronics,andvehicleintegraBonsuppliersasprojectpartnerstosupportthedevelopmentoftheirtechnologyatscale


GenerateElectric

WorkElectric

DriveElectric


43

Usingfederalprojectstosecureadownstreamstrategicmarketchannelpartnero Custommanufacturingequipmentdevelopinguniquemachiningprocessforhigh-volumeproducBonofwindturbinehubsandblades

o Securedcontractmanufacturingasprojectpartnercostshareinhigh-volumescaledemonstraBoninexchangeforincludingexclusivelicensetoequipmentwithroyalBesbacktotheequipmentcompanyonaper-machined-unitbasis



44

o EDC— Jobscreated— InvestmentaJracted— IPdeveloped— Newcompaniesformed

o Stateoffices:Energy— Energyoffice— Reducingenergywaste— Reducingelectricitycosts

o Stateoffices:DOT— Reducingemissionsfromvehicles— Reducingfueluse,congesBon

Stategovernmentop6onsScaleFinancing


45

o MarketResearchGrants— Grantsthatoffsetcostformarketresearch

o FirstCustomerAssistancePrograms— Grantsthatoffsetcostforcustomerresearch,idenBficaBon,andacquisiBon

o ExpertinResidencePrograms— FundingthatoffsetscostforcontracBngmanagementteamandconsultants

ExamplesStateGovernmentFinancing


46

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

o SBIRandOtherFederalR&DFundingMatchingFunds— Fundingputupasamatchtosupportfederalprojectproposals

o VentureMatchPrograms— EquityinvestmentsthatprovidematchmoneytohelpaJractventurecapitalinvestments

Examples(cont.)StateGovernmentFinancing


47


VentureCapital

CorporateStrategic


andReported



Proofofconcept


on

Componentorsystem



environment


environment




envm’t

Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9



FamilyandFriends,Loans,Crowdfunding

ARPA-E


DOESBIR/STTR


andreported



Proofofconcept


on

Componentorsystem

validaBoninlab

environment


environment


environment


environment



Actualsystem

testedanddata

collectedover

lifeBmeofsystem

TRL1 2 3 4 5 6 7 8 9



48

IncubatorsScaleFinancing

o Typicallyprovidebusinesssupportserviceso Usuallydedicatedtosupportstart-upsandearly-stagecompanies

o OAenprovidephysicalofficeorlabspace,sharedservicesforcompanies

o OAenconnectedtoauniversityornaBonallabtosupportspinoffcompanies

o Usuallydonotprovidedirectfinancialinvestmentbutmaycarryequityincompaniestheysupport


49

o Goalistogrowearly-stagebusinesseso Typicallytechnologyspecificandsupportedbyindustryo Companiestypicallyrequiredtosuccessfullycompletecoachingortrainingcurriculum

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

AcceleratorsScaleFinancing


50

ExamplesIncubatorsAndAccelerators


51

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

Businessplancompe66onsScaleFinancing


52

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


53

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


54

o IncubatenergyNetworkhJps://incubatenergy.org/

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

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

CleantechandhardwareSelectedIncubatorResources


55

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


56

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


57

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

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

Cleantechandhardware

SelectedBusinessPlanContests


58

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

Philanthropicfounda6onfundingScaleFinancing


59

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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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


63

o Interestpaidondebtistax-deducBble,soyou'renotspendingasmuchasyouthink

o ItallowsyoutoretainequityinexchangeforborrowingmoneyandthecostofloaninterestoverBme

o Debtfinanceissubjecttorisinginterestrateso Itcanbedifficulttosecure,parBcularlyifyourbusinessispre-revenue,R&Dheavy

o Youmayberequiredtoofferpersonalguarantees(e.g.,collateral)

DebtfinanceprosandconsGrowthFinancingOp2ons


64

o InvestorswillgetinvolvediftheybelieveyouareabusinesswiththepotenBalforsignificantgrowth

o Businessangelsarewealthyindividualswhoinvesttheirownfundsinyourbusinessforequity.Theyalsooffermentoringandadvice.TheytendtoinvestsmallersumsandtakelessBmetocompleteadealthanventurecapitalistfirms.

EquityfinanceGrowthFinancingOp2ons


65

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

o Banksalsoofferdirectequityinvestmentswiththepromiseofnoninterferencewithday-to-dayoperaBons

o PrivateequityfirmsareanotheropBonbutaremorelikelytowantachangeinmanagementandoperaBonalcontrol

Equityfinance(cont.)GrowthFinancingOp2ons


66

o NoteverybusinesswillaJractequityfinance;onlyhigh-growthbusinesseswithaJracBveprospectscansecurethiskindofinvestment

o YouwillhavetogiveupaporBonofthebusinessandyoumustgrowandoperatetoafixedschedule

o EquityisbeJerrespectedthandebtandcanconferacertaincredibilityandpresBgeonyourcompany

o EquityinvestorscanoAenadvancebusinessthroughindustryknowledgeandstrategicconnecBons

o SecuringprivateequityisBme-consuming;itcantake12–18monthstopitchandsecureinvestment

EquityfinanceprosandconsGrowthFinancingOp2ons


67

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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o Howdotheywork?— High-net-worthindividualsorgroupsinvesBngpersonalmoneytogetreturns

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

o Whatdotheycareabout?— BeJerreturnsthantypicalconservaBveinvestmentstheymake

— Usuallyfirstmoneyin— Tendtofocusonlocalentrepreneursandlocaleconomicdevelopment

— InvestinareasofpersonalexperBseandinterest

BasicsAngelInvestors


72

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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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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o Howdotheywork?— Tech-scouBngunitofalargecorporaBoninterestedinnewtechnologythatsupportstheirproductdevelopmentandcorporatestrategy

— UseinvestmentarmasawaytocomplementinternalR&D— InvestmentsalignwithcorporateobjecBvesandbuyintocompaniestheywillhelpgrow

— Typicallylaterstage(SeriesB+),typicallylessthanmajorityshare,andnotalwaysboardseat

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

BasicsCorporateStrategicInvestment


80

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


81

ExamplesCorporateStrategicInvestors


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Por^oliosCorporateStrategicInvestors


83

o Firstpriority…financeyourgrowththroughsaleswheneverpossible

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

o Onlytakethemoneyyouneed…avoidrackingupdebtandbelean…forceyourselftobesmartwithyourfinances

o Takinginvestmentintheformof“equity”canprovetobeeitherlowriskorexpensiveforacompany(seeaddiBonalexplanaBononthenextslide)

TipsFinancingGrowth


84

o Givingupequityatanearlystagemaymeanyoudonotneedtopayitbackifyoufail,butifyouprovidetoomuchequitytoothersitcanprohibitthelossofrevenuesforeverifyourventureprovessuccessful

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

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

Tips(cont.)FinancingGrowth

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.

https://en.wikipedia.org/wiki/Process_validation

https://study.com/academy/lesson/what-is-computer-hardware-components-definition-examples.html

https://en.wikipedia.org/wiki/Return_on_investment

https://en.wikipedia.org/wiki/Software

https://en.wikipedia.org/wiki/List_price

http://whatis.techtarget.com/definition/wholesale-price

https://en.wikipedia.org/wiki/Work_in_process

https://en.wikipedia.org/wiki/Factoring_(finance)

https://en.wikipedia.org/wiki/Cost_of_goods_sold

https://en.wikipedia.org/wiki/Operating_expense

https://www.investopedia.com/terms/p/plstatement.asp

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)

https://en.wikipedia.org/wiki/Revenue

https://en.wikipedia.org/wiki/Net_profit

https://en.wikipedia.org/wiki/Profit_margin

https://en.wikipedia.org/wiki/Working_capital

https://en.wikipedia.org/wiki/Working_capital

https://en.wikipedia.org/wiki/Intellectual_property

https://www.investopedia.com/terms/u/unitcost.asp

https://en.wikipedia.org/wiki/Initial_public_offering

https://en.wikipedia.org/wiki/Venture_capital

https://en.wikipedia.org/wiki/Common_stock

https://en.wikipedia.org/wiki/Convertible_bond

https://en.wikipedia.org/wiki/Simple_agreement_for_future_equity_(SAFE)

https://en.wikipedia.org/wiki/Preferred_stock

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.

https://en.wikipedia.org/wiki/Participating_preferred_stock

https://en.wikipedia.org/wiki/Simple_agreement_for_future_equity_(SAFE)

https://en.wikipedia.org/wiki/Venture_capital

sustaining quality and warranty - build4scale · pricing structure. o net proﬁt margin can vary...

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