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The “Art” in Startups: Getting Funded



Contact ACS Webinars™at [email protected]

ACS WEBINARS™ October 20, 2011

Dr. Stephen Flaim

Flaim Partners Consulting Joseph Steig

VentureWell at NCIIA







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October 20,2011 www.techcoastangels.com

An Introduction to

Stephen F. Flaim, Ph.D.

President, Tech Coast Angels, San Diego

Vice Chair, Tech Coast Angels

7


Who are Angel Investors ?

TCA

Accredited investors who invest their own capital

They come from diverse operating backgrounds

• C-Level Managers, • Entrepreneurs, • Senior Executives & Other Professionals

They mentor and coach entrepreneurs • Serve as directors • Provide industry contacts & advice • Assist with team building, strategic planning

and subsequent fundraising

They can devote time and add substantial value

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What Do Angels Bring to a Start-Up ?

Guidance & Team Building • Mentoring and Coaching • Active on Board of Directors • Advisory Board Participation

Business Contacts • Additional Management • Customers • Vendors • Strategic Partners • Service Providers • Follow-on Financing

Funding • Direct • Venture Capital Affiliates

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• Help entrepreneurs

• Stay engaged – using skills and

experiences to help build a business

• Giving back to community or university

• An active form of investing –

not just watching markets

• Make money - Return on Investment is the metric

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What Motivates Angels?

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October 20,2011 www.techcoastangels.com Sources: Center for Venture Research (pre 03 data) and Kauffman Foundation/ACEF (04-09 data)

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Why Angels join groups

• Syndication - dividing the work eases the load

• Variety of vertical experience available

• Standardized processes and term sheets

• Deal flow encouraged, entrepreneur-friendly

• Pick and choose the deals you like

• Great camaraderie among the like-minded

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An Organization of Angel Organizations

www.angelcapitalassociation.org

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% of All Start-Up Firms > 90% < 10% < 1%

< $10 M

$10 M to $50 M

$50+ M

5-Y

r R

eve

nu

e P

roje

ctio

n

< 20%

20% to 50%

> 50%

An

nu

al G

row

th R

ate

Internal Bootstrapping &

Angels Angels & VCs

Primary Sources of Funding

Angel Investing, Osnabrugge & Brown

Spectrum of Start-Up Investments

Lifestyle Firms Entrepreneurial Firms

Middle Market Firms

High-Potential Firms

ANGELS’

INTEREST

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http://www.angelcapitalassociation.org/

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Investment Per Round (Millions)

Nu

mb

er o

f In

vest

ors

$5.0 $7.5 $10 $2.5

Power of Angel Investing, Payne

Angels

VCs Gap

Investor Focus

• Scarce capital – very few deals • Wealthy, solo, private investors • Strategic partners – corporate investors • Boutique VCs • Alliances between Angels and VCs

Seed Track Funding

15


17

SO: Understand the Capital Food Chain

or Don’t look where the money’s not

Investment Round

Num

ber

of

Invest

ments

$5 million $10 million

Angels

VCs

GAP

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Angel & VC Markets Are Large, Complementary

$20.1 B

61,900 Deals

Mostly Early Stage

2010 Angel

Investments UNH Center for Venture

Research

Mostly Late Stage

3,277 Deals

$21.8 B

2010 VC

Investments PWC Money Tree

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Total Investments (2010)

Angels VCs

Dollars $20.1B $21.8B

($1.7B seed/startup)

# Investments 61,900 3,277

(363 seed/startup)

# Investors 260,000 794

Per round $325k

avg $5-30M

($4.7M “seed”)

Investors per round 6-20 2-3

Sources: UNH CVR, PWC MoneyTree, NVCA

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The Key Difference?

• VCs: invest other peoples’ money

–Investment imperative

• Angels: invest their own money

–Investment inertia


• Friends, family & fools

• Angels

• Venture Capital

• Not accredited Unsophisticated Investing in a friend Passive 1-2 lifetime investments ($100 to $5,000 each) • Accredited Expertise and personal money Active Investing in entrepreneur Portfolio of angel deals

• Limited partnership Institutional money General Partners active Invest in company Large portfolio

Typical round: $10,000

Each investor: $ 2,000

Source: estimate

Typical round: approx $500,000

Each investor: $ 25 - 40,000 Source: Center for Venture Research

Typical round: $7,000,000

Each investor: $3,000,000 Source: PWC MoneyTree

Funding Scope for Startup Companies

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Funding Startup Entrepreneurs

(typical year)

• Startup companies

• Funded by FF&F

• Funded by Angels

• Funded by VCs

500,000

200,000 (est.)

35 - 50,000

< 500

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WHAT DO ANGEL INVESTORS EXPECT?

ROI = 30% - 40%

Revenue

Experienced management team

Ongoing relationship with management

1 2

3 4 5

Investment Horizon 3 - 7 years

6 7

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24

VC & Angel Investments

$0

$20

$40

$60

$80

$100

$120

$B

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

VC

Angel

Source: PWC MoneyTree, UNH Center for Venture Research


Current VC Investment Climate

• Few exit opportunities

• Inability to raise new funds from LPs

• Less available capital for new deals

• Some refocusing on Clean Tech/Energy

• Fundamentals more important than ever

25

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Leading To: “Early Exits”

• VCs investing at later stages need to wait for large returns

• Startup costs for many companies are significantly lower

• Therefore, angels look for companies that can be acquired quickly without needing follow-on VC money

26


Tech Coast Angels Overview

27

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What is the Tech Coast Angels ?

A Nonprofit Mutual Benefit Corporation governed by a Board of Directors.

TCA members collaborate on due diligence, but make individual investment decisions.

TCA is not a fund TCA does not make investments TCA does not participate in any funding decisions TCA does not receive any share of returns from its members’ investments

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A Snapshot of TCA

• CA Non-Profit Founded in 1997

• The largest angel group in the US –investing primarily in Southern California

Los Angeles (92 members)

Inland Empire (16 members)

Santa Barbara/ Westlake (22 members)

• Members are encouraged to – collaborate within and across networks. – attend any TCA meeting or activity. – participate in any member-led

investment – provide mentoring and guidance as well

as capital San Diego (60 members)

Orange County (70 members)

• Over 250 members organized in five networks

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Who are the INDIVIDUALS in Tech Coast Angels?

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• Are accredited investors (within SEC rules)

• Have track records managing and building successful companies as entrepreneurs or operating executives (70%)

• Are experienced in angel investing, leading due diligence, structuring investments, and coaching entrepreneurs.

• Form an extensive peer network of domain and industry expertise and contacts for subsequent funding, talent and technology

• Dedicate significant time and effort to TCA activities

• Agree as individuals to invest in at least two TCA member-led investments per year; many have 10 or more deals.


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• Evaluate 500 deals yearly (fund 25-30/yr)

• Have invested >$110M to date

– 170 Early Stage Companies in CA

– Typically $250K – $1M (avg. is $463K)

• These companies raised an additional $1.2B from VC’s & other investors

• TCA has done > 25% of all the early-stage tech deals in Southern California

Since TCA was founded in 1997

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Relationships & Expertise

• Affiliations with a majority of SoCal-based

venture capital firms for future raises

• Extensive sponsor support – provide access

• Members provide hands-on mentoring and guidance in addition to capital • Wide range of industry experience and

expertise

• Extensive community participation


33

TCA Investment Areas

• High tech/software/IT

• Telecommunications/Internet

• Life Sciences • BioTech

• Medical Devices

• Consumer Products

• Clean Tech

• Media

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www.techcoastangels.com

34


35

TCA Summary

• Funded 25~30/yr from 500 applications

• All applications considered – no fees

• Syndicate with regional angel groups

• Work with VC affiliates and other VCs

• We likely have members with experience in your market and technology

• Historically our $1 Series A leads to $10 follow-on investment

• High value-add

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Venture Capital 101

Joseph Steig

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and

Where’s the money? Not in venture capital!

• This presentation is an overview of venture capital

• BUT if you want to know where the money really is … you can jump to the end of the presentation!

Intro

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What is venture capital?

• A type of private equity typically provided to early-stage, high-growth potential companies

• VCs generate a return through an eventual liquidity event such as an IPO or sale of the company

• Venture capital investments are usually made as cash in exchange for shares in the company

• VCs also add value by serving as board members but don’t charge extra for this

What is …

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Venture

Capital Firm

(General

Partner)

Limited Partners

(individuals, corporations, pension funds, fund of funds

etc.)

Venture Capital Fund

(e.g. Long River Ventures II)

Portfolio

Company

(Investment)

Portfolio

Company

(Investment)

Portfolio

Company

(Investment)

Fund management in

exchange for fees and

20% profits

Invest in the Fund in exchange for

80% profits after return of principal

Structure

Structure of a typical venture capital firm

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Analyst Associate Senior

Associate Principal Partner

Venture Partners and

Entrepreneurs in Residence

VC hierarchy

The players …

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Seed Start-up Sustained Growth Early Growth

Pre-Revenue Revenue/Profitable

Founder’s Savings

Friends/Family

Angels

Venture Capital

Evolution of capital

Where does venture capital “fit”?

Research

Company gets

incorporated

Government & Foundation Grants

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Seed Start-up Sustained Growth Early Growth

Pre-Revenue Revenue/Profitable

Bootstrap Angel/Seed Series A Series B Series C+

$50K - $1.5M $0 - $100K+ $2M - $7M $5 - $15M $5 - $50M+

Stages

Example round stages and sizes

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A VC is itself a small business

• VCs have to raise $$$

• They then have to find “customers” (YOU!)

• They have to close those customers (make the investment)

• They have to invest time and energy into those customers (aka portfolio companies)

• And then they “harvest” by exiting through sale or IPO of YOUR company

• Exits are rarely if ever through cash flow

What VCs do

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What a VC looks for in a potential investment

• People

• Ideally, a team with track record

• Market

• Market needs to be large ($1 billion +/-)

• Addressable by the team and technology

• Product

• Clear path to marketable product

• VCs don’t take much technology risk!

• And a workable transaction

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Market size, exit multiples keys to startup math

• If a VC ends up with 20% of your company and has paid $5 million

• Therefore, in this example they would want to get $50 million out for their 10x return target

–Therefore, company has to sell for $250 million

• If sale is on 10x revenue multiple, revenue would have been $25 million

• Therefore, if market size is $1 billion, company would have to have 2.5% of the market

Startup math

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A 100:1 ratio of deals to funded deals

Venture deal flow capital math

70 don’t get a meeting

30 get a first look

10 get serious consideration

1 gets funded

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Of the funded deals …

Venture portfolio math

~30% ~30% ~30% ~10%

Several will die Several will be

“walking dead”

Several will do ok

(~3x)

ONE

hits

big

(10x)

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The VC process is pretty much standardized …

• YOU start with an executive summary and a PPT “deck”

• YOU research VC firms and get referrals

• Meetings come from referrals not cold calls

• THEY hopefully take a meeting.

• Due diligence. More meetings. Term sheet. Even more due diligence.

• Then paperwork and LAWYERS

• Then, hopefully, investment

Process

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VC terms are typically preferred stock

• Key is to understand the difference between CONTROL and OWNERSHIP

• VC’s rarely take majority ownership

• BUT they will have certain control via the form of stock they purchase

• Typically preferred stock, which gives them a preference upon liquidation (basically, first money out) and also spells out certain control provisions

• Typically invest in Delaware C Corps

• Much more rarely other states or LLCs

Terms

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Example capitalization structure at Series B

Founder

CEO (may not be founder)

Series A Representative

Series A Representative

Series B Representative

Independent 1

Independent 2

Ownership Board of Directors

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VCs DO invest at the seed or early stage

• Some VCs do invest at the seed stage

• But some VCs are ONLY later stage (Series A, Series B or later)

• Seed investing is often collaborative with entrepreneurs or because of reputation of co-investors who have validated your company for the VC

• Some will even invest via convertible debt

• Convertible debt is debt that “wants to be” equity but will convert at a later point, at a discount

• VCs never invest in Common Stock; Angels sometimes do

Earlier stage terms

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Good VCs can be pivotal to your company

• All VCs should be value-added investors

• Help with new hires

• Help identify first customers

• Help with next round money

• BUT this help could also mean firing YOU in the best interest of the company!

• VCs have their own business to run

• Hopefully their interests are aligned with yours

–but not always!

After the investment …

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VCs like software deals a LOT!

• ROI is about time value of money, capital efficiency

• Software can be invented and reinvented quickly

• The product costs almost $0 to replicate

–This makes it a magical industry for investors!

• Chemical businesses have complications!

• Research may not be fast, sales cycles may be slow, acquirers may be old-fashioned, and then there’s health and safety and other liabilities!

–BUT chemistry is the foundation science so hang in there! You’re doing more than the latest GROUPON!

Some challenges for chemists …

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$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2011e2010200920082007200620052004200320022001200019991998199719961995

$

B

I

L

L

I

O

N

S

Other

Software

Industrial/Energy

Biotech

Semiconductors

Total U.S. VC investment per year

VC investments

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BUBBLE!

Data from PWC Moneytree

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Where else can you find money?

• Only a TINY fraction of startups get VC$

• Estimates are that 10x get only angel$

– And 10x THAT get neither angel$ nor VC$

• Other forms of equity

• Grant funding

• SBIR Grants

• National Collegiate Inventors and Innovators Alliance (www.nciia.org)

• REVENUE!!!

• Customers are the best source of funding!

Where else?

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A few of example deals

Deals

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A few resources to learn more about VC

• askthevc.com

• Recently published the book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist”. It’s great.

• crunchbase.com

• avc.com

• Blog by the mensch of venture capital

• angelcapitalassociation.org

• Includes list of most formally organized angel groups

• startupcompanylawyer.com

• Includes Wilson Sonsini’s term sheet generator tool

VC resources

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Supporting the science, engineering ecosystem

• National Collegiate Inventors and Innovators Alliance

• 501c3 not-for-profit providing catalyst grant funding and educational programs to university student innovators and faculty through the U.S. for 15 years

– Focus on scalable, technology-based ventures that deliver social value

» Next deadline for university student grant funding proposals is December 2, 2011 www.nciia.org

About the NCIIA

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About us …

Leadership

Dr. Judy Giordan is a nationally recognized R&D

executive serving in senior technical leadership roles at

firms such as Pepsi-Cola Company, Henkel Corp, and IFF.

She is a founding board member and advisor to

companies in multiple industries and holds a PhD in

Chemistry from the University of Maryland.

Joseph Steig is a CFO and advisor to seed and early

stage companies in a wide range of industries, from

aquaculture to computer chip design to composite

materials. He is Venture Development Manager at NCIIA

and also CFO of Long River Ventures.

MORE at www.ecosvc.com

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The “Art” in Startups: Getting Funded



Contact ACS Webinars™at [email protected]

ACS WEBINARS™ October 20, 2011

Dr. Stephen Flaim

Flaim Partners Consulting Joseph Steig

VentureWell at NCIIA





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Celebrate National Chemistry Week! www.acs.org/ncw

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Upcoming ACS Webinars™ www.acswebinars.org

Thursday, October 27, 2011

Making Money Out of Chemistry: The Science in

Paper Money Dr. Steve Carlo, Technical Manager, Bureau of Engraving and Printing

Ross Morres, Program Manager, Bureau of Engraving and Printing

Thursday, November 3, 2011

Boost and Lose Your Memory With Chemistry Dr. Todd Sacktor, SUNY Downstate Medical Center


Do you use ACS Webinars in the classroom?

We’d like to hear from you!

Email us ([email protected]) or go to

www.acswebinars.org

to share ideas & learn more!







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of the presenter and do not necessarily

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