1. Sources of Funding Steve Morris OTBC smorris@otbc.org

2. Funding Process What funds do you have? What milestones can you reach with the $ you have? Decide on next milestones; Develop slides, exec summary, etc... Find/pitch/close investors Meet the milestones Repeat No Does that get you to cash flow positive, or to a fundable event? Yes

3. 3 Fundable Event A set of milestones which, when reached, will let you close enough funding to reach the next fundable event until you reach cash-flow positive or get acquired or go IPO.

4. 4 A Typical Funding Strategy $20K of founder savings –Validate the market and create some “slide-ware” $150K of Friends/Family –Create rough prototype –Get some customer feedback $1 million from angels –Complete a Beta-release product $6 million from VCs –Launch/market the product

5. 5 Stages & Sources of Funds Discovery Proof-of Concept Product Design Product Development Revenue Idea Venture Funds Institutional Equity Bank Loans / Bonds Angels Seed Funds Angel Groups Friends & Family SBIR/STTR SBA Loans Equipment financing Venture Banks Finance Receivables Strategic Investors Merger or IPO Customers/Partners Idea Gov. Loans/Grants Micro Loans Founders

6. Reasons to Avoid Investors You will not spend many, many months of full- time effort raising money You will not have to “manage” your investors You will not have investors on your Board You will not have to give up equity You will not have to give up control At the beginning, you aren’t investable anyway

7. Sources: Founder Savings & Credit Plan on no salary for (quite) a while (typically 6 months or more) Don’t expect back-pay when you eventually get funded Do expect to get out-of-pocket expenses reimbursed

8. Sources: Friends & Family Be very careful to set expectations –Risk is high! Loans may be better then selling stock –Many small shareholders becomes a pain –Only sell stock to accredited investors

9. Sources: Customers/Partners Revenue is the best source of funds! Develop an early product quickly and sell it Get customers to pre-pay early orders Do consulting work* Develop a product under contract with another company* * But be sure you retain rights to the IP!!!

10. Sources: SBIR Grants (www.sbirworld.com) SBIR: Small Business Innovation Research –Significant percent (2.5% = >$1B) of federal R&D funds are reserved for small business –Qualifications American owned and independently operated For-profit Principal researcher employed by business Company size limited to 500 employees –Awards granted in 2 phases Phase 1: up to $100K for feasibility study Phase 2: up to $750K for R&D

11. Sources: STTR Grants Funding for small business partnered with non-profit research institution (smaller pool than SBIR) Qualifications –Small Business Similar to SBIR, but Principal researcher need not be an employee Minimum amount (30%) must be subcontracted to research institution –Research Institution Located in U.S. Either College/University, domestic nonprofit research organization, or federally funded R&D center Awards granted in 2 phases –Phase 1: up o $100K for feasibility study –Phase 2: up to $750K for R&D

12. Sources: SBA Guaranteed Loans Basic 7(a) Loan Guaranty –The loan itself comes from a finance institution, not the SBA –Available for most business purposes (working capital, equipment, furniture, land, building, etc.) –10 to 25 year loan maturity –Must meet SBA size standards (number of employees; revenue) –Maximum loan size of $2M (SBA guarantees up to $1.5M of that) –2% to 3.75% loan fee (depending on loan size) and 0.545% annual fee Microloan 7(m) loan Program –Loans of up to $35,000 –Generally require collateral and a personal guarantee

13. Source: Business Oregon Entrepreneurial development Loan Fund –Company < 24 months old; < $100K in revenue –Virtually any biz purpose; 28% start-ups Oregon Capital Access Program –Loan insurance to allow higher risk Oregon Business Development Fund –Up to $500K; Long term/working cap.; Job creation/retention Credit Enhancement Fund –Guarantees; Traded sector business; short term; <$500K

14. Sources: Regional Investment Funds $7 Million in funding state-wide from Oregon Lottery (through Business Oregon) Administered by local Regional Investment Boards Example: Mt. Hood Economic alliance –$600K –Focus: create jobs and leverage additional investments –Forgivable loans; grants; loans

15. Sources: City Programs Portland (PDC) –$500K debt fund –Deferred Loan Program –Revolving Loan & Real Estate Fund –Economic Opportunity Fund –Enterprise Loan Fund –North/Northeast Business Assistance –Quality Jobs Program –Storefront Improvement Program

16. Sources: Equipment Financing Equipment becomes collateral Allows you to stretch cash … in return for paying some interest Worth considering if you’re buying capital assets Typical criteria –Cash flow from operations to service debt, or… –Sufficient liquidity and likelihood of future liquidity to service debt payments

17. 17 Stages & Sources of Funds Discovery Proof-of Concept Product Design Product Development Revenue Idea Venture Funds Institutional Equity Bank Loans / Bonds Angels Seed Funds Angel Groups Friends & Family SBIR/STTR SBA Loans Equipment financing Venture Banks Finance Receivables Strategic Investors Merger or IPO Customers/Partners Idea Gov. Loans/Grants Micro Loans Founders

18. Equity: Common vs. Preferred Stock purchased by investors may have special rights –Preferred shares (vs. Common) Examples of special rights –Board seat –First in line if an acquisition or IPO occurs –Dilution protection –A veto in many major decisions When you sell any amount of Preferred equity, you lose a lot of control

19. Equity: The Exit Strategy How will your investors make money? –Someone buys-back their shares (with interest) –There is an acquisition –There is an IPO

20. Sources: Angels High net worth individuals Investment may be structured as: –Loan (probably convertible to Stock) –Stock purchase Must be accredited investor –$1M net worth or $300K income in the last 2 years Typical criteria –They have to like you and your idea Angels invest because they want to –The beginnings of a team –Proven technology

21. Sources: Angel Groups Two basic types –Joint due diligence, but invest separately –Pool money and invest jointly Easier to find than individual angels Some local examples: –Portland Angel Network –Womens Investment Network –Portland Venture Group –Oregon Sustainability Angels –Keiretsu Forum (Portland Chapter)

22. Sources: Venture Bank Bridge Venture banks can provide bridge loan if you’re close to a VC deal The bank will talk to your prospective investors; they have to believe the deal will happen There will be terms to consider –Interest rate –Collateral –Covenants –Stock

23. Sources: Financing Receivables If you have receivables, you may be able to get a loan –Customers may not pay you for 60 or 90 days after they give you an order Receivables are the collateral You’ll pay interest, but you get cash faster Typical criteria –Accounts Receivable due from creditworthy companies –You are not in imminent risk of going bankrupt

24. Sources: VCs Institutional investors (not individuals) They invest other people’s money (unlike angels) Typical funding criteria –Require “home run” potential (10x+ return) –Market size of several hundred million dollars –Compelling reason to buy –Compelling competitive advantage –Strong team –Customer references –Proven technology (no “research” investments) –Working (early) product is a huge help (may be an absolute requirement)

25. 25 Sources: VCs 1,000 Plans received 20 Get significant due diligence 4 or 5 Investments

26. Strategic Investors Looking for strategic advantage –May be potential interested in acquisition down the road Usually will not be the lead investor Can add to your credibility with Vcs –They (probably) have more domain knowledge than the Vcs –Especially if they are well-known names! Leverage your existing relationships

27. Sources: Merger/Acquisition One reason to get acquired is to get access to cash May also be an exit strategy for investors But your negotiating position is weak if you’re just about our of cash

28. Sources: IPO Initial Public Offering –Sell stock on the public market Very expensive –Reporting requirements alone can cast millions of dollars per year Requires revenue and established track record of growth … and profitability (usually)

29. Sources vs. How Much SourceTypical Amount Savings & credit cards $10K - $50K Friends & family $50K - $200K Grants (SBIR, STTR) $150K - $1.5M Angel investments $200K - $2M VC seed fund $200K - $2M Venture capital investment $4M - $15M

30. 30 Resources OTBC (otbc.org) –FastTrac TechVenture OregonStartups (oregonstartups.com) Oregon Entrepreneurs Network (oen.org) –Networking events –Angel Oregon, Venture Northwest –Executive Series –Business Concept Reviews –Business Plan Development Seminar –Business Plan Reviews –CEO Bus Tour