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Financing Fast-Growth Businesses Innovation Ventures, LP + Delaware Innovation Fund

Financing Fast-Growth Businesses Innovation Ventures, LP + Delaware Innovation Fund. Sponsored By:. In cooperation with. Presented to:. 1. Agenda. Background Needs, sources, timing, types State / Gov’t Funding Federal and state programs Angel Investors Venture Capital

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Financing Fast-Growth Businesses Innovation Ventures, LP + Delaware Innovation Fund

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  1. Financing Fast-Growth BusinessesInnovation Ventures, LP + Delaware Innovation Fund Sponsored By: In cooperation with... Presented to: 1

  2. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 2

  3. Growth Requires Capital 3

  4. Think about the sources of funding across the life of your business 4

  5. Capital sources vary according to where you are in the “Valley of Death” Product Lifecycle Source: DOE 5

  6. Debt and Equity are very different 6

  7. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 7

  8. Is there such a thing as free money? • Outright grant money is very rare, but... • FEDERAL • STATE SBIR/STTR Low-Interest Loans Convertible Debt Tax Incentives Special Grants 8

  9. Federal SBIR/STTR programs • Funding for small business research • Restrictions Apply • Phase I (<$150K), Phase II (<$750K), plus Phase II adds • Contact SBA or specific agency 9

  10. US Small Business Administration (SBA) An agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. www.sba.gov • SCORE, SBDC, WBC • Capital • Equity (through leveraged SBIC’s) • Grants (to supporting organizations) • Loans (guaranteed, through local lender) • Numerous other services 10

  11. The SBDC and DCED Small Business Development Center (SBDC) OUR MISSION The mission of the network of Pennsylvania Small Business Development Centers is to grow the economy of Pennsylvania by providing entrepreneurs with the education, information and tools necessary to build successful businesses. www.pasbdc.org Dept. of Community and Economic Development THE GOAL of the Department of Community and Economic Development (DCED) is to foster opportunities for businesses and communities to succeed and thrive in a global economy. www.newpa.org 11

  12. Ben Franklin Technology Partners • Four regional organizations for business development: • invest risk capital • offer business expertise • deliver customized solutions Northeast PAwww.sep.benfranklin.org Southeast PA www.nep.benfranklin.org Central and Northern PAwww.cnp.benfranklin.org Southwestern PAwww.innovationworks.org 12

  13. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 13

  14. In the Beginning... • A company’s financial support often starts with one of the four F’s • Founders • Friends • Family • Fools • DON’T OVERVALUE YOUR STARTUP! 14

  15. The front line of investing: Angels $10K to $250K Range Equity Convertible Debt Interest Loan 15

  16. Regional Angel networks SYNDICAT ION • Collaboration: • Deal Size • Deal Flow • Due Diligence ?? 16

  17. Regional Angel networks Examples: See www.paangelnetwork.com for information Berks Angel Network, ReadingBlue Tree Allied Angels, Wexford Delaware Crossing Investor Group, DoylestownErie Angel Network, Erie Great Valley PA Angel Network, Scranton Indiana County Angel Network, Indiana Investment Circle of York, York Lancaster Angel Network, Mount Joy LORE, Philadelphia Mid-Atlantic Angel Group, Philadelphia Minority Angel Investor Network, Philadelphia Northeastern PA Angel Network, Bethlehem Private Investors Forum, Jenkintown Robin Hood Ventures, PhiladelphiaSouthwest PA Angel Venture Network, PittsburghSusquehanna Investment Network, Lewisburg Winners Investors Network, AltoonaYork Angel Network, Wrightsville 17

  18. Not all angels are the same 18

  19. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 19

  20. A VC fund is accountable, too... 20

  21. Venture capital managers must plan for losses as well as gains 21

  22. The VC or angel group process involves several distinct stages 22

  23. Breaking down business risk 23

  24. VC’s assess your business’ situation against the ideal – due diligence 24

  25. Stage risk overlays weighted business risk 25

  26. Reward follows risk Risk 26

  27. It’s all about the exit • You are not a lifestyle business! • Must achieve significant growth and value-added • Investors look for 8X – 10X return • Exit by buyout or IPO • * Looking for founders with the same goal * 27

  28. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 28

  29. The term sheet • Pre-money valuation • Amount of investment • General time frame • Key terms and provisions • Exclusivity and confidentiality • Non-binding on either party 29

  30. Participating Preferred • VC investors expect Preferred Stock • Claims on assets ahead of Common Equity • Payout ahead of Common Equity (1X – 3X) • Annual dividend (8 – 12%) • Founders and prior investors to Common • Participating Preferred • After initial payout, Preferred converts to Common and participates in remaining payout along with Common on proportional basis 30

  31. Valuation Early-stage VC investors are looking for a 8X -10X return in 3 to 5 years. They ask: What multiples of revenue or EBITDA are typical for this industry? What revenues or EBITDA are required to support this price? Will this company sell for 8-10 times the post-money in five years? Will this company sell for 8-10 times the post-money in five years? Do all factors support the required revenues or EBITDA? 31

  32. Board of Directors / Voting Rights The Preferred shareholders will expect a strong say in guiding the company: Certain rights preserved for the Preferred shareholders as a voting class At least two of five board seats, with a third seat for an independent director 32

  33. Anti-dilution Dilution: the issuance of equity that reduces the percentage ownership of current shareholders • Anti-dilution provisions are invoked if company issues lower-priced stock. • Founders/Common shareholders absorb all dilution • Weighted Average • Full Rachet 33

  34. Founders’ vesting • Founders’ stock and options will re-vest • 25% to 50% immediately • Balance over 2 to 4 years • Monthly, Quarterly, or Annually • Commits the Founders to the company’s success • Founders may forfeit or be forced to sell unvested stock if they are separated from company 34

  35. Agenda • Background • Needs, sources, timing, types • State / Gov’t Funding • Federal and state programs • Angel Investors • Venture Capital • Understanding venture money and the investment process • Key Issues of Venture Financing • Expectations in the term sheet • Innovation Capital Advisors LLC 35

  36. Innovation Capital Advisors LLC • Delaware Innovation Fund (DIF) www.difonline.com • Innovation Ventures, LP www.innovationventures.com • Early Stage East www.earlystageeast.org 36

  37. Delaware Innovation Fund • Open-ended non-profit entity • Originally funded by the State of Delaware and regional banks • Early-stage investing $25K up to $100K • Debt, equity, or royalty financing • Mostly (but not strictly) a Delaware focus • Broad areas of investment interest 37

  38. Innovation Ventures, LP • Ten-year limited partnership • Small Business Investment Company (SBIC) • LPs include Commonwealth of Pennsylvania, State of Delaware, regional banks • Rohm and Haas – strategic investor • Early-stage equity up to $500K first round • Mid-Atlantic Region • Software/IT for Financial Services, Specialty Materials, and Advanced Technologies for Electronics/Medical Devices 38

  39. Credits and Thanks Mike Gurau, CEI Community Ventures Mark Blanchard, Vermont SBDC Innovation to Invention, DOE 39

  40. Contact Information David J. Freschman Patrick J. Foley, Jr., Ph.D. Walter A. Chiquoine Innovation Capital Advisors, LLC Three Mill Road, Suite 201 Wilmington, DE 19806 (302)777-1616 info@innovationcapital.com Innovation Ventures, LP 40

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