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Early Stage Funding

Early Stage Funding. Sean G. Ryan. Background. Currently Consulting with Start-ups Business Plans Fund Raising Charleston Angel Partners Corridor Roundtable. Background. Accenture (Anderson Consulting) Business Process & Technology Consulting Consulted with Fortune 500 Companies

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Early Stage Funding

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  1. Early StageFunding Sean G. Ryan

  2. Background Currently • Consulting with Start-ups • Business Plans • Fund Raising • Charleston Angel Partners • Corridor Roundtable

  3. Background • Accenture (Anderson Consulting) • Business Process & Technology Consulting • Consulted with Fortune 500 Companies • 1995 “the internet will be a big library at best, most links lead to junk” • Digital River • E-commerce Service Provider (ASP) • Pre Dot-Com • Director of Software Development • IPO August of 1998 • Today’s Market Cap: $1.3 Billion

  4. Background ExactTarget • Web-Based Email Marketing • Co-Founder, CTO • Post Dot-Com Bubble, hard to get money • Jupiter Research ranked ExactTarget highest in business suitability 2004 • Several rounds of funding, most recent $10M Insight Venture Partners BookSurge • Print on Demand, zero inventory book production • Investor, COO • Sold to Amazon, April 2005

  5. Uses of funds Types of companies Types of money Stages of development Appropriate sources Example Seeking Funds

  6. Uses of Funds Growth Requires Capital • Operations • Hiring Competent Management • Sales and Distribution • Support and Service • Administration • Working Capital • Accounts Receivable • Inventory • Capital Expansion Technology • Equipment • Leasehold Improvements

  7. Types of Companies Lifestyle • Provide a family income/support desired lifestyle • Fulfill personal goals • Generally $1M or less in annual sales • Limited upside • Sole proprietorship, LLC, S-Corp High Growth • Fewer than 1 in 20 businesses • Possibly very large returns • Generally require more funds • Fiduciary responsibilities

  8. Types of Money

  9. Where can companies get the money? • Grants/Government • Internal Cash-Flow • Debt • Equity Types of Money

  10. Stages of Development

  11. Stages of Development Money High Growth • - You have an idea • - Writing the business plan • - Investigating the market • Looking for people to join you • Creating a prototype/demo of product or service • Investigating patents Lifestyle Time Expansion Maturity Seed Startup Early Growth

  12. Stages of Development Money High Growth • You have a new business • Business plan is solid • Patents, if any, may be in process • Product demo or prototype has traction – interested clients/investors • Maybe some initial sales • Key management, in place or on sidelines Lifestyle Time Expansion Maturity Seed Startup Early Growth

  13. Stages of Development • Success in marketplace • Hiring sales and marketing • Hiring operations • Office space/warehouse/manufacturing • Equipment purchases Money High Growth Lifestyle Time Expansion Maturity Seed Startup Early Growth

  14. Stages of Development • Growing quickly • More hiring • Transition from initial admin/operations to full scale • Move offices to accommodate hires • New production facilities/hardware • Invest in marketing • Invest in product development • Competition takes notice • Fire-fighting, keeping the wheels on Money High Growth Lifestyle Time Expansion Maturity Seed Startup Early Growth

  15. Stages of Development Money High Growth • Continued growth • Formalize organization • Departments are created • Who is that person? • National presence in market space • Focus turning to margins and efficiency Lifestyle Time Expansion Maturity Seed Startup Early Growth

  16. Risk Assessment Risk* • 80% of startups fail • Less than 5% become high growth Risk Time Expansion Maturity Seed Startup Early Growth * Level of investment risk assumed by investor

  17. Sources of Funds

  18. Sources of Funds Risk Founders Friends andFamily Angels Venture Capitalists Acquisitions &Equity Markets Banks Time Expansion Maturity Seed Startup Early Growth

  19. Sources of Funds Risk Founders: Highest risk Typically invest up to $100K Use their own savings Ask friends to join them Offer a piece of company as incentive – outlined in Operating Agreement Work without salary (may defer on books) Provide space (garage/basement) Ask for favors (legal advice, accounting) Should all be highly active Founders Time Expansion Maturity Seed Startup Early Growth

  20. Sources of Funds Risk Friends and Family High risk Fund most new businesses Typically invest up to $200k Can be quick money Personal relationship risk Part of networking for your business Formal Private Placement Memo Have consistent agreements drawn and approved by a lawyer Keep records Generally passive investors Valuation Founders Friends andFamily Time Expansion Maturity Seed Startup Early Growth

  21. Sources of Funds Risk Angels Moderate to high risk Typically invest $50K to $1M Perform due diligence Groups may work as a syndicate Can help with next round of funding 1/3 of deals at the seed stage May take seat on board In 2004: 225,000 Angels invested $22.5B in 48,000 ventures Founders Friends andFamily Angels Time Expansion Maturity Seed Startup Early Growth

  22. Sources of Funds Risk VCs Moderate risk Typically invest $2.5M to $10M Perform due diligence Can help with next round of funding 6% of deals at the seed or startup stage Generally lead a round Will take seat on board In 2004: $21B in 2,876 ventures $7M average Founders Friends andFamily Angels Venture Capitalists Time Expansion Maturity Seed Startup Early Growth

  23. Sources of Funds Risk Banks More likely to loan when cash flow is good and assets on the books Borrow on receivables and other assets Acquisitions/Equity: IPOs are rare Acquisitions are much more common Founders Friends andFamily Angels Venture Capitalists Acquisitions &Equity Markets Banks Time Expansion Maturity Seed Startup Early Growth

  24. Example

  25. Example • Multiple steps in raising funds - rounds • Larger sums raised at each step • Growing valuation • Owners get diluted

  26. ExactTarget Example 4 Guys and a Napkin Operating Agreement, LLC 3 Season Porch First Sale using PowerPoint! VC Round IPO orAcquisition Founders Friends and Family IndividualAngel x2 InvestmentOwnershipValuationFounder Value $25K25%$0$0

  27. ExactTarget Example Private Placement Father-in-Law in for $5,000 – Sh*t! 250 sq. ft. office, no windows V1 of product sends 25K emails 30 times VC Round IPO orAcquisition Founders Friends and Family IndividualAngel x2 InvestmentOwnershipValuationFounder Value $25K25%$0$0 $200K20%$1M$200K

  28. ExactTarget Example First “Real” Investor Wealthy, Nice Guy Extended Network of F&F Salary – Wife is happy! New Office, Employee Opts VC Round IPO orAcquisition Founders Friends and Family IndividualAngel x2 InvestmentOwnershipValuationFounder Value $25K25%$0$0 $200K20%$1M$200K $1M14%$5M$700K

  29. ExactTarget Example First VC Incorporate, Formal Board of Dir. Partial Exit for Founders More Work, More Responsibility VC Round IPO orAcquisition Founders Friends and Family IndividualAngel x2 InvestmentOwnershipValuationFounder Value $25K25%$0$0 $200K20%$1M$200K $1M14%$5M$700K $10M8%$35M$3M

  30. ExactTarget Example Next Year Based on Meeting Sales Goals Must Maintain Margins IPO Market Must Remain Strong Prayer! VC Round IPO orAcquisition Founders Friends and Family IndividualAngel x2 InvestmentOwnershipValuationFounder Value $25K25%$0$0 $200K20%$1M$200K $1M14%$5M$700K $10M8%$35M$3M

  31. Things Not to Do • Wait until the last minute to raise money • Digital River and ExactTarget layoffs • Spend money on party • 1999 Pixelon.com throws $10M party after $23M VC Raise • Get more money than you need • WebVan vs. Simon Delivers/PeaPod Models • Spend money on “buzz” • Beyond.Com “Naked Guy” SuperBowl Ad • Cyberian Outpost “Wolves” SuperBowl Ad

  32. Things To Do • Have skin in the game • Fail fast, fail small, try again, find a model • Focus on revenues, margins – this will make raising money easier and valuations better • Don’t be a big business too soon – DR Accounting on Qbooks until IPO • Focus on the size of the pie and not the size of your piece • Commit, raising funds often forces this • Get excited, be confident and think big • Look for similar business models

  33. Questions?

  34. Thank You

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