1. Financing Growth Alex F. DeNoble, Ph.D. San Diego State University MEET U.S. Program

2. MEET U.S. The Fund-raising Challenge: Raising funds is like a chess match. The entrepreneur must constantly think ahead to the next fundable milestone. This challenge raises 2 fundamental questions: What does my company have to look like at the next fundable milestone? What must I do to get the company ready for the next fundable milestone?

3. MEET U.S. Growth of a Firm Firms evolve through lifecycle stages Each stage is characterized by: –New strategic challenges and issues –Evolving managerial skill requirements –Changing levels & types of risks –Changing financial requirements

4. MEET U.S.

5. Sources of Capital by Stage of Development Seed Stage: Self-funded Family, friends, fools (3f’s) Government grants Series B: Growth: Angel syndicates VC’s Strategic Partners Series A: Angel Investors Angel Syndicates Some early-stage VC’s Rapid-Growth: VC’s Strategic Partners IPO Corporate Buy-outs

6. MEET U.S. Value Drivers by Stage of Development Seed Stage: Proof of concept Initial market validation Series B Growth: Referencable customers Company infrastructure Strategic alliances Strategic investors Series A: Technology validation Further Market Validation Assembling the team Rapid Growth: Sales Growth Profitability

7. MEET U.S. Challenges of a Growing Firm Seed / Development Phase Defining, refining and testing products & markets Gaining credibility –Customers –Suppliers –Investors Attracting critical talent Establishing logistics & distribution channels Growth Phase Building an organization –Infrastructure –Policies –Procedures Managing people –Recruit –Train –Retain Managing Customers & Markets Raising Capital

8. MEET U.S. Types of Equity Capital Savings and other personal assets Friends, family and fools (the 3 F’s) Angel Investors Angel Syndicates Venture Capital Firms Strategic Corporate Partners The Public Markets Corporate Buyout

9. MEET U.S. Ventur e Capital Fund Pension funds Insurance cos Individual s Corporation s Portfolio Cos. $ $ $ $ $ $ $ $ $ Venture Capital Funds Flow

10. MEET U.S. Ventur e Capital Fund Pension funds Insurance cos Individuals Corporations Portfolio Cos. Harvesting the Venture Fund Return on Investment

11. MEET U.S. Deal Structure Issues: Objectives of Equity Investors Maximum Return (IRR; Xreturn) Large Equity participation Liquidity IPO Merger or Trade Sale Put back to the Company Hedge Risk

12. MEET U.S. How Equity Investors Hedge Risks Financial instruments Control Keep founders and motivate them Avoid litigation Voice in management Control over major events Protect proprietary information Preemptive & first refusal rights Antidilution provisions Covenants (negative & affirmative)

13. MEET U.S. Deal Structure Issues: Founder’s Objectives Keep as much equity as possible Minimize dilution Keep control of operations Incentives for founders & key employees Quality investors with deep pockets Keep restrictions to a minimum Force conversion of preferred to common as soon as possible

14. MEET U.S. Deal Structure Issues: Company’s Needs Minimum funds to get to next milestone Balance Sheet Considerations Debt vs equity Simple capital structure Availability of conventional financing Cash flow & income statement considerations Future Needs Current Investors vs future investors Other sources of cash

15. MEET U.S. Art vs. Science of Equity Investing Art Management Investors Location The Story The Deal Science Market Competition Technology Proprietary position Financial requirements Valuation Source: Brian Dovey, Partner, Domain Associates

16. MEET U.S. Science: Market Size/Unmet Need Customer requirements Customer loyalty Sales cycle Price sensitivity Source: Brian Dovey, Partner, Domain Associates

17. MEET U.S. Science: Competition Who else is out there? What is their edge? What is your unfair advantage? How long can you sustain this unfair advantage? Source: Brian Dovey, Partner, Domain Associates

18. MEET U.S. Science: Technology What do other experts think about the business? How many technical things must go right for it to be a success? Is it breakthrough or incremental? Source: Brian Dovey, Partner, Domain Associates

19. MEET U.S. Science: Proprietary Position What is patentable and is it worth patenting? Are you free to practice your art? Can you block others? What should stay a trade secret? Is there a cohesive strategy to move the product to market? Source: Brian Dovey, Partner, Domain Associates

20. MEET U.S. Science: Financial Requirements How much money is needed to reach the next financeable milestone? Do you believe them? What happens when that doesn’t happen? Source: Brian Dovey, Partner, Domain Associates

21. MEET U.S. Science: Valuation Who are you selling to? What might they be willing to pay? Run some numbers as a reality check What type of return will justify the risk? Source: Brian Dovey, Partner, Domain Associates

22. MEET U.S. Art: Management Do they have the right people? Can they recruit the right people? Can you work with them? Are they bureaucrats? How do they work up and down the organization? Can they tell the right story to the right audience? Is the chemistry right? Source: Brian Dovey, Partner, Domain Associates

23. MEET U.S. Art: Investors How much is the corporation willing to risk? Are other investors interested in the deal? Are there investors from previous rounds still investing? Do the investors have experience in this industry? Source: Adapted from Brian Dovey, Partner, Domain Associates

24. MEET U.S. Art: Location Will it be easy to recruit senior management to your location? Will it be easy to recruit new employees when you need them? Are there potential acquirers around? Source: Brian Dovey, Partner, Domain Associates

25. MEET U.S. Art: The Story Is it compelling? Is it understandable? Is it differentiable? Can it be told in 15 minutes or less? Source: Brian Dovey, Partner, Domain Associates

26. MEET U.S. Art: The Deal How do you and others value the company? Is it destined to be public or acquired? Do you syndicate? With whom? Who are you competing with for the deal? Don’t forget the management pool Is a “staged financing” appropriate? Source: Brian Dovey, Partner, Domain Associates

27. MEET U.S. Value-Added Benefits of VCs Obtaining additional equity financing Recruiting and selecting additional member of the management team Interfacing with other investors Monitoring financial performance Serve as a sounding board to team Monitor operating performance Formulating business strategy Source: Ehrlich, De Noble, Moore & Weaver, 1994

28. MEET U.S. Exit Strategy Some options include: Going public Selling the business A stock buy-back at the going rate Leveraged buy-out Second round of investment Source: Ehrlich, De Noble, Moore & Weaver, 1994

29. MEET U.S. Source: Guy Kawasaki The Top Ten Lies of Entrepreneurs

30. MEET U.S. Top Ten Lies of Entrepreneurs # 10 Entrepreneur “Our Projections are conservative” Investor “Multiply this forecast by.1 and add five years” Source: Guy Kawasaki

31. MEET U.S. Top Ten Lies of Entrepreneurs #9 Entrepreneur “IDC (or Jupiter or Yankee Group or Gartner Group) forecasts that our market will be $50 billion by 2003” Investor “This is the fifth $50 billion market I’ve heard about today” Source: Guy Kawasaki

32. MEET U.S. Top Ten Lies of Entrepreneurs #8 Entrepreneur “Amazon will sign our deal next week” Investor “Call me when you get Bezos’s signature” Source: Guy Kawasaki

33. MEET U.S. Top Ten Lies of Entrepreneurs #7 Entrepreneur “Key Employees are set to join us as soon as we get funded” Investor “Give me their phone numbers so I can verify this story” Source: Guy Kawasaki

34. MEET U.S. Top Ten Lies of Entrepreneurs #6 Entrepreneur “We have no competition” Investor “Either there is no market or you don’t know how to use a search engine” Source: Guy Kawasaki

35. MEET U.S. Top Ten Lies of Entrepreneurs #5 Entrepreneur “We need you to sign a non disclosure agreement” Investor “You’re clueless: no one signs a nondisclosure agreement” Source: Guy Kawasaki

36. MEET U.S. Top Ten Lies of Entrepreneurs #4 Entrepreneur “Cisco (or Oracle or HP or Sun) is too slow to be a threat” Investor “If arrogance were venture capital, your deal would be oversubscribed” Source: Guy Kawasaki

37. MEET U.S. Top Ten Lies of Entrepreneurs #3 Entrepreneur “We’re glad the bubble has burst” Investor “We are too, because your valuation just dropped 50%” Source: Guy Kawasaki

38. MEET U.S. Top Ten Lies of Entrepreneurs #2 Entrepreneur “Our patents make our business defensible” Investor “Hire more engineers, not patent attorneys” Source: Guy Kawasaki

39. MEET U.S. Top Ten Lies of Entrepreneurs #1 Entrepreneur “All we have to do is get 1% of the market” Investor “I want to fund a company that will get 99% of the market” Source: Guy Kawasaki

40. MEET U.S. Thank You