Transcript Slide 1

Part IV: Start-up Financial Strategy
Chapter 11: Funding the Technology Start-up
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publishing as Prentice Hall
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Chapter Overview
• Risks and stages of funding
• The cost of raising capital
• Government funding sources
• Seed capital
• Start-up funding
• Funding biotechnology
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Risks and Stages of Funding
First Customer
Marketing
Risk
R&D Risk
Manufacturing
Risk
Revenue
Seed
Self Funding
Friends and Family
Private Investors
SBIR/STTR
Management
Risk
Initial Public
Offering
Early Stage
Private investors
Some Venture Capital
Strategic Partners
SBA Loans
SBIC
Bank Debt
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Growth and Mezzanine
Venture Capital
Public Equity
Strategic Partners
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Risk Points
• Seed capital stage
– Funding for product development and
business launch
– Risk associated with technical feasibility and
manufacturing
• Early stage or start-up
– Secure first customer
– Risk associated with capturing enough
customers for product acceptance
• Growth stage
– Focus on managing growth
– Risk associated with systems and controls
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Cost of Raising Capital
• Up-front costs: preparation of financial
statements, business plan, prospectus,
legal advice, marketing to potential
investors
• Back-end costs: investment banking
fees, legal fees, marketing costs,
brokerage fees, state and federal fees.
• Total costs can be as high as 25% of
total amount raised
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Bootstrapping
• Borrow, partner, lease
• Get into business quickly to prove the
concept
• Hire as few employees as possible
• Lease or share as much as possible
• Use other people’s resources
– Favorable terms from suppliers
– Customers pay a portion up front
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Government Funding Sources
• Small Business Innovation Research Grants
(SBIR)
– Phase 1: up to $100,000
– Phase 2: up to about $750,000
• Small Business Technology Transfer Research
Program (STTR): partnerships between research
institutes and small technology companies
• Small Business Investment Company (SBIC)
– Private VC firms licensed by SBA, provide long-term
loans
• The Small Business Administration (SBA)
– Partners with commercial banks to guarantee 75% of
loan value
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Seed Capital
• Friendly money – people you know
– Money from strangers will require a private placement
memorandum and prospectus to meet “blue sky” laws
• Debt Financing
– Banks typically do not lend to start-ups
– Credit cards, commercial finance companies
• Equity arrangements
– Be careful of trading equity for services because it is
more expensive at this stage
– Difficult to get rid of a person who doesn’t work out
• Strategic Partnerships and Intermediaries
– Associating with a successful large company can give
a stamp of approval
– R&D partnerships share the risk of development
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Start-up Funding
• Risk factors for investors
– Degree of uncertainty
– Asymmetric information in favor of the
entrepreneur
– Asset base is principally intangible (e.g. IP,
know-how)
– Market conditions are often erratic
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Angel Investors & Networks
• Private investors who are the principal source of
informal capital
• Fund up to about $1 million
• Invest in people first, technology and market
second
• Major risks include moral hazard and information
asymmetry
• Invest in familiar industries
• Seek annual returns greater than 20%
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Unlikely Angel Deals
Characteristics Not Favorable to Private Investment by an Angel
A “me-too” type of product
A poorly defined vision for the company
No intellectual property
No management team, a solo entrepreneur
Business location more than 100 miles
away
Weak management team with no
experience
Mature or fading industry
Exit time more than 7 years away
Return on investment less than 15 percent
Unfamiliar business or industry
Not enough market research with
customer
Minority position with no voting rights
Weak competitive analysis
Too many co-investors
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Funding Biotechnology
• Challenges
– 7-9 years to bring a new drug to market
– Technology is typically unproven at early
stages
– Most biotechnology is licensed from
universities and research institutes, not
owned by company
– Difficult to calculate the value of biotech firms
because of intangibles
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Stages of Biotech Funding
• Seed stage
– Typically government grants to fund research
– Investor capital sought on basis of technical strength
and initial market research
• First-round Funding: FDA Phase I Testing
– Assess safety of drug, procedure, or device
– Typically $15-$20 million required
• Second-round Funding: The Business Model
– FIPCO: Fully Integrated Pharmaceutical Company
• Difficult entry and depends on IPO
– Licensing Model
• Focus on development and testing, then licensing
develop of applications and clinical trials to large
pharma
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