Transcript Workshop Presented by University of the Pacific Economic

Funding Entrepreneurs
Roger Akers – Akers Capital LLC
Akers Capital LLC
[email protected]
916-966-2236
Financing Food Chain
• Understanding the Financing Food
Chain
–
–
–
–
–
Savings & Credit Cards
Friends & Family
Crowd Funding
Angels
Venture Capitalists
Financing Progression
 Understanding the Financing Food
Chain
Stage
Source
Preseed
Seed/Start-up
Founder
s,
Friends
&
Family
&
Crowd
Individu Angel
al
Groups
Angels
Investm $25,000
ent
to
$100K
$100K
To
$500K
$500K
To
$2,000
K
Early
Later
Venture
Capital
Funds
$2,000 $5,000
K
K+
To
Source:
Kauffman Foundation
$5,000
K
Create Value by
Achieving Milestones
Angel
VC
VC
Mezzanine
1,000
Low
$20MM+
Investment Risk
IPO
$10MM+
IPO
Full
Commercialization
Prove Mgt
Execution
$500K+ Customers Profitable
Deals
Start Scaling
Proof
of
$50K+
Revenue
Concept (-) Profit
High Idea
80-120
60-100
40-80
25-35
>120
%ROI
100
$5MM+
10
1
8-11
Valuation ($MM)
Seed
Size of Angel Activity
• Approx. 250,000 active angels in this
country
• Invest approximately $30 billion annually
most of it in seed, start-up and early
stage
• 7 million accredited investors – qualified
potential angels
• Informal investors; $92 billion, 3.3 mil
companies
Expected Returns
• Pre-seed stage
Founders
20X in 7yrs
• The Crowd
The masses
Something?
•
Angels
10X in 6yrs
• Early-stage
Venture capital
• Mid-stage
Venture capital(s)
• Late-stage
Venture capital(s)
• Exit
Investment banks
10x in 6 yrs
3X in 3 yrs
2X in 2 yrs
1.35X 1yr
Where
• “Use your own cash when you can”
• Friends, Family and Fools
• Crowd Funding
• Angels and Local Venture
• Local Venture and Syndication National /
Strategic Partner
Where – “Other”
 Get a Partner who has money
 Lawyers, CPA’s, Bankers, Angel Groups, High Net Worth
 The Crowd – Who and How?
 Local VC, Super Angels with market knowledge
 Customers, Suppliers, Compliments, Manufacturers
Funding Emerging
Companies
• Historically – Goal of Many Entrepreneurs was
VC Funding
• Angels Provided Bridge Between Family and
VCs
– Patient Money, Some Could Bring Contacts
• Now the Crowd???>?>?>?>>?
• Venture Capital Firm Could Bring:
– Deeper Pockets
– Operating Experience
– Valuable Contacts
– Hands-On, Sage Advice
– Legitimacy – Mark of Approval or Distinction
A New Paradigm
“The Crowd”
A new platform is appearing every day – Funders
Club – Circleup - RealthyMogul – AngelList
Syndicate are amazing sources of information
Example - FundersClub Community: 11K+ accredited investors;
$22M+ invested; 47.9% unrealized net IRR*; 101 companies funded•
Reward / Donation based Crowdfunding
•
Equity Based Crowdfunding
•
Loan or Debt Based Crowdfunding
Crowdfunding
• Initially, crowdfunding was limited to a reward
or donation basis. By collecting incremental
donations from hundreds or thousands of
backers, sites pool the capital necessary to
launch products and support ideas of various
sizes. In return for backing products, funders
receive prototypes, discounts, or special
product packages, while those participating in
donation-based funding do not expect or receive
anything in return. Although these types of
crowdfunding skyrocketed in popularity, growing
by 524% from 2009 to 2012, their potential to
benefit startups pales in comparison to that of
equity crowdfunding.
Jobs Act
•
•
•
•
The goal of Title III is to level the playing field for everyday citizens
looking to invest. Once enacted, Title III will allow issuers to advertise
and extend investment opportunities to unaccredited
investors, potentially causing the U.S. investing market to grow to $300
billion.
According to Title III rules proposed by the SEC in October of 2013,
transactions involving these unaccredited investors must meet specified
requirements, such as: 1) The amount raised must not exceed
$1,000,000 in a 12-month period, 2)
Individual investments in a 12-month period cannot exceed the greater
of $2,000 or 5% of net worth for those making less than $100,000
annually, and $10,000 or 10% of net worth for those making at least
$100,000 annually, 3) These transactions must be conducted through an
intermediary that is either a broker or a funding portal.
With a less sophisticated investment audience comes more regulation.
Thus, there is no effective date currently in place for Title III of the JOBS
Act. To circumvent this issue, numerous states such as Indiana and
Michigan have created their own exemptions to this regulation by
passing less restrictive legislation. To date, nearly 15 states currently
have intrastate crowdfunding regulations in place.
Benefits of Equity
Versus Reward CF
•
•
•
In reward-based crowdfunding, a target amount and deadline are set for a project.
Once a raise begins, promotional videos are usually released to generate and
maintain interest in the project. Funders then pledge in certain tiers, receiving
different rewards based on the amount donated. If the target amount is hit on or
before the deadline, backers are charged the amount they pledged and are given
the corresponding reward. This creates incentive for individuals to promote the
project themselves through social media and other channels. However, if the target
is not hit, none of the backers are charged or rewarded. Because of this process,
rewards-based crowdfunding is an all-or-nothing approach.
Though equity crowdfunding and reward-based crowdfunding provide support for
up-and-coming projects and products, equity crowdfunding offers a greater reward
for startups and investors who desire to back them. Equity crowdfunding allows
individuals the opportunity to invest on a larger scale, raising 40 times more per
company than any other type of crowdfunding today. This provides a middle ground
between the $ average reward-based donation and the traditional five-figure
minimum sum required to invest in a company.
With reward-based crowdfunding, the bragging rights of those who donated at early
stages grow with a company, but the reward remains the same. Conversely, equity
crowdfunding allows the investor’s commitment to grow side-by-side with a
startup, providing a growing revenue or profit-share.
Rewards / Donation
Based
• Rewards Funders back products, arts, and other
ideas – In exchange the receive Products,
Discounts or incentives - See Kickstarter,
RocketHub – 46,000 successful campaigns –
80% that raised 20% of goal were funded – 5%
Fee – 56% fail
• Donation Funders Contribute to philanthropic
causes, expecting nothing in return – See
Indiegogo, Crowdrise – Average raised $3700 –
80% fail – 4% - 9% Fee – Fixed or Flexible – To
keep or not to keep – 80% fail
Equity Based – Pg1
•
Equity crowdfunding allows backers to reap eventual financial
returns on investments, and the investment scale for businesses
and startups is typically much larger than donation-based
crowdfunding campaigns. The experience of funding something
for $25 to $50 on impulse is radically different from considering
the long-term prospects of a business, and investing $1,000 to
$10,000, or See Circleup, Crowdfunder.com,
• Solicitation began Sept 23rd, 2014 - General.
•
Social Proof: Knowing who backs a campaign can help sway
other potential investors
• Momentum: Initial funding can beget more funding
• Validation: Having raised money online successfully can be a
proof point of its own
• Customer Engagement: The people who fund you are also your
customers
Equity Based – Pg 2
• As the overall crowdfunding market is expected
to grow roughly at a rate of doubling year over
year, it is set to rapidly expand with the more
immediate kicking off of Title II (general
solicitation and accredited investing activity
online).
• Title III of the JOBS Act (non-accredited
crowdfunding) is most likely to be proposed for
commenting this Fall and put to a vote by the
SEC Commissioners sometime at the end of the
year or early 2015.
Loan or Debt
• Funders loan money – AngelList,
SeedCapital, Somolend, Prosper
• Securitized lending based on Assets
including A/Rs, Real Property, etc.
1.
Expecting income – Cash Flow
2.
Return of their initial investment – 7-34% cost
3.
Usually with some warrant or conversion capability –
Maybe an equity kicker will happen someday
Size of Angel Activity
• Approx. 250,000 active angels in this
country
• Invest approximately $30 billion annually
most of it in seed, start-up and early
stage
• 7 million accredited investors – qualified
potential angels
• Informal investors; $92 billion, 3.3 mil
companies
Changing Value
Proposition Of Angels
• Value Proposition for Angels Has Changed:
• Angels Can Be:
– Deep Pockets; Start Small Then Go Big
– Willing to Fund Companies Through Later Stages
– Bring Sage Advice and Contacts
• To Help Raise More $$
• To Help Create More Sales
• To Help Bring Employees and Consultants to the
Company
– Not Seal of Approval for Company on Wall Street
– But Maybe Legitimizes Management Competency
• Result: Angels Can Be a Viable Alternative to VCs in the
Right Circumstances
VC Funding Has
Changed
• The Value Proposition for VCs Has Changed:
– VCs Increasingly Looking Farther Up the
Chain
– Bigger Individual Investments
– Less Time Spent Guiding Individual Portfolio
Cos.
– VCs Sometimes More Banker or Newly Minted
MBA Than Seasoned Manager
– VC/Institutional Money Not Necessary
Prerequisite for Successful Liquidity Events
– Wall Street Will Make Its Own Assessment of
the Quality of the Opportunity
Current Equity Capital
Climate
•The bad and good news:
•Liquidity is still very difficult – Merger oriented
•VCs are at a crossroads relative to the pace of investing
•Valuations still have downward pressure
•Subsequent rounds for VC-funded companies are not easy
•Liquidity windows open and close with the economy
•VCs do have lots of money to invest
•Better more complete companies are emerging from this period
•Expectations are much more realistic
•Those companies that succeed in raising $ have more board
involvement, better resources, and less competition
Words to the wise
•
Don’t burn bridges with investors
•
Mitigate Risk / Maximize Return
•
Take the smart money
•
Don’t screw your old investors
•
Incent the employees with good expectations and personal
growth
•
Communicate often to your investors
•
Keep your word – always
• You will lose control – Have great partners when you do
Reference Materials
• MicroVentures.com, Forbes,
Crowdfunding.com
• Some Useful Reference Materials
– Inside Secrets to Venture Capital
•Brian E. Hill & Dee Power
– The Art of the Start
•Guy Kawasaki
– Term Sheets & Valuations: A Line by
Line Look at the Intricacies of Term
Sheets & Valuations
•Alex Wilmerding