Transcript Start-up Seminar -final version

BOOTSTRAPPING STRATEGIES
Randy Harmon,
NJ Small Business Development
Centers of Rutgers Business School
DON’T COUNT VENTURE CAPITAL
COMING OUT OF THE GATE
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Raising debt and equity financing is all about
perceptions of risk and opportunity
Early stage and pre-sales companies are
generally perceived as too risky
The further along you can develop the venture
before formal financing, the better your
chances are of survival and ultimately raising
financing
BOOTSTRAPPING
- 4 Fs:
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Friends
Family
Founders
Fools
- Everything else beyond the pursuit of
formal debt and equity financing that an
entrepreneur does to both raise and
minimize the resources needed to launch
their business and carry it through its early
stages
BOOTSTRAPPING
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Cleaning out your personal savings or retirement accounts
Home equity loans and second mortgages
Credit cards
Friends & family plan
Research and development grants
Strategic alliances
Outsourcing activities requiring large up-front investments
Purchasing used equipment
Bartering your product/service for someone else’s
Advances from professional service providers
Suppliers
Advance payments from customers
DOWNSIDE- There is often a trade-off between time and money and the
delay can sometimes be detrimental or fatal
SMALL BUSINESS INNOVATION
RESEARCH PROGRAM (SBIR)
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Best source of risk
capital
Largest Federal R&D
grants program targeted
to small business-nearly
$2 billion annually
All Federal agencies
with large external R&D
budgets participate
Three phase competitive
program
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Dept. of Agriculture
Dept. of Commerce
Dept. of Defense
Dept. of Education
Dept. of Energy
Dept. of Health and
Human Services (NIH)
Dept. of Transportation
Environmental Protection
Agency
Homeland Security
NASA
Nat. Science Foundation
THREE PHASE PROGRAM
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Typically annual solicitations in which
agencies define areas in which they are
interested in sponsoring research
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Phase I- up to $100,000, runs 6 months
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Demonstrate technical feasibility
Phase II- up to $750,000, runs 2 years
Proof of concept
 Development of a prototype
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Phase III- no new funding
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Commercialization of the technology
SMALL BUSINESS TECHNOLOGY
TRANSFER PROGRAM (STTR)
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Younger, poorer sister of SBIR program
5 largest Federal Agencies participate
 Department of Defense
 NASA
 Department of Energy
 National Science Foundation
 Department of Health & Human Services
Less than 10% of the funding of SBIR
3 Phase program
Requires 30% of contract to go to a collaboration with a
nonprofit research organization
CLOSEST THING TO ENTREPRENEUR’S
“HOLY GRAIL” OF FREE MONEY
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No loans, no equity
Entrepreneur maintains ownership of the
technology
Good odds
 1 in 10 Phase I proposals are funded
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Presently better under STTR
2 in 5 Phase II proposals are funded
PATH TO EQUITY FINANCING
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SBIR/STTR provides up to $850,000 in
financing over a 3 year period to develop a
technology and remove much of its risk.
Vulnerability of technology entrepreneurs to
focus almost exclusively on the technology
If the company simultaneously works to
reduce market and business risk it can
become a prospect for equity financing.
ADVANCED TECHNOLOGY PROGRAM
(ATP)
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National Institutes of Standards and Technology (NIST)
Invests in development of innovative high risk/high
potential economic impact technologies
Aims for grand slam home runs
Research priorities set by industry based on their
understanding of marketplace
Cost sharing-at a minimum small companies pay all
indirect costs
Rigorous pear reviewed competitions
$2 million over three years
Approximately $60 million available
STRATEGIC ALLIANCES
BUSINESS PARTNERSHIPS
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You partner with another company to gain access to resources that
you need but don’t have
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For most young businesses this typically means partnering with a
larger, more established business
More important than ever given current risk adverse venture
capital environment
SPEED ENTRY TO MARKETPLACE AND MINIMIZE THE REQUIRED
FINANCING
Loss of control
Alliances come in several flavors:
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Financing
Marketing and sales
Manufacturing
Licensing
FINANCING
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Large companies may invest in smaller
entrepreneurial ventures to supplement or substitute
for their own R&D
Less risky and more cost effective means of
accessing cutting edge technology
Strategic partners most likely to understand and
appreciate value
Potentially more favorable terms of investment
MARKETING AND SALES
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Partner with a company that has an established sales
force that is selling similar but non competing
products to your prospective customers
The value to the larger company is that your product
may fill a gap in or extend their product line
No marketing/sales employees to recruit, hire and
train; no payroll
Access to partner’s network of customer contacts
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Downside: Less control, lower priority
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MANUFACTURING
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Identify regional manufacturer
Eliminates or defers costly equipment purchases
No manufacturing employees to recruit, hire and train;
no payroll
Speeds market entry
Often referred to outsourcing
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Downside: Less control
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LICENSING
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Transfer of rights to commercialize a technology, or
an application of a technology to another company in
return for financial consideration
Typically some combination of up front cash,
consulting contract and longer term royalty payments
Use cash and validation generated from the license to
commercialize other applications and build a
company
Particularly useful for first application of a platform
technology or the first technology of a company with
multiple technologies
There is typically a tradeoff between upfront money
and royalty payments
Downside: Lower rate of return, loss of control, time lag
before royalty payments flow
CASE STUDY:
INMAT, INC.
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Nanocomposite coating to improve air retention in rubber
Initial product Air D-Fense 2000 utilized in premium Wilson tennis
balls, official ball of Davis Cup
Ultimate market is truck and car tires, at least several years away
Client for 4 years, recipient of guidance and help in financing and
building business including assistance in pursuing Springboard
and Seed Capital loans and identifying an angel investor
Lack of success in raising venture capital because investors
wanted to see second near term commercial product
Unsuccessful SBIR proposal in 2001, topic returned
Attended first annual NJ SBIR conference in December 2001
Was assigned a consultant who spent 12 hours reviewing
critiquing and helping to strengthen proposal
Received Phase I award to explore application of coating to rubber
gloves for treating hazardous chemicals
Strategic alliance with major glove contractor
Assisted InMat with Phase II proposal and commercialization plan
Invited to negotiate Phase II contract in December 2002
Bolstered by increased probably of second product, company
closed on $1.5 million in venture capital in April 2003
NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC)
OF RUTGERS BUSINESS SCHOOL
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Part of a national public, private and academic partnership
Free business counseling, consulting, and affordable business
training
Funded in part by the U.S. Small Business Administration and the
NJ Commerce and Economic Growth Commission
11 regional centers and 18 satellite offices across NJ
More than 250,000 small business owners, prospective
entrepreneurs and business professionals served since 1979
Serve businesses from pre-startup stage to those with 500
employees
Specialty programs in international trade, government
procurement, E-business, & technology commercialization
NJ SMALL BUSINESS DEVELOPMENT
CENTERS (NJSBDC)
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Services include help with:
 Business plans
 Marketing plans
 Financial statements
 Loan packages
 Record keeping
 Taxes
 E-commerce
NJSBDC Web Site: www.NJSBDC.com
SBA Web site: www.sba.gov
NJSBDC TECHNOLOGY
COMMERCIALIZATION CENTER
MISSION: Assist New Jersey science and technology
entrepreneurs in commercializing their new technologies,
financing and building their businesses.
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TECHNOLOGY HELP DESK- 1-800-432-1TEC(832)
 Telephone counseling throughout the commercialization
process, from startup to market entry and equity
financing
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SBIR/STTR TRAINING AND PROPOSAL ASSISTANCE
 Conferences, seminars and workshops
 Assistance in identifying suitable topics
 Consultants to guide entrepreneurs through the
proposal development process and to review, critique
and strengthen draft proposals
 HELPED ENTREPRENEURS WIN $2.4 MILLION IN 2003
NJSBDC TECHNOLOGY
COMMERCIALIZATION CENTER
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TECHNOLOGY COMMERCIALIZATION CONSULTING
Targeted to SBIR and STTR award winners. Help with:
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Business models and plans
Marketing plans
Financial projections
Financing strategy
Approaching equity investors
Strategic business partnering
Assisted entrepreneurs in raising $1.8 million in equity
financing during 2003
www.NJSBDC.com/SciTech
LESSONS LEARNED
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Market entry takes more time and costs more than
entrepreneurs’ most conservative estimates
The better and more comprehensive your planning, the
better your chances for success, minimize your surprises
Reader should know after the first sentence what the
company does.
Layman’s terms, Don’t make reader work hard to understand
the technology and the business opportunity
A great technology may not be good enough, Thou shalt
know thy markets and customers and their needs
Differentiate yourself from your competitors in a way that
provides the perception of value to your prospective
customers, and that you can sustain over time
LESSONS LEARNED
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Management, management, management
First business hire or advisor should usually be a
marketing and sales professional who knows your
markets
Venture capitalists will expect you to understand your
markets and customers at least as well as anyone
Validate market demand before approaching venture
capitalists
Develop a bootstrapping strategy which you can fall
back on
Develop your venture as far as you can before quitting
day job
Network
If the reader is not EXCITED by the end of the executive
summary, you have lost them