Alternatives to Venture Capital for financing technology commercialization

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Alternatives to Venture Capitalfor financing
technology commercialization
February 28, 2003
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Corporate Finance Advisors (CFA)

• Specialize in assisting companies using a
  combination layering of equity, debt,
  subordinated debt, and other alternative
  financing sources for rapidly growing businesses

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My Background

• Over 350 million in financing arranged since
  1994
• Focus on structuring mix of debt / equity
• Largest single deal 11 million
• Average deal 1.5 - 2 M

• Sam Thacker

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Todays Objective

• Introduce you to alternatives to classic venture
  capital and how they can be used
• Provide real world examples of how the various
  alternatives to VC have been used
• Challenge you to think differently about
  financing technology commercialization

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Historical Foundation (pre 1990s)
Government
IBM 3M Etc.
NASA Aerospace
Defense
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Changes in Financing 1988-1996
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Grass Roots Financing
SBA
Asset-Based
Conventional
?
Construction
TraditionalLOC
Credit Card
EquipmentLeasing
AngelInvestor
HomeEquity
Factoring
SBIC
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Financing Pyramid
IPO
Big-time VC
Institutional VC
Early seed stage (SBICs)
Corp VC, Strategic Alliance
Larger-scale commercial loans
Private Placement (PPM) Reg. D
Band of Angels
Angels (wealthy families), individuals
SBA / Microloan Comm Loans
Friends Family
Personal Funds
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Advent of Small Business Investment Companies
(SBICs)

• Small Business Investment Companies (SBICs) have
  provided approximately 27 billion in long-term
  debt and equity growth capital to nearly 90,000
  small U.S. companies since 1959.

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SBIC Success Stories

• Intel Corporation
• Staples, Inc.
• Extreme Networks, Inc.
• Kronos, Inc.

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Venture Capital FundInvestments 1995-2001
Billions
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Nature of the Technology

• Enabling
• Disruptive
• Can a company be formed around the technology?
• Companies vs technologies

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Enabling Technology

• Easy to understand implications
• Fits current value chain
• Incumbents will easily finance

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Disruptive Technology

• Will not be understood at first
• New markets need to be developed
• System anti-bodies kick in

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Financing Companies vs. Financing Technology

• Companies are free standing
• Technology needs a home
• Companies are easier
• Power of Strong Management

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Investor / Lender expectations

• Value of Technology to owners
• Liquidity
• Risk vs. Reward
• WIIFM?
• Realistic expectations

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Banks in the Financing Mix

• Debt, rarely equity
• Three Cs of banking
• Character
• Capacity
• Collateral
• Cash Flow

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Venture Capital Banks

• Silicon Valley Bank, Imperial Bank, etc.
• Regularly provide debt / equity financing and
  take more risk than regular commercial bank.
• Have high degree of expertise in technology

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Balance Sheet Financing and Technology
Commercialization

• Match financing method to asset being financed
• Layer multiple types of methods to minimize
  equity dilution and mitigate risk
• Understand key ratios

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Current Asset Financing

• Purchase orders
• Inventory
• Accounts Receivable
• Contracts

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Financing Long-term Assets

• Equipment
• FFE
• Real Estate

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Intellectual and Intangible property

• Patents
• Software
• Goodwill
• New GAAP rules
• SFAS 142

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Mezzanine Debt Financing
An investment of between 2 million and 20
million into a profitable company for a major
expansion generally leading to an IPO in 3 to 18
months.

• Brick Mortar Oriented
• Strong EBITA
• Strong track record of performance

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Corporate Venture Money

• Why use this type of money?
• Few sources can have a profound impact on your
  outcome.
• Less emphasis on strict investment criteria
• A large strategic doesnt mind being first in
  on an investment round.
• A large strategic looks very, very good on the
  cap table.

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Corporate Venture Money

• Example 17B of Nortels recent writedown was
  from investments.
• Corporations have different needs
• Corporations are well versed in buy/make
  decisions.
• Equity juices the deal

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Corporate Venture Money

• What makes you valuable?
• Technology is clearly yours
• You are the expert
• STRONG strategic component

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Corporate Venture Money

• The power of strategic intent
• Assume 5,000 wins
• 20000 engagements
• Gross Revenue of 500M
• Your product increases the wins by 10.
• Average win 100,000
• New wins 5,500
• Incremental Revenue 50M

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Corporate Venture Money

• Techniques for finding the right strategic
• Who bears the cost of failure?
• Who currently has the same customers as you?
• Who wants the same customers as you?
• Who has similar business/manufacturing processes

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Corporate Venture Money

• Top things to think about
• Strengths Weaknesses
• How do you create incremental revenue?
• Find the strategic connection
• Elephant on a leash

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Government Backed Programs

• Generally have a background agenda
• Lift for specific
• Industries
• Geographic areas
• Socio-economic
• Gaps in banking system

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Government Backed Programs (SBA)

• Small Business Administration (www.sba.gov)
• Does not loan money
• Allows lending institutions to consider higher
  risk loansHouston 330M (2001)

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Government Backed Programs (SBA)

• Several SBA programs
• Programs target specific businesses/goals
• Guarantee up to 80 of 100K
• 75 of gt 100K, max 750K
• Loans are made at the regional level
• Collateral is important

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Government Backed Programs (SBIC)

• Venture Investment Companies licensed by the SBA
  www.sba.gov/INV
• Private Capital Government Lending
• 4.8B in 2001
• Profit Motivated (25 - 46 IRR)

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Government Backed Programs (SBIC)

• Fill the gap just under typical VC financing.
• Will be tough just like VCs
• Have specific focuss
• Provide expertise

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Government Backed Programs (Local EDCs)

• Focus on job creation / tax base
• Regaining popularity
• Community feels able to influence own destiny

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Government Backed Programs (State Focus)

• Driven to attract certain sub-segments like
  biotechnology medicine
• Start off where local EDCs end, often
  cooperatively
• Often involves academia / research

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Philanthropic Investments

• Benefit society / mankind
• Examples drug discovery, biotechnology,
  medical, and learning technology
• Find an insider to help you find sources

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Angels and Angel Groups

• Tend to be either vertically or geographically
  focused
• Small funds for early stage
• Collective due diligence

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Academic Corporate Partnership

• In kind contribution may substitute for
• Understand academic institutions need
• Share / collaborate IP creation

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Incubators and Accelerators

• Many rethinking focus
• Understand strengths weaknesses
• Have realisticexpectations

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Public vs. Private Company

• Current trend in becoming public via reverse
  merger
• Do your homework, learn strengths / weaknesses
• What reverse mergers do and dont do

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Conclusion

• Think creatively when considering financing
  sources for your project
• When possible, layer financing methods to protect
  shareholder value while balancing speed to market
• Be persistent and look at all options