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William Newman Northwest Technology Ventures

The Role of Funding Sources and the Business Plan in Technology Entrepreneurship & Commercialization. William Newman Northwest Technology Ventures. Northwest Technology Ventures. Seed venture capital fund, $14M Founded in June 2002 Oregon companies exclusively

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William Newman Northwest Technology Ventures

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  1. The Role of Funding Sources and the Business Plan in Technology Entrepreneurship & Commercialization William Newman Northwest Technology Ventures NTV

  2. Northwest Technology Ventures • Seed venture capital fund, $14M • Founded in June 2002 • Oregon companies exclusively • Focus: R&D commercialization • Seed capital to found businesses to commercialize technology and research • Sweet spot: research sector spinouts aka “tech transfer” • Principals • Bill Newman, Ph.D. - academic experience, biomedical university-based startup, venture capital • Gordon Hoffman - serial entrepreneur (semiconductors, EDA software), angel investor NTV

  3. Ongoing Growth “Private Equity” R&D Gov’t, Industry - discovery Formation Angel Institutional Public Markets • The “3 F’s” (friends, family, & fools) • - “just the basics” • Venture Capital funds • - Home run mentality • - Significant investment $$; governance and oversight • - 2003: 915 funds, $18.2 billon invested, 2,700 deals • Angel Investors • - “early and often” • - Individuals, unorganized, limited follow-on • - 2003: $18.1 billion invested, 42,000 deals Don’t overlook non-equity capital - Grants (SBIR, STTR), foundations, other? - Customer NRE - Strategic relationships (access, credibility, risk reduction / loss of freedom, …) Capital Sources for Formation and Growth NTV

  4. The “3 F’s” (friends, family, & fools) “just the basics” Angel Investors “early and often” Individuals, unorganized, limited follow-on Venture Capital funds Home run mentality Significant investment $$; governance and oversight Organic growth (bootstrap) Consulting-based funding SBA loans/grants Customer deals (NRE) Strategic partner deals Early-Stage Capital Sources ObviousOften Overlooked NTV

  5. Raising Money From Angels • Characteristics of a Likely Angel • High Net Worth • Recent Liquidity Event • Industry Knowledge • Relationship Oriented • Lead Versus Followers • Target and Negotiate the Investment with a Few Lead Investors • Minimum/Maximum Angel Rounds • Angel Networks (PVG, PAN, WIN) • Only Take Money from Accredited Investors • Current Climate NTV

  6. Venture Capital • What is a Venture Capital Fund? • “Mutual fund” for private, illiquid securities with 10 year life (in general); generally unproven businesses • Who are investors in a VC partnership? • Who has a 10-year investment horizon and can lose 100% of capital? • Pension funds, foundations, endowments, trusts, banks, insurance companies, “some” high net worth individuals, corporations • Venture Capital • Specialized: <2% of businesses formed (SBA) • Geographic concentration: 33% Silicon Valley, 50% California, 67% California and New England (role of research institution) • VC $$: metro=99.2%; non-metro=0.8%; rural=0% (infrastructure) • Home run mentality: 10% = 10x, 30-50% = write-off • Investment characteristics: high growth potential, capital efficiency, exit potential • Significant investment $$; governance and oversight NTV

  7. What VCs Look For • Attractive Market Opportunity • size … growth … competitive structure • Compelling Need • breakthrough solution, validated • Proprietary Position • technology … product … market … regulatory • Management • visionary, committed, market-oriented, nimble • Financial Perspective • Management & employees understand that early cash flow is “king” NTV

  8. Characteristics of the Venture Deal • “faster, better, cheaper” • if so, look for 10X; “move to the next curve” • “brave new world” • not just new, but necessary • “are the dogs eating the dog food” • do customers want your product? • “science projects” (also known as ratholes) • is there a product and market in the foreseeable future? • “putting lipstick on the pig” • no, really, this is a great deal! NTV

  9. What kind of $$$? What kind of Business? • Service • Personal expertise • Issues: scalability, marketing, expansion capability • $$: are they required? • Sole Proprietorship / Closely-held • Typical small business • Successful, lucrative, sole proprietor • Exit strategy not relevant • $$: “bootstrap”, “customer financing”, loans, private equity • Venture • High growth potential • Large market; compelling need; breakthrough & proprietary technology; exit potential mandatory • Highly concentrated & specialized: geographic, industry sectors • $$: pre-VC: Angels (=5-10x venture), non-equity sources (ie SBIR, DARPA, …) NTV

  10. Industry Structure Matrix Switching Costs High Low High Barriers to Entry Low NTV

  11. Industry Structure Matrix Switching Costs High Low High Barriers to Entry Low NTV

  12. Industry Structure Matrix Switching Costs High Low High Barriers to Entry Low NTV

  13. Industry Structure Matrix Switching Costs High Low High Barriers to Entry Low NTV

  14. Industry Structure Matrix Switching Costs High Low High Barriers to Entry Low NTV

  15. Raising Institutional Capital: Overview of the Process • Preparing the business plan • A “business plan” or a plan for the business? • Presenting the business plan • Initial screening/filtering: status and fit • Due diligence process • Validation; based on interviews, research, expert opinion • Market, need, defensibility, management • Valuation • A negotiation • Term sheet • Ongoing relationship • Board of Directors, introductions, strategic advice • Exit strategy NTV

  16. The Business Plan: What is is; What it isn’t • Is it a “Business Plan” … or a plan for the Business? • Is your goal to “Sell the Plan”? … or build a business? • Key value: • Clarity of thought and critical thinking • Working document for continued strategy review and measurement of progress NTV

  17. Investment Evaluation: Key Issues • Filtering process • 100:10:1 • invention : product : business : platform : investment • Validation • Attractive Market Opportunity • size … growth … competition • Compelling Need • breakthrough solution • Proprietary Position • technology … product … market • Management • visionary, committed, market-oriented NTV

  18. Business Plan Outline • Executive Summary • Background: Mission, Vision, Corporate Summary • Company & Technology Description • Market Opportunity & Need • Customers & Market • Product Plan • Technology & Confirmation • Operations • Marketing, Sales, & Distribution • Competition • Management • Financial Projections • Profit & Loss, Cash Flow, Balance Sheet • Financing Needs and Uses of Funds NTV

  19. Workplan What is the Company’s strategy, and what objectives need to be accomplished to achieve it? • Objectives • strategic and tactical • Workplan • credible • technology, product, operations, marketing • Milestones • performance standards; measurable criteria • Resources • time, people, equipment, money NTV

  20. Executive Summary • Mission • Market opportunity (size, growth; compelling need) • Description of product/service (innovation/uniqueness) • Marketing and product development strategy • Development status/near term objectives • Management qualifications • Capsule summary: key historical and forecasted financial data • Funding requirements and uses of funds NTV

  21. Investment and Valuation, by Stage NTV

  22. What VCs Don’t Want to Hear • Our projections are conservative • Our market is $$$ billion and we only need 0.00001% of it to succeed • We are in final negotiations with a large partner • We will sell only common stock to investors • We have no competition • Our technology cannot be duplicated • “XYZ Co.” (a Fortune 100) is too slow moving • We are creating / changing the market and our product will become the standard • We have first mover advantage • Our goal is to attain 2% market share NTV

  23. New Markets are Hard to Gauge • "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is, inherently, of no value." • Western Union internal memo, 1876. • "The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?" • RCA: David Sarnoff's associates in response to his urgings for investment in the radio in the 1920s NTV

  24. New Markets are Hard to Gauge • "I think there is a world market for, maybe, five computers." • Thomas Watson, chairman of IBM, 1943 • "There is no reason anyone would want a computer in their home." • Ken Olson, Digital Equipment Corp.,1977 • "640K ought to be enough memory for anybody." • Bill Gates, 1981 NTV

  25. The Second Mouse Gets the Cheese NTV

  26. Selling is What It’s All About “Don't worry about people stealing your ideas. If your ideas are any good, you'll have to ram them down people's throats.” Howard Aiken Computer Pioneer NTV

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