Turning Great Ideas Into Great Companies
Mindbend 2005
Bruce J. Shook Ch.E. „81
Agenda
The process of company creation
Two
critical phases
Making it to seed funding Making it to a liquidity event
Summary: ingredients for success
But first, some caveats…
I am a life science entrepreneur
It
is a capital intensive business It is highly regulated It takes a long time and lots of cash to bring a product to market
Your industry may be very different Your goals may be very different
Process of Company Creation
Part I: Making it to Seed Funding
Define Your Destination 1 Build Initial Team 2 Develop Initial Intellectual Property 3 Seed Funding 4
Process of Company Creation
Part II: Making it to a Liquidity Event
Hit Your Milestones 1 Reevaluate the Team 2
3 Serious Venture Funding 4 Product Launch
IPO or Sale to Big Co
Define Your Destination
“Begin with the end in mind….”
- Stephen Covey
Define Your Destination
Begin With the End In Mind
Understand what success is for you and your team before you take anyone else‟s money
Becoming a “for hire” technology developer? Ringing the bell at NASDAQ after your IPO? Selling out to Big Co so you can focus on your
next
great idea (serial entrepreneur)?
Make sure your targeted customer cares
Who are you serving? What unmet need are you
meeting?
Your planned destination should drive everything you do (and don‟t do)
Build the Team
Identify the knowledge areas critical for success in your venture
Technology,
finance, IP, regulatory affairs, manufacturing Will change with company‟s stage of development
Hire people smarter than you are in each area The team is not limited to employees
Get
name brand experts aligned with your company anyway you can Directors, advisors, consultants, mentors
Develop Initial IP Estate
Understand the IP landscape in your market space inside and out
Know
every relevant patent held by every competitor Know where the “white spaces” are
Develop Initial IP Estate
Get patents filed covering your ideas with claims that are as broad as practical
Do
this before you talk to outsiders about your ideas and definitely before you publish or present any of it Don‟t believe that prospective investors will “keep it confidential” Make the investment in a good patent attorney Top priority for your limited startup funds
Seed Funding: 4 Basic Sources
Angels •High Net Worth Individuals
FFF
•Friends •Family •Fools
Seed Money <$500K
Early Stage VC Funds •PA Lifescience Greenhouses •Ben Franklin •PA Early Stage
Grants •SBIR (www.sba.gov/sbir)
Finding Seed Funding
Look at who has financed similar companies in your space – see Venturesource at www.ventureone.org Network, network, network
Talk
to faculty (engineering & business) with knowledge of your industry Call CEO‟s who have done it before Talk to attorneys & accountants specializing in startups
Finding Seed Funding
More networking…
Attend
local industry & venture related gatherings
Greater Philadelphia Venture Group (www.gpvg.com) Eastern Technology Council (www.techcouncil.org) Pittsburgh Technology Council (www.pghtech.org/networks/entrepreneur/seed.asp) Early Stage East 2005 VC Conf (5/11-12) (www.earlystageeast.com)
Look
into state supported programs
Ben Franklin Investment Forum (www.venture-forum.org) Life Science Greenhouses of PA (www.lsgpa.com)
Negotiating Seed Funding
Select the investor carefully
Go
with established funds with a solid reputation if at all possible Reference them with others who have taken their money before Find out how they behaved when things went badly Find out how they treated management
Negotiating Seed Funding
Consider the future impact of the deal terms
Avoid
strings that will repel future investors
Debt to be repaid by the next investor in Downstream royalties on sales
Make
certain management‟s ownership is competitive
Benchmark against recent deals It‟s downhill from here
Process of Company Creation
Part II: Making it to a Liquidity Event
Hit Your Milestones 1 Reevaluate the Team 2
3 Serious Venture Funding 4 Product Launch
IPO or Sale to Big Co
Hit Your Milestones
Your mission: increase the value of your company faster than you are spending other people‟s money How?...Hit your planned milestones on time and on budget Milestones are value inflection points
Two Quick Definitions
Pre-$ Valuation: the price the investors are putting on all your hard work to date – what‟s your company worth today? Post-$ Valuation: what your company is worth immediately after the cash comes in
Post-$ Valuation = Pre-$ Valuation + $ Invested
Neuronetics as an Example
Two Private VC Rounds
Series A
Pre-$ Valuation $ Invested Post-$ Valuation Pre-$ Valuation $6.5MM 16.5MM $23MM
Series B
$40MM
$ Invested
Post-$ Valuation
$17MM
$57MM
Adjust the Team
The team is the most important determinant of success Needs can change dramatically as the company matures
New
skills will be necessary; Old skills may not Ask yourself what the next round of milestones will demand and make sure you have it
The Founder may not be the best CEO
Don‟t
let your ego get in the way of success
Serious Venture Funding
>$2MM Three critical considerations:
How
much do you need to raise to hit the next value inflection point (milestone)? What is the pre-$ valuation? Who are you taking money from?
You will give up majority control sooner or later
Serious Venture Funding
How Much Do You Raise?
Decide what you need to hit the next major milestone that investors will regard as value enhancing Make sure you have at least 6 months of cash beyond the milestone to get the next financing done When in doubt…double it
Serious Venture Funding
Pre-$ Money Valuation
Investors want it low; you want it high Valuation at this stage is NOT a science Valuation is typically based on the recent deals that were done in your space Competition keeps investors honest Don‟t try to get every nickel – there are more important considerations
Serious Venture Funding
Who Are You Taking Money From?
Your investors are your partners and will likely control your company Investor experience, reputation and past behavior trump pre-$ valuation Reference investors like you would a new employer or employee
Talk
to CEO‟s who have taken their money
Doing business with the best pays enormous dividends
The Liquidity Event
Is it mandatory?
If
you accepted VC money, then Yes Investors need to harvest their gains
They have investors, too
Does it mean that you are done as an independent company?
That
depends….
The Liquidity Event
“When you get to a fork in the road, take it.” -Yogi Berra
IPO and stand alone? Or,…. Sell to Big Co?
The Liquidity Event
Initial Public Offering (IPO)
Pros:
you stay independent; gives access to substantial capital; may allow you to sell the company later at a higher price Cons: stock can be tough to sell if you want to cash in; you are a public company; company value may decrease substantially if things don‟t go according to plan
The Liquidity Event
Sell to Big Co
you know what you are getting – value is locked in; liquidity can be immediate; sales ramp may be much faster in Big Co‟s hands; now it‟s somebody else‟s headache… Cons: it‟s not your baby anymore; sales ramp may be much slower in Big Co‟s hands
Pros:
Ingredients for Success
Begin with the end in mind – know your destination Assemble the best team available – people are the single most important determinant of success Target an important unmet need – know your customers and what they want Develop bullet proof intellectual property – define what you uniquely own and get it into patents early
Ingredients for Success
Raising cash
Take
time to understand the venture financing process and market dynamics in your space Make financial advisors part of your team Adopt a milestone based focus – create value faster than you spend All cash is not equal
Reference prospective investors carefully Do business with the best
Always bear in mind that your own resolution to succeed is more important than any one thing.
- Abraham Lincoln