Getting Funded

Entrepreneurs who have successfully launched and grown their venture will inevitably have to start preparing for an exit. At last week’s panel on Financing Growth and Exits, The Capital Network (TCN) brought in an expert panel consisting of a successful entrepreneur, an investor, an investment banker and a lawyer to provide participants with a complete overview of the exit process. Here are some highlights of the Breakfast Roundtable on June 29:

Exit experiences become a complex but exciting process of “letting go” for entrepreneurs. Dr. Murat Kalayoglu, Founder and Chief Science Officer of HealthHonors, successfully took his idea from start-up to a successful exit in just 3.5 years. His advice was:

• Take the time to prepare the business, (as well as your mental state) for an exit.
• Leverage existing data to find new customers as well as reducing the cost of delivering incentives to customers for a speedy exit.
• A successful growth and exit can only be achieved by giving up some control and letting others help you succeed

Tim McMahon, Managing Director of Covington Associates, discussed the keys to executing a successful deal. His key points to ensure a successful exit were:

• Keep your exit strategy in mind - Company building is fundamentally about building long term monetary value
• Start raising your visibility by aggressive PR and building strong relationships with potential buyers
• Know both your tangible and intangible value drivers: revenue, profit, team, sales, expense, geography
• Articulate the story of your business and keep it consistent. What differentiates you from your competitors?
• Know your buyer universe: Market/Channel Partners, Vendors, Suppliers, Competitors, Indirect, Direct, Investors, Angels, Venture Capital, Private Equity
• Build strong relationships early and often: a successful partnership has two-way benefits at exit time
• Get organized – A successful exit takes time. Make sure your financials are in order and you have gathered the right advisors

Roger Walton, General Partner at Castille Ventures, spoke of the many paths a business can take from seed to expansion and growth, and finally to an exit. He advised:

• Any company that incurs revenues greater than $5 million and has proven its idea can grow should have begun exit preparation.
• A firm’s main motivations to acquire another company are to fulfill a strategic need, lower costs, lower risk, to increase growth or valuation potential, or to acquire a unique technology, intellectual property, or team.
• The keys to a successful growth in the eye of the investor are a large market, sustainable competitive edge, a scalable offering and business model, and a scalable team. Firms that take all of this into account should consider themselves in good standing to be acquired.

Panelist Paul Sweeney, a Corporate Partner with our sponsor Foley Hoag LLP, provided some key tips for entrepreneurs to consider when preparing for an exit. He advised:

• Founders should always remain in close contact with their lawyer and collect due diligence throughout the entire lifetime of the business.
• Don’t lose track of your equity holders: make sure your stock ledger and capitalization table are complete, correct and up-to-date
• Don’t ignore 409A problems: Granting options below fair market value can have a very ugly result
• Founders should limit unaccredited investors because unaccredited investors such as friends and family often impose a greater disclosure liability, are not as sophisticated as an accredited investor and require more disclosure.
• Pay close attention to key LOI terms, i.e., purchase price calculation, tax treatments of certain issues, identification of non-competes and employment agreements, indemnification limits
• Don’t give away “veto” rights unless absolutely necessary: Preferred Stock investors should be only non-founder player with right to block transaction
• Don’t freely grant Rights of First Refusal or Rights of First Offer

While founders, investors, lawyers, and acquirers all play a vastly different role in an exit, all are an essential part of the process. Learning what to expect from each party will help entrepreneur’s carry out the most successful exit.

A key theme mentioned by all panelists throughout the program, is the important of building strong relationships early. It is important to build relationships with customers and potential buyers early on to ensure a successful and competitive sale process later on.

When should a startup cleantech company use angel investors, venture capital, or government funding when seeking early stage funding? TCN’s recent special evening event focused on this topic, with over 100 entrepreneurs attending and a panel of speakers including Philip Guidice, the Commissioner of the Massachusetts Department of Energy Resources, David Kopans, co-founder and CFO of EnergyClimate Solutions , Dave Power, president of Power Strategy, and Bard Salmon, chairman of the board of Perillon Software.

General consensus among the panel was that that venture capital is not the best place to seek funding for clean technology. As summarized by Bard Salmon, CleanTech is the new “.com”, and most venture capitalists are looking at the industry as a new opportunity to have in their portfolio. There is a general lack of experience among venture capitalist groups regarding the cleantech industry. While there are some venture capital groups that do attempt to specialize in a specific aspect of cleantech, the panel generally seemed to advise against venture capital for early stage funding. As a general rule of thumb, Bard Salmon advises to seek venture capital only when the total money needed for the business is greater than $5 million dollars.

David Kopans suggested the following steps when considering angel funding for your firm:

• Invest as much as your own money as possible in the idea. Then turn to your parents, then college friends, then friends of friends who may be interested in your idea, and finally angel groups. Bootstrapping is essential to this strategy. By investing as much of yourself in your idea as you can in terms of time and money, you create credibility for potential investors.
• Cut your business into milestones. Outline specific value creation steps for you business, no matter how small, and decide who will fund your business at each milestone. This is especially helpful with angels who are worried about dilution of their ownership when you seek further funding. By outlining this beforehand, angel investors will know what to expect at each stage of your business.

As far as available government funding opportunities for cleantech companies, Philip Guidice, discussed that finding new energy sources is a high priority in Massachusetts as well as Washington right now. He cautions however that government funding should not be an entrepreneur’s main source when seeking funding. Working with the government will help more with credibility, testing, and market opportunities, as well as creating credibility for newly developing companies. One great resource is the Massachusetts Clean Energy Center that provides small amounts of funding to entrepreneurs by matching their current fundraising.

Any additional advice on cleantech early stage financing? Feel free to post your comments here.