42629 lecture 11 pt 3

Funding sources and strategies- Who has the money and how/when you should talk to them.

2012Original material by Jakob A. Bejbro Andersen for course 42629 – Innovation and Product Development Department of Mechanical Engineering, The Technical University of Denmark

2

Why you need funding

• A mature company grows organically:

– Reinvests share of earnings.– Often loan financed.

R&D (-$)

PRODUCE (-$)

OTHER COSTS

(-$)

SELL! (+$

$$$)

$

• A startup is immature: – The viability of the cycle has

not been proven.– (Several) investments are

needed to establish a sustainable cycle.

R&D (-$$$)

PRODUCE (-$$$)

OTHER COSTS

(-$$)

SELL? (+$$)

Investment

(+$$$$$$)

Mature

Company

Startup


3

Who to go to at different stages

Pre-se

edSeed

Startu

p

1st ro

und

2nd round

3rd ro

und

Pre-public

Public offerin

g

Stage

FFF (Friends, Fools and Family)

Crowd funding

Business angels

Private / corporate investors

Innovation environments

Public funds

Venture Capitalists

Pension funds

Banks

Stock investments

IMPORTANT TASKS

INVESTOR TYPE

Validate idea

Proof of concept

Visualize idea

Describe market

Identify customers

Sell to pilot customer(s)

Proof of market

Test prototype Build production

Estimate cost Formulate business model

Produce product Validate costs

Optimize production

1st segment sales

2nd segment sales

Proof of traction

Continued expansion

Formulate marketing strategy Ongoing marketing efforts

R&D

Optimize sourcing strategies

Idea

INVESTMENT SIZE (DKK)20.000 - 5 million 3 - 20 million 10-100 million >50 million


4

Pre-seed / Seed stage• Pretty much everything needs to be described

– The risk of failure is very high (66% according to litterature).– The value of the company is low.

• Typical funding sources– FFF, Crowd funding, Business Angels, Public funds and innovation

environments.

• Investment criteria– The idea has great value.– The team is key.– Investors expect a high potential

return on investment (ROI).


5

Pre-seed / Seed stage II• Typical characteristics for the phase:

– Each task aims to validate critical points in the business plan.– Validation of technology and market means reduced risk.– Often, one critical factor can kill off the business.

VALUE OF COMPANY

LEVEL OF RISK

COSTS

Time

Market insights

Prototype works!

Pilot customer

signs

• Investors are likely to invest between DKK 0.5-5 million.

• Crowd funding and the FFF are typically in provide smaller investments.


6

Startup Phase• Important factors have been validated

– Concept has been thoroughly tested.– Cost estimates have been validated or detailed.– Business plans have been validated with partners/customers.– First customer(s) have signed... something.

• Typical funding sources– Private investors, Venture Capitalists (for high growth ventures),

public funds.

• Investment criteria– Market validated, ”the customers are waiting”.– The team is key.

• The investor is likely to take an active roll in daily operations.– Sales and marketing are important issues.


7

Startup phase II• Typical characteristics for the phase:

– Focus on getting to break even.– Sales, not written letters of intent.– Initial costs are high.– Through optimization, costs are reduced. VALUE OF

COMPANY

LEVEL OF RISK

COSTS

EARNINGS(!)Pilot customer signings

First ”Real”

sales

Large Production

costs

Break even!

• Typical investment of between DKK 3 and 20 million

Time

ED

GE

FL

OW

EDGEFLOWRevisited (slides courtesy of EdgeFlow Aps)

ED

GE

FL

OWEdgeFlow’s ”Catch 22”

A startup in the seed phase or a seed venture in the startup phase?

• We are in dialogue with several investors who are saying:

• ”We need letters of intent from customers!”

• The customers are saying:

• ”Interesting, but we need more hours of operation”

• And EDGEFLOW is saying:

• ”We need money to create a product that can run for long periods”

• We have a proof of concept and a good understanding of the market and costs involved in producing. Several customers have shown an interest.

ED

GE

FL

OWExercise 3

Help your lecturer.

• In your groups:

• Spend 5 minutes discussing how Jakob should handle his predicament.• Ask Jakob for clarification if needed.

• Be ready to share your conclusions!

(Thank you in advance!)


11

Growth phase (1st round -> pre-public)

• ”Traction” has been shown in first segment(s)– The rollout strategy works – now it should be replicated.– Going into new segments requires significant investments.– Risk is much lower (cultural differences and such).

• Typical funding sources– Private investors, Venture Capitalists (later stage),

Banks, Pension funds.

• Investment criteria– Medium yield, low risk investment.

1

2

2

3

3

4

4

4

3 1


12

Growth phase (1st round -> pre-public) II• Typical characteristics for the phase:

– ”Hockey stick” time!– Growing from national/regional organisation til international.– Less need for entrepreneurs and more need for operational

savvy.

Investments in new segments

VALUE OF COMPANY

LEVEL OF RISK

COSTS

EARNINGS

Time


13

Different investors – different termsType Risk Profile Expected return Equity

shareholderReturn multiple /

timing

FFF High Risk May vary Perhaps None

Business angel High Risk Cash return Yes 10x / 5 yrs out

Innovation env. High Risk Cash return + reports

Yes 10x / 5 yrs out

Private investor Medium-High Cash return + knowhow/tech

Yes 5x / 5 yrs out

Venture Capitalist

Medium Risk Cash return Yes 5-10x / 5 yrs out

Pension Fund Medium-Low Cash return Yes 2-4x / 5 yrs out

Public fund High Risk Reports, knowledge

(public)

No None

Banks* Low Risk Cash return No 1-3x / 5-10 yrs

Shareholders Medium-Low Cash return Yes 2-6x / 5 yrs out

Crowd funder High Product/perk No None

* Note that banks usually require collateral from the founders or board

!


14

”Gearing” an investment• Investors tend to want as much as possible for as little as

possible (good ”mileage”).• Also, an investor is often interested in sharing the

investors with others (syndicating the investment).• A bigger investment means your company has to give

away a larger share...

• ... Unless you are able to establish some gearing for the investment:

• Gearing can be created through public funds* that typically invest a max. of 40-60% of the total funds required.

* See www.innovationsradar.dk

http://www.innovationsradar.dk/


15

For each group:

Spend five minutes searching www.innovationsradar.dk:

Find at least one fund that is suitable for your business.

When is the deadline for applying?

Share your result with the class.

Exercise 4:

http://www.innovationsradar.dk/


16

Additional notes on traditional investors• Modern equity taking investors tend to provide funding

and knowhow.– A ”knowledge” investor is a very strong asset.

• A single investor is rarely interested in getting a majority in the company


17

A quick note on ”Why Crowd Funding rules”• As established earlier, investors are necessary to get the

wheels rolling.• To invest, they have to see a potential for sales and

earnings.

• Crowd Funding does just that:

It gets the wheels rolling AND

it validates the market


18

Introducing: Vaeksthus Greater Copenhagen• The Vaeksthus provides a host of useful services to

entrepreneurs.• Kristian Lund (Project Consultant) will introduce some of

these services right after the break.

• See more on: http://www.startvaekst.dk/vhhr.dk

http://www.startvaekst.dk/vhhr.dk


19

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42629 lecture 11 pt 3

Education

bejbro andersen

seed phase

typical investment

typical funding sources

seed venture

preseed seed stage

pilot customers

typical characteristics