6.3 Funding Sources

Chapter 6.3
Additional Resources

Chapter 6.3 outlines important information and guidelines for analyzing funding requirements and assessing investors.  The steps below have been excerpted from the chapter and are presented with active web links to assist innovators in getting started.

Identify Comparable Companies
  1. What to Cover – Investors look at historical information, in conjunction with current information, to predict financial trends for a business. Since start-ups lack historical financial data, the next best source of information comes from comparable companies. As mentioned in 6.1 Operating Plan & Financial Model, comparable companies, or proxy companies, are those whose operations resemble what is required to commercialize the innovator’s idea. After reviewing proxy company selection criteria and the corresponding analysis that has been completed in chapter 6.1, put on an investor’s hat to scrutinize these examples from a funding perspective. Consider what lessons can be learned from the funding strategies taken by the proxy companies, as well as what risks can be avoided. Anticipate what questions investors might ask based on the experiences of these companies. When approaching individual investors, it is also important to understand which companies they think are the most appropriate comparables based on their personal experience and thus may require additional analysis.
  2. Where to Look
    • Other Chapters – Review 6.1 Operating Plan & Financial Model and 6.2 Business Plan Development.
    • Yahoo! Finance – This website aggregates the financial data of public companies. By looking up a known public competitor, a hyper-text link in the left-hand column leads to a web-page of “Competitors.”
    • VentureXpert – Provides data on mergers and acquisitions, IPOs, and VC funding based on data from Securities Data Corporation. Users can search the database to find detailed information about private start-ups including funding, investors, and executives.
    • VentureSource – Another database that contains detailed information about private start-ups including funding, investors, and executives.
    • Hoovers Online – A database of product profiles for companies, which includes competitors.

Confirm Funding Milestones and Capital Needs
  1. What to Cover – To select funding milestones, start by reviewing the operating plan developed as part of the business planning process. Compare the operating milestones in that document with the operating and financing milestones analyzed from proxy companies. At this point in the process, similarities should exist between the business plan milestones and those of comparable companies. The most critical part of selecting financing milestones is to identify significant risks for the start-up and determine how these risks may differ from those of other comparable start-ups. Once funding milestones are selected, characterize the overall process by describing the number of rounds of funding needed, the average amount of each round, and the average duration between milestones. When determining the amount of capital and time needed to reach each funding milestone, again consider the plan laid out in the operating plan. Also take into account potential deviations from the plan and build in an appropriate cushion. Use the comparable company that has already been studied to check these estimates. As a final check of the funding milestones and capital needs, talk to seasoned innovators and investors.
  2. Where to Look

Determine a Company Valuation
  1. What to Cover – Assessing valuation is critical to splitting the value, ownership, and control of the company between the founders, previous round investors, and the next round of investors. Begin by discounting the terminal value for the company and then perform a comparables analysis as described in the Valuation section of this chapter. Once the pre- and post-money valuations for each round are calculated, determine the percentage ownership of each stakeholder. Then, take into account the many other factors that can influence the final numbers (e.g., experience of the team, competitive threats, investor interest in the specific space, macroeconomic market conditions).
  2. Where to Look

Research and Select Investors
  1. What to Cover – Based on the company’s stage of development, consider the different types of investors, as well as the advantages and disadvantages of each type of funding. Then, determine from which types of investor(s) to seek funding. Research specific companies (or individuals) to assess the potential fit between the business and the investor’s interests and requirements. Carefully assess the track record and the reputation of these investors to avoid entering into discussions with those who may inadvertently disclose confidential information to potential competitors.
  2. Where to Look

Approach Investors
  1. What to Cover – Many experts recommend starting with a group of 10 potential investors and keeping seven to eight active at any given time to help ensure the funding needs of the business are met. Whenever possible, leverage personal and professional connections to make introductions to potential investors. Follow up with a well- articulated elevator pitch. Be prepared to present a business plan and prototype shortly thereafter. Decide ahead of time how much you are comfortable disclosing and be open about disclosure limitations. Most investors may refuse to sign an NDA so you need to have your provisional patents submitted and all your trade secrets well protected. In general, raising funds is more challenging than many investors anticipate, taking up to 12 months or longer for each round.
  2. Where to Look
    • Personal Network – Be diligent, assertive, creative, and professional in seeking referrals to appropriate investors.
    • Service Providers – Lawyers, accountants, consultants and other professional service providers with which an innovator has worked can be an excellent source of referrals.
    • Other Chapters – See 6.2 Business Plan Development

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