# Presentation: 193740

## 
		Gary E. Spanner

	Manager, Office of Small Business Programs
	Pacific Northwest National Laboratory
	(509) 372-4296
	gary.spanner@pnl.gov
	www.pnl.gov/edo
	April 17, 2002
	IT Day, Pasco, WA

- 		Gary E. Spanner
- 	Manager, Office of Small Business Programs
- 	Pacific Northwest National Laboratory
- 	(509) 372-4296
- 	gary.spanner@pnl.gov
- 	_[www.pnl.gov/edo](http://www.pnl.gov/edo)_
- 	**April 17, 2002**
**	****IT Day, Pasco, WA**

***Raising Equity Capital***

## My History with Equity Capital

- Honorary member of the _[Alliance of Angels](http://www.allianceofangels.com/)__[ ](http://www.allianceofangels.com/)__– to help the AoA gain access to Tri-City technologies_
- Organizing committee for the **Early Stage Investment Forum** in Seattle
- Organized two local investment forums for Puget Sound investors and several local training events

## Some Regional History of Equity Capital

- WA & OR venture capital investments: 220 in 1999, 265 in 2000, 100 in 2001
- Early Stage Investment Forum:  350 applications last two years, about 15 from Tri-Cities, 1 accepted that was later rejected
- Alliance of Angels:  Number of applicants unknown, 6 have presented to full membership, 1 received funding

## Some Regional History of Equity Capital (cont’d)

- Alliance of Angels Forum in Tri-Cities (10/00):  4 presented to steering committee, 1 presented to full membership, no investments
- Local surveys suggest that access to equity capital is a problem
- Local equity investments in the last several years by outside investors: I know of about $40M, only one IT firm

## $$ Sources

- Direct Private Investors
- Friends & family
- Individual “angel” investors
- Groups of individuals (e.g., formal & family funds)
- Institutional
- Venture capital firms/funds
- Pension funds (private & public) & endowments
- Corporate
- Financial institutions and insurance companies
- Foreign firms
- SBICs

## $$ Sources (cont’d)

- Governmental
- Economic development funds & agencies
- Pension funds
- State investment boards
*Enterprise Capital Resources, Seattle, 1999*

## $$ Sources (cont’d)

- Common perception that equity capital for technology deals is not available locally
- Credit cards, second mortgages
- Several venture capital funds in Spokane
- _[Alliance of Angels](http://www.allianceofangels.com/)_: 170 private investors, accept applications on web, hear four presentations per month at a luncheon meeting (allianceofangels.com)
- _[Early Stage Investment Forum](http://www.esif.org/home.htm)_: annual event in March, 300 private and institutional investors, extensive coaching for presenters (_[www.esif.org](http://www.esif.org/)_)

## $$ Sources (cont’d)

- Puget Sound Venture Club: ~ 25 members, monthly presentations, probably need a referral to get in
- List of local and regional $ sources, including angels and VCs, at _[www.pnl.gov/edo/funding](http://www.pnl.gov/edo/funding)_
- You’re welcome to dig through my file for many others
- Columbia Basin College BizWin Competition: $30K seed funding (_[http://www.bizwin.org/](http://www.bizwin.org/)__)_

## What Investors Want

- Respect
- Play a role in something new and exciting
- Business model that they understand
- Management team with these attributes:
- Perseverance
- Decency
- Competency
- Track record
- Personal financial commitment
- Burning desire to succeed

## What Investors Want (cont’d)

- Potential for fast growth and lead market share
- Appropriate involvement
*August 2001 – Avogadro Partners, LLC*

## The Mind of the Experienced Private Investor

- Know the business (a solid hedge or “Why Warren Buffet avoids Internet deals”)
- Do their own due diligence and invest with others who fill their expertise gaps
- Deal only with people they like
- Plan on participating in subsequent rounds

## The Mind of the Experienced Private Investor (cont’d)

- Invest alongside a significant investor—one who has a track record of commitment and pockets deep enough to keep the company afloat
- Becoming a successful private investor is definitely an apprenticeship process. They benefit from investing alongside experience.
- Avoid unrealistically high valuations
- Understand the liquidity risk
*August 2001 – Avogadro Partners, LLC*

## Further into the Mind

- Invest in ‘hot’ industries (where VCs are concentrating their investments)
- Prefer large gross margins—generally more forgiveness for problems that an early-stage venture might encounter
- Focus on assumptions underlying projections, as opposed to the projections themselves. The assumptions indicate the degree to which management has an understanding of all components of the business.
- Control risk through the staged infusion of capital based on performance
*	**August 2001 – Avogadro Partners, LLC*

## Training Events for $$ Hunters

- Entrepreneur’s Forum of the Great Northwest, April 17, 2002
**WaFAST** Pacific Northwest Regional Conference, May 1 & 2, 2002, Spokane:  SBIR/STTR and Eye-of-the-Investor workshops
- Spokane Economic Development Council Spring Rally, Coeur d’Alene, May 15, 2002, VCs discussing what they look for
**Tri-Cities Venture Group**, series of breakfast meetings

## Training Documents for $$ Hunters

- Online version of *Rainmaking in a Capital Drought – Everything You Need to Know About Raising Capital in This Dry Climate* available soon on **www.pnl.gov/edo**
**Flier**, *What Private Investors Look for in Early-Stage Technology-Based Businesses*
***Tri-Cities Tech Business Update*** announces training opportunities, many for $$ hunting

## Training Documents for $$ Hunters (cont’d)

- Books:
***Finding your Wings – How to Locate Private Investors to Fund your Venture***, Benjamin & Margulis
***Business Plans that Win $$,*** Rich & Gumpert

## The Business Plan

- What is your company about?
- What pain or problem is there in the market place?
- Why?
- Who
- How much?
- How does your company soothe the pain or solve the problem?
- What compelling benefits do you offer the customer?
- Who is the management team and why can they bring the solution to the market? What have they accomplished so far?

## The Business Plan (cont’d)

- What is your strategy?
- How will you make money & when (business model)?
- What’s your capitalization plan
- Money raised so far?
- How much capital in what kind of offering now?
- Use of proceeds (list milestones)
- Exit strategy
- Summary: Why invest?
*August 2001 – Avogadro Partners, LLC*

## Pertinent Experience Matters

- When you need other people’s $$, you need experienced entrepreneurs on the executive team (i.e.,  people who have raised capital and taken products to market)
- VCs consider an experienced management team a prerequisite to funding
- Investors are betting on the jockey as well as the horse
- Investors consistently state that the management team is the most important factor
- If you want experienced management, you better have a stock option plan

## How to Obtain Experienced Management

- Tech Job Connection now available at **www.pnl.gov/edo/jobs**
- Several local firms having success with remote CEOs plugged into $$ and other vital networks (Integrated Environmental Technologies, MesoSystems, Advanced Imaging Technologies)
- There is excess experienced management talent available on Interstate 5 nowadays

**Notes:**
  Consists of... 
  Demand driven program, so... (show the form)
...or other quick help
...to improve the program and inform DOE

## My Observations and Advice

- Early stage investors are looking for a 40% rate of return (5 times their investment in 3 years)
- Nobody got rich owning Microsoft stock, only by selling it
- For tech investors, wealth results from increasing stock prices
- Sell the investment opportunity to investors, not the technology and not the market

## Investors Expect Share Prices to Increase

## My Observations and Advice (cont’d)

- How ESIF opportunities compare to Tri-City opportunities: greater scalability (leads to stock price increases) and more experienced management teams (serial entrepreneurs)
- Tri-Cities is close enough to I-5 to attract investors
- Tri-Cities has a technology opportunity cachet
- Consider Small Business Innovation Research Program as alternative to seed funding
- Do what it takes to show an experienced management team
- Investors expect the CEO to give the pitch, using electronic PowerPoint