The Arizona Center for Innovation (AzCI) provides workshops and sessions designed to help new ventures. This is an overview of funding considerations for a technology or science-based startup. Presented by Marie Wesselhoft, MSDx. Please contact us at: www.azinnovation.com to learn more.

1. Funding Considerations
Presented by Marie Wesselhoft
President and Co-Founder of MSDx

2. © 2011 Arizona Center for Innovation 2
Marie Wesselhoft, President and Co-Founder MSDx
Marie has over thirty years of business experience with a successful track
record in Healthcare. Marie held positions such as VP/General Manager, VP
Marketing, Area VP of Sales, Product Manager, throughout her twenty year
career at Cardinal/Baxter/American Hospital Supply Company. In her role as
General Manager of the Scientific Products, an $850 million business, her
responsibilities included management of a national sales and marketing team
comprised of more than 140 people. Throughout her career she has had
opportunities to launch $100 million diagnostic product lines, negotiate
partnership agreements, manage key accounts, as well as facilitate the
integration of teams for acquisitions and divestitures. During her years at
Humana Hospital she was both a Laboratory Director and Medical
Technologist. She also has experience with several healthcare start-up
companies in her work at the Arizona Center for Innovation. She graduated
from the University of Wisconsin with a BS in Medical Technology and
completed an MBA at the University of Chicago.
About the Presenter

3. © 2011 Arizona Center for Innovation 3
Funding Varies by Type of Business
Solar Company
Grant
Restaurant
Debt
Software Company
Equity

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Funding Varies by Risk
New Drug
New IT
Solution

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Team Formation
Product
Sales & Marketing
Funding
Pathway to Funding

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Grants
Founder
Angel
VC’s
Debt
Funding Needs Vary Over Time

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The Financing Pyramid
Source: Bob Fick, Small Business Development Center

8. Investigation Feasibility Development Introduction Growth
Pre Seed Seed Early Stage
IP
O
Mid Stage Late Stage
© 2005 Goldsmith

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Preparing to Seek Financing
• Business Plan
• Financial Forecast
• Elevator Speech
• Presentation
• Amount Required and Purpose
• Valuation
• Exit Strategy

10. © 2011 MSDx, Inc. All rights reserved.

11. © 2011 MSDx, Inc. All rights reserved.
The $1.0 Million Dollar Box

12. © 2011 Arizona Center for Innovation 12For Research Use Only- Not for Diagnostic Purposes

13. © 2011 MSDx, Inc. All rights reserved.
The MSDx Opportunity
Personalized Medicine Solution- Panel of Blood
Testing Products used in Monitoring Therapy Effectiveness
Laboratory Testing Market- $46 Billion world wide,
growing at 7%
Proven Business Model- Recurring revenue model.
Releasing a research kit in 2011 and an FDA product in
2013.
Innovative Technology- Window into the Brain-
Applications in MS and other Neurological Disease

14. © 2011 MSDx, Inc. All rights reserved.
Founders, Family, Friends
$600,000
2 Grants
$430,000
2007 2008 2009 2010 2011
Angels
$200,000
MSDx Funding

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Do’s
Don’ts
Funding- Our Lessons Learned

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Founder, Family and Friends
• No one funds your job
• Think before you leave your day job.
• Think about it long and hard!
• Credit card
• Your assets are on the line
• Establish a process to handle cash and time
• Represents ownership percentage
• Share in proceeds from company sale
• No obligation to repay?
• Very risky

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• Credit cards
• Obligation to repay
• Interest bearing
• Leasing equipment
• Priority claim on assets vs. owners
Early Debt

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Grants
SBIR/STTR
• Allocated from Federal Agency Budgets
• Over $2 billion available
• Matching research
• Phases I and II; “Phase III”
• Excellent pathway to VC or partner
• Grant or contract; not debt or equity
• Little concern about IP issues
• http://www.grants.gov/
Tip: Cast a broad net when researching grants. You may find new
opportunities through your industry or affiliations; for minority-
owned businesses; etc. Grants often bring added value and help
validate your progress and are a critical part of your funding strategy.

19. © 2011 MSDx, Inc. All rights reserved.
$ 204,000
QTDP Grant
$226,495
AZ Innovation Grant
MSDx Receives Two Grants
Track Record- Currently 2 of 8

20. © 2011 MSDx, Inc. All rights reserved.
MSDx Goal-
Grants for 30% of Cash
Our
Do’s
&
Don’ts

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Angel Investors
For consideration:
• Repay obligation
• Represents ownership percentage
• Voting/nonvoting
• Share in dividends/distributions, if any
• Claim on assets secondary to creditors
• Share in proceeds from company sale
• Often received in stages
• Individual high net worth investors
• Angel groups
• Match your market
• Exit timing and risk profile must fit

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Angel Investors
Who is an angel investor?
• SEC accredited investor
• >$1 million in net worth or $200K income
• Generally invest $25-250K in a deal
• Generally make several angel investments
• Roles: Lead investor, investor/advisor, passive investor
Typical angel investment:
• $250-1M in total (multiple investors)
• Valuation: $1-3M
• Angel equity: 20-40%
• Expected ROI – 60% annual or 10x
Source: Angel Capital Association

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Angel Investors
Angel organization statistics:
• Number of orgs 1999 = <100, 2006 >250
• ACA memberships = 127 from 43 states
• ACA attendees 2002 = 35, 2007 = 330
• Average number of investments = 7.4
• Total $ invested per org = $1.8M
• Average $241,000 per round
• Average per angel investor = $31,000
Investment Brackets:
• $0-250K – Pre-seed – P, F, F & F
• $250-1.5M – Seed/start-up – Angels
• $4-10M+ - Early/later stage – VCs
• Investment Gap $1.5-4M
Source: Angel Capital Association

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MSDx Angel Investors…..

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National and Local Angel Groups

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Investment Environment
• <1 in 20 Start-ups obtain angel financing
• <1 in 500 Start-ups are VC financed
• <1 in 5,000 new companies go public
• <1 in 25 angel deals see VC money
• <1 in 250 angel-funded companies go public

27. © 2011 Arizona Center for Innovation 27
• Am I willing to give up some ownership and control?
• Will my company generate significant revenues and earnings in 3-7 years?
• Do I have a strong management team?
• Have I made a personal investment in the company?
• Do I have a clear picture of the market and a realistic plan for meeting my
sales goals?
• Will my company produce a superior return for investors?
• Am I willing to accept board of director decisions?
• Do I have a 3-7 year exit plan?
Does My Company Qualify for Angel Investment?

28. © 2011 Arizona Center for Innovation 28
Why Investors Turn Down Deals
• Quality of management
• Size of opportunity
• Rate of market growth
• Product quality
• Competition
• Barriers to entry
• Stage of development

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Considerations
The money:
• How much is needed?
• What is the financial strategy?
• How will you structure the deal and set valuation?
• What is the exit strategy and expected ROI?
• Does the entrepreneur understand financial concepts?
Valuation:
• No formula – it is a “black art”
• Must be estimated
• Comparative, discounted cash flow
• Back into it using required ROI
• Subject to a number of factors
• Typically $1-3M … OR LESS!

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Considerations
Back into it:
• Investment - $1M
• Profit in year 5 (exit) - $2M
• Industry P/E – 15x
• Valuation in year 5 - $30M
• Required investor’s ROI – 60% or 10x
• Required investor’s valuation - $10M
• % of Company required – 33%
• Today’s post money valuation - $3M
Valuation
• Management team: 0-30%
• Size of opportunity: 0-25%
• Product or service: 0-10%
• Sales channels: 0-10%
• Stage of business: 0-10%
• Size of this round: 0-5%
• Need for more financing: 0-5%

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Considerations
Due diligence process:
• Don’t start unless it appears there is a deal
• Business plan review (vision etc.)
• Management presentation and discussion; site visit(s)
• References
• Competitive, IP, financial analysis
• The terms sheet and deal
Typical deal terms:
• Common or preferred stock, sub debt with warrants
• 1st position for liquidation, dividends, conversion
• 1st rights for registration, participation, anti-dilution
• Voting, board member or observer
• Performance – milestones, tranches, ratios, executive
compensation

32. © 2011 MSDx, Inc. All rights reserved.
MSDx Term Sheet Highlights
–Pre-Money Value
–Series A2 round
–Warrants
–Liquidation Preference
–Redemption Rights
–Anti Dilution
–Board (5)

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Angel vs. Venture Capital
Angel Venture Capital
Number of investors 400,000 900
Number of deals 50,000 2,500
Total annual investment (2006) $20 billion $26 billion
Investment size $.5 million $7-8 million
Stage of investment company Startup Later
Amount of capital required to prove the
business model
Under $3 to 5 million Over $3 to 5 million
Years before being able to exit 2 to 5 years 10 to 12 years
Most likely value of the company at the time
of the optimum exit
Under $50 million Over $100 million
Willingness to relinquish control of
important financial decisions
Not always required Almost always required
Source: Angel Capital Association

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Venture Capital Considerations
• Specialize by Industry Sector, Geography, and Stage of Development
• Primarily Focus on Later Stage Companies
• May Take 4-6 Months to Complete
• For the Select Few
• Rapid Revenue Growth
• Market Dominance
• Barriers to Entry
• Demand Significant Returns
• Workable Investment Window
• Professionals

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Investment Requires Exits
• Investing only works if the investors can get their money back – even if it
takes a while
• The traditional venture capital model no longer works, restricted by types of
exits a VC may need
• Still quite a good time for entrepreneurs and angel investors
Interesting resources on VC reporting:
• PricewaterhouseCoopers MoneyTree™ report:
www.pwcmoneytree.com/MTPublic/ns/index.jsp
• National Venture Capital Association: www.nvca.org/

36. Acquisition
31 Acquisitions in 18 Mos.
Deals at 3-4x Revenue
Candidates: Alere, Athena
Buying Sales & Filling Gaps
Diagnostics & Pharma Buyers
Expand to Other
Neurological Diseases
Two Paths for Exit
Alzheimer’s
Parkinson’s

37. © 2011 MSDx, Inc. All rights reserved.
Lessons Learned
1. You are never done
2. It is about them not you
3. It take 100% longer than you think
4. Investments are in companies not products
5. Nothing is as scary as payroll without cash
6. Multiple Sources
7. Always do the right thing
8. The best capital is revenue

38. © 2011 Arizona Center for Innovation 38
Summary
Grants
Founder
Angel
VC’s
Debt
• The innovation continuum describes the chain of processes that are
involved when bringing a product from concept to market.
• As the product moves along the continuum and the new venture develops,
different types of funding may be needed. Each will present unique
opportunities that should be considered when creating a funding strategy.

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Great Resources
Handy online tools for exit and other considerations:
www.Early-Exits.com
www.AngelBlog.net
www.BasilPeters.com