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Funding Sources – Invest Your Time Wisely!

Often, an entrepreneur knows funding for their venture is necessary, but doesn’t always look in the right places for that illusive
financing. Focus your time and effort seeking out the types of investors that give you the best chance to close a financing round.
Following are some thoughts on (i) the two categories of investors: Institutional Investors and Angel Investors, and (ii) financial
intermediaries.

by Bob Seidel, Cairncross & Hempelmann with additional comments by John Waechter, Waechter Lufkin, Venture Banking

Northwest Entrepreneur Network

Institutional Investors – Institutional Investors come in two flavors: Venture Capital (financial) Investors and Corporate (Strategic)
Investors. Venture Capital firms are financial investors which have specific returns targeted for their investors. They will focus on
price and the terms of an investment. Venture Investors will require Board representation when they invest. Several thoughts
about what type of companies interest Venture Funds:

Companies with an opportunity to grow in a large market (>$1 Billion).
Companies which can use a significant investment (>$1-2 Million) to accelerate growth.
Companies that have a unique market position; i.e. proprietary technology, sales traction.
Companies with professional / experienced management teams.

Venture Funds are figuring out how to work in an environment where returns have suffered dramatically. The fall out from the "dot
com crash" has left funds and their managers looking hard through their portfolios to make difficult decisions about the life and
death of the companies they’ve invested in. The result of this shakeout is that Venture Funds are cautious, slow, more inflexible
on price and terms, and likely to want to syndicate (share the risk) the deal with other Venture Funds.

Corporate, or Strategic Investors have a different focus. While price and terms of an investment are obviously still important, the
primary focus shifts to the strategic importance of the company they may invest in. Some examples of strategically important
companies:

Companies that will drive sales of the corporate investor’s products.
Companies that may develop technologies that can aid the development of the corporate investor’s products.
Companies focused on a different area of the same industry as the partner.

Strategic investments often include an additional "deal" document – Joint Development; Joint Marketing; Co-development; or
others. Strategic Investors may invest smaller amounts than Venture Funds and may not require Board representation when they
invest.

Angel Investors – Angel Investors are typically wealthy individuals, technically defined as "accredited investors" by the SEC.
Angels have become more organized in the last 5 years through groups like the Northwest Entrepreneur Network, but rounding
them up can still be like "herding cats." Individual Angels typically invest $10,000 – $250,000 in financings. They are less likely to
negotiate price and terms so long as the deal is perceived to be within the normal ranges (i.e. market driven). A couple thoughts
on dealing with Angel Investors:

Start to finish, an Angel financing can take 4-6 months.
Angel financings require LONG hours by senior management and can wreak havoc on the Company’s focus.
Angels will consider various types of investments and can be very interested in "niche" opportunities.

The number of Angel financings has decreased significantly since mid-2000, probably matching the decrease in the value of a
typical Angel’s portfolio. A key challenge is finding those Angels currently interested in an early stage investment.

Intermediaries – Intermediaries (aka brokers, finders, consultants) can be tremendously helpful, or a complete waste of time and
money. Quality Intermediaries can help advise as to the size, timing and the direction of the financing. More often,
Intermediaries are associated with Angel financings, but it is becoming more and more common for Intermediaries to assist
Companies with all types of financings. If you are considering hiring an Intermediary, here are several points for due diligence:

What is the Intermediary’s track record? What deals have they completed recently? What deals have they not completed
recently?
Check references! Check with CEOs of companies for whom the Intermediary has been successful and unsuccessful. Also,
ask your attorney and accountant to check their sources for the Intermediary’s reputation.
Make sure you understand the fees, terms and restrictions (be wary of long-term exclusive relationships).
Check work product of the Intermediary if you expect to get assistance with drafting offering materials or a business plan.
Have a written agreement with the intermediary that includes an indemnity and a covenant to comply with federal and
state security laws.

Summary – The financing of a start-up today has returned to normalcy, which, unlike in the late 1990’s, is extremely difficult.
Venture Funds are licking their wounds; corporate investors are focused on next quarter’s earnings, and Angels are watching the
market – wondering how much of their portfolio should be dedicated to high-risk investments. Whatever the appropriate funding
source for your Company, make sure that you treat every meeting with a potential investor as THE most important meeting. You
only get "one bite of the apple" – make it a good one!

Robert C. Seidel is a partner at Cairncross & Hempelmann and chairs the firm’s Corporate and Finance Group.

John Waechter is a member and co-founder of Waechter Lufkin, Venture Banking. He advises and assists entrepreneurs in
attracting and securing financial and strategic partners.

http://www.nwen.org/venturer/0402/feature1.html

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