During this “early commercialization period,” Jim was committed to moderating investor risk by leveraging on- campus and contractor facilities as much as possible.
6 B ased on a pre-money valuation of $2.5 million. The principal and
interest on this seed-round note would convert into equity at the A- round with an additional 30 percent discount to A-round investors. Seed-round investors would have the right to reinvest in the A-round to offset dilution.
EXHIBIT 6
SPC Financial Projections
2004 2005 2006 2007 2008
BigBelly unit sales 50 300 1,200 3,600 9,000
BigBelly revenues $225,000 $1,200,000 $4,200,000 $10,800,000 $22,500,000
Hippo royalty revenues 0 120,000 525,000 1,620,000 3,937,500
Total income 225,000 1,320,000 4,725,000 12,420,000 26,437,500
COGS 146,250 660,000 2,100,000 4,860,000 9,000,000
Gross income 78,750 660,000 2,625,000 7,560,000 17,437,500
SG&A 400,000 1,600,000 2,600,000 5,000,000 11,000,000
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126 Part II The Opportunity
The team felt that if their products continued to perform well, their market penetration estimates would be highly achievable (see Exhibit 7). Jim estimated that by 2008, SPC would become an attractive merger or acquisition candidate.
In January 2004, as Jim began work on drafting an SBIR 7 grant proposal, his parents helped out by invest-
ing $12,500 in the venture. That same month, while at- tending a wind energy conference sponsored by Brown and Rudnick , Jim overheard an investor saying that he was interested in putting a recent entrepreneurial wind- fall to work in socially responsible ventures. Jim decided it was worth a try:
I gave him my three-minute spiel on the compactor. He said that it sounded interesting, but that he was into wind power—after all, this was a wind power confer- ence. “Well then,” I said, “have I got a business plan for you!”
That afternoon Jim sent the investor the most recent version of the data acquisition buoy business plan. That led to a three-hour meeting where the investor ended up explaining to Jim why the DAQ was such a good idea. Jim said that the investor also understood how difficult it would be to get the venture fully funded:
[The investor] said, “Well, I sure wish you were doing the data acquisition buoy, but I can also see why you’re not.” I assured him that my passion was, of course, offshore wind, and that it was something I was planning to do in the future. So he agreed to invest
$12,500 in the compactor—but only because he wanted to keep his foot in the door for what SPC was going to do later on.
In February, after the folks at Vail had come back with their favorable review, Jim called on his former in- ternship boss at the Spire Corporation. Roger Little was impressed with Jim’s progress, and his company was in for $25,000. In April the team earned top honors in the 2004 Douglas Foundation Graduate Business Plan Competition at Babson College. The prize—$20,000 cash plus $40,000 worth of services—came with a good deal of favorable press as well. The cash, which Jim distributed evenly among the team members, was their first monetary compensation since they had begun working on the project.
Although SPC could now begin to move ahead on the construction of the next 20 cabinets, Jim was still focused on the search for a rather uncommon breed of investor:
This is not a venture capital deal, and selling this idea to angels can be a challenge because many are not so- phisticated enough to understand what we are doing. I had one group, for example, saying that this wouldn’t work because most trash receptacles are located in alleys—out of the sun.
Here we have a practical, commonsense business, but since it is a new technology, many investors are unsure of how to value it. How scalable is it? Will our patent filings hold up? Who will fix them when they break?
Earlier that spring Jim had presented his case in Boston to a gathering of angels interested in socially responsible enterprises. Of the six presenters that day, SPC was the only one offering products that were de- signed to lower direct costs. During the networking
EXHIBIT 7
Market Size and Penetration
2004 2005 2006 2007 2008
Top-Down
SunPack market * ($ billions) $1.0 $1.0 $1.0 $1.0 $1.0
SunPack % penetration 0.0% 0.1% 0.5% 1.2% 2.6%
Bottom-Up
Total potential customers ** 30,000 30,000 30,000 30,000 30,000
Potential units/customer 20 20 20 20 20
Total potential units 600,000 600,000 600,000 600,000 600,000
Cumulative units sold 50 350 1,550 5,150 14,150
Cumulative % penetration 0.0% 0.1% 0.3% 0.9% 2.4%
* Assume $600,000 BigBelly market (5 percent of $12 billion waste receptacles sold to target segments) plus a $400,000 power unit mar- ket ($1.2 billion compacting dumpsters sold/$12,000 average price 3 $4,000 per power unit).
** Assume 400 resorts, 600 amusement parks, 2,000 university campuses, 5,000 commercial campuses, 2,200 hotels, 4,000 municipali- ties, 57 national parks, 2,500 state parks and forests, 3,700 RV parks and campgrounds, and 17,000 fast-food and retail outlets.
7 The Small Business Innovation Research (SBIR) Program was a source of
government grant funding driven by 10 federal departments and agencies that allocated a portion of their research and development capital for awards to innovative small businesses in the United States.
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They wanted my people to have “skin in the game” be- cause they might get cold feet and choose to get regular jobs. I told them that SPC workers are putting in 20 hours a week for free when they could be out charging consulting rates of $200 an hour. They have plenty of skin in this game, and I’m not going to ask them for cash. Besides, if we could put up the cash, we wouldn’t need investors, right?
As Jim settled into his seat for the flight to New York, he thought some more about the investors’ other primary contention: His pre-money valuation was high by a million:
These investors—who still haven’t given us a dime—are saying they can give me as much early-stage capital as SPC would need, but at a pre-money of $1.5 million and dependent on us hitting our milestones. With an immediate funding gap of about $50,000, it’s tempting to move forward with these guys so we can fill current orders on time and maintain our momentum. On the other hand, I’ve already raised some money on the higher valuation, and maybe we can find the rest before the need becomes really critical.
session that followed, Jim said that one group in particu- lar seemed eager to move ahead:
They liked that Spire had invested, and they seemed satisfied with our projections. When I told them that we had a $25,000 minimum, they said not to worry—they were interested in putting in $50,000 now and $200,000 later. In fact, they started talking about set- ting up funding milestones so that they could be our primary backers as we grew. They wanted me to stop fund-raising, focus on the business, and depend on them for all my near-term financing needs.
At this point I felt like I needed to play hardball with these guys, show them where the line was. My answer was that I wasn’t at all comfortable with that, and that I would be comfortable when I had $200,000 in the bank—my bank. They backed off that idea, and by the end of the meeting, they agreed to put in the $50,000; but first they said they had to perform some more due diligence.
Momentum
By May 2004 the Seahorse Power Company had a to- tal of six team members. 8 All SPC workers had been
given an equity stake in exchange for their part-time services. The investor group expressed deep concern with this arrangement, saying that the team could walk away when the going got tough—and maybe right when SPC needed them most. Jim explained that it wasn’t a negotiable point:
8 Three of the most recent equity partners were Richard Kennelly, a
former director at Conservation Law Foundation where he concen- trated on electric utility deregulation, renewable energy, energy efficiency, air quality, and global warming; Kevin Dutt, an MBA in operations management and quantitative methods from Boston University with extensive work experience in improving manufactur- ing and operational practices in a range of companies; and Steve Delaney, an MBA from Tuck School of Business at Dartmouth College with a successful track record in fund-raising, business development, market strategy, finance, and operations.
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