Published on February 17, 2014
SHOW ME THE MONEY! Jordan Schlipf @jordups www.foundercentric.com
up rt ta es Th “ e” pl eo p ion at uc ed
ROB FITZPATRICK SALIM VIRANI DEVIN HUNT JORDAN SCHLIPF
WORKSHOP VS. LECTURE Caveat: this is just one man’s opinion
1 TYPES OF FUNDING
4 WAYS TO FUND A COMPANY 1. Revenue 2. Debt 3. Grants 4. Equity
REVENUE The Customer Funded Business Fact: the vast majority of fastgrowing businesses never raise VC (nor write business plans) Prof. John Mullins “The New Business Road Test”
5 Types of Customer Funded Business: 1. Pay in advance: architects, DELL 2. Matchmaker models: eBay, Expedia, AirBNB 3. Subscription models: Netfix, Tutor Vista 4. Scarcity models: Zara, GILT 5. Service-to-product models: Microsoft, GoViral Prof. John Mullins “The New Business Road Test”
REVENUE Even if it s not the long-term plan, it puts you in a stronger position for eventual fund-raising!
Ideally you want to be able to say to investors "We'll succeed no matter what, but raising money will help us do it faster." Paul Graham
WARNING Raising, or trying to raise, Venture Capital too early is dangerous
DEBT Almost always a bad fit (and dangerous) for startups which deal with uncertainty Its good when you have guaranteed income but negative working capital Asset based lending, and you might be personally liable
EQUITY Sell a % of your company for cash If the company fails, you owe nothing Good for high growth potential businesses – manages to achieve the required “risk vs. reward” profile for investors
We re mostly talking about equity funding
REMEMBER Equity funding is designed around the needs and desires of investors, not startups
2 STAGES OF EQUITY FUNDING
STAGE AT WHICH ‘SERIES A’ HAPPEN 60% 25% 5% 10%
FUNDING STEPPING STONES Sweat Equity £0 Fools, Family & Friends <£10 Accelerator £15-60k Business Angel £25-50k SEIS (UK only) £150k Seed £250-600k Series A £1-5m Series B £3-15m
SUCCESSFUL FUNDING JOURNEY Sweat Equity Accelerator Seed Series A Series B £0 £15-60k £250-600k £1-5m £3-15m
REMEMBER The Series A funding gap is real. Plan to survive off of your seed round until you can raise a Series B.
REMEMBER You will need to “herd the cats”. No single investor will write the whole cheque (co-invest)
FUNDRAISING IS A JOURNEY You need to match your financing strategy to the ‘stepping stones’ or funding stages available
YOU BRIDGE THE GAPS… …WITH SWEAT EQUITY
If you've [already] sold more than about 40% of your company total, it starts to get harder to raise an A round, because VCs worry there will not be enough stock left to keep the founders motivated. Paul Graham
3 WHAT DO VCs NEED TO SEE IN THEIR INVESTMENTS?
VC INVESTABLE BUSINESSES 1. 10x / 8x returns in 3-5 yrs 2. Big market & growing 3. Ambitious founders +skills 4. Defensible moat 5. Sexy?
QUESTION Do I need a business plan? Is a slide deck enough?
Source: “The New Business Road Test”, John Mullins
UNIT ECONOMICS That you have an understanding of the unique cash flow of your business and its associated risk dynamics (sensitivities) The unit economics are within range or realistically ‘optimizable’ (Series A)
RUNWAY & BURN RATE “What the hell are you intending to spend my money on… and do I believe you” Link the cash burn with timing and key milestones. Does this align with next funding stages?
REMEMBER Investors only get paid if you sell the company, so you re promising to try and do that
4 FREQUENTLY ASKED QUESTIONS
QUESTION How much equity do you give to your cofounders? What about late additions?
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake Joel Spolsky
We can t invest in a company where the CTO has that little equity. It s too much of a risk. Sitar Teli (paraphrased)
QUESTION How much equity goes to key early employees?
KEY EMPLOYEES #1-5 I would suggest the following allocations of options by position: Senior VP of Sales CFO Senior Engineer Junior Engineer *Based on Series A 3.0% 2.0% 0.5% 0.1%
QUESTION What do you give an advisor? What do they give you?
ADVISOR EQUITY Equity before funding After funding EXPECTATION 1-4 hours per month 1-2% 0.5-1%
RULE OF THUMB Important long-term or need someone senior, but light on hours-permonth
QUESTION How much should we pay ourselves?
5 THE LEGALS THAT MATTER
THE 3 LEGALS THAT MATTER 1. IP assignment 2. Founder vesting 3. Employment contracts (non-compete)
FOUNDER VESTING Typically structure: • 3 or 4 Year term st year cliff • 1 • Linear: monthly or quarterly
EMPLOYEE OPTION POOL Typically 10% Be aware that employee options effectively dilute you without diluting investors Note: only to next funding round
OTHER BELLS & WHISTLES • Liquidation preference - full, capped or non-participating Beware multiples! • Pre-emptions rights • Right of first refusal & Co-sale • Drag-along
TIP Ask the VC to run a spreadsheet demonstrating the individual ‘pay outs’ based on different sales price scenarios
WARNING What you agree will carry forward to future rounds!
USEFUL RESOURCES www.passioncapital.com www.taylorwessing.com/ twtechfocus/ http://ycombinator.com/ seriesaa/
QUESTION What s the difference between pre-money and post-money valuations?
FORMULA Post money valuation = pre money valuation + amount of cash invested
WHAT % DO THE INVESTORS END UP WITH? % Investors = amount of cash invested / post money valuation
QUESTION Your company is worth $2m ‘pre’ and you raise $500k. How much is it worth after the money? What % do you still own? The investors?
QUESTION 3 co-founders evenly share a company. They raise 250k on 750k pre What % and £ does each of them own now? What % of the company have they given up ?
FORMULA 1. Post-money valuation = Pre-money valuation + Investment amount 2. Purchase price per share = Pre-money valuation / Number of fully-diluted shares before investment 3. Number of new shares issued to investor = Investment amount / Purchase price per share 4. Number of fully-diluted shares after investment = Number of fully-diluted shares before investment + Number of new shares issued to investor
RUN THE NUMBERS! When investors put cash into a business, your % ownership goes down, but your ££££ ownership stays the same
There s no evidence of what an early-stage startup will be worth
So we make it up as a combination of necessity plus comparisons
VALUATION RULE #1 Regardless of amount being raised, expect to give up 20-40% per round
Don't worry about giving up too much equity at an early stage. If the company is successful you will be very rich. If it isn't successful then holding 60% versus 30% won't matter Don Dodge
QUESTION What is the danger of a sky-high valuation? (remember the 10x exit rule)
REMEMBER Valuations that are too high will deter other VC firms from investing. They will expose you to all sorts of problems regarding compensation and expected future returns for your employees and investors.
WARNING Valuations that are really low are obviously bad as well, since they mean that you either got screwed or that there is something wrong with your idea
VALUATION RULE #2 Raise enough money for 12-24 months
QUESTION Why raise for so much time?
THE FUNDING TIMELINE Raising money takes 3 months (full time) But you don t want to negotiate with an empty bank account, so you leave a safety buffer of 3 months at the end Which gives you 9-21 months to actually build your company
WARNING Short runways are often perceived as a sign of massive weakness. Ideally, you have min. 6-3 months of cash in the bank.
So what s your valuation? (Or rather, your valuation range)
FIGURING OUT YOUR VALUATION 1. Figure out 12 and 24 month budgets (include a safety factor) 2. Work out a valuation for each based on 20% and 40% dilution 3. You ve now got the four corners of your valuation range 4. Negotiate inside those ranges based on your strength vs. peers
FIGURING OUT YOUR VALUATION In other words, if you re strong, you can either negotiate toward the 20% (less equity) or the 24 months (more runway)
TIP Keep negotiation simply by focusing only on premoney valuation and the amount they re putting in
One of the things that surprises founders most about fundraising is how distracting it is. When you start fundraising, everything else grinds to a halt. Paul Graham
I said, I m not raising money right now. But I will be in 3 months. What are you scared of and where would we need to be for you to be excited? Stephen Rapoport
LONDON VS. THE VALLEY In 2012, the valley did $12.5B over 977 rounds and London did $1.75B over 274 rounds Source: Dow Jones VentureSource, 2012 So the valley has 4x the deals and 2x valuations (but also more startups)
WARNING It’s virtually impossible to change your VC; once they’re on your board and cap table, they’re there for good. So you have to choose very wisely
DO YOUR INVESTOR DUE DIL f6s.com (accelerators) angel.co (angels & VCs globally) capitallist.co (London angels) thefunded.com (investor ratings) + ask around (previous investees)
TIP Momentum is everything! See as many investors as quickly as possible. Create the illusion of being oversubscribed
TIP Close a strong lead investor ASAP (e.g. cash in bank), and then fill in the rest as a rolling round
TIP Search for a champion or evangelist within a VC firm
TIP Create a data room or DD folder using Dropbox or Box
TIP Cold emails to investors don t work. You need warm intros
RESOURCES Read this article: http://paulgraham.com/ fr.html www.feld.com/
LIST OF FUNDING SOURCES
WE’RE HERE TO HELP! Jordan Schlipf @jordups LEARN MORE? bit.ly/fc-list
Presentation about Fundraising given by Jordan Schlipf (Founder Centric) on Startupbootcamp Alumni Summit 23 & 24 Jan '14 in London.
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