Wasabi Ventures Academy: Startup Financing 101


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Having an understanding of all of the ways that fundraising can happen for startups will help anyone who wants to participate in any aspect of the ecosystem. This class will cover all aspects of early stage financing, including debt instruments, equity financing, angel financing, crowd-sourced funding, and venture capital.

This is part of Wasabi Ventures Academy Startup Foundations:

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Wasabi Ventures Academy: Startup Financing 101

  1. 1. Early Stage Startup Financing 101 Part of the Wasabi Ventures Academy – Analyst Training An Innovative And Dynamic Approach To Venture Capital And Incubation
  2. 2. Two Buckets Of Financing Options NON-EQUITY FINANCING Self-Financing/Bootstrapping Angel Financing EQUITY FINANCING 1 2 1 2 3 Debt/Bank Financing Strategic Financing Venture Capital Academy.wasabiventures.com @wasabiventures
  3. 3. Self-financing/Bootstrapping Financing growth from cash flow and personal funds or sometimes family Example in the portfolio – Peku Publications pekupublications.com Often good bootstrapped companies emerge from a service or consulting companies that are productizing their offering Example in the portfolio – SocialToaster socialtoaster.com KEY POINT: Second time, successful startup people often self-finance or bootstrap the Early Stage. Academy.wasabiventures.com @wasabiventures THINGS TO THINK ABOUT: Bootstrapped companies almost always spend cash more effectively than equity financed companies – WV loves to work with bootstrappers! If they are coming out of service business in the same vertical, they should understand the market No outside influences driving startup to places the business shouldn’t/doesn’t want to go Resources for product and market dev constrained by cashflows or size of pockets, but this is a good thing May miss a big opportunity if other players raise finance and invest heavily, but this is mostly a head fake A founder has to take on all/most of the risk
  4. 4. Debt / Bank Finance NET-NET BANKS ARE WORTHLESS IN THE STARTUP WORLD Academy.wasabiventures.com @wasabiventures Relatively limited funds are available Banks only lend to businesses they can understand and they understand very little in the startup world Process is slow and painful Almost always need a personal guarantee
  5. 5. Why Should I Raise Outside Capital? Academy.wasabiventures.com @wasabiventures > You Believe in Your Offering > You Believe in Your Team > The Opportunity is MASSIVE (i.e. over $100MM valuation) > You have outside investors who have different goals > The pie to split is smaller > Speed is now more important than ever > Financing to execute > Credibility > Access to partners > Hopefully some guidance and direction ALL OF THIS LEADS TO A BIG WIN FOR YOU RAISING MONEY RAISES THE BAR WHAT YOU GET
  6. 6. The Opportunity is Too Small Is this a vitamin or an aspirin? Is this a company or a feature? Money is Not Your Primary Focus “I want to make the world a better place.” Would this better be served as a non-profit You Don’t Want it to be BIG You don’t want a massive number of employees You like having your hands involved in every aspect When To Not Raise Outside Equity Financing? Academy.wasabiventures.com @wasabiventures
  7. 7. What Happens When You Raise Money When You Shouldn’t Academy.wasabiventures.com @wasabiventures You let people into your business who are not aligned with your goals and dreams You will be working at something you may not like for 3 to 7 years and doing it for little pay You have lost control of the business when you didn’t want to Can’t do a small exit and call it a win Almost always means you will be raising money forever
  8. 8. Venture Capital – What Is A VC? Raise a fund from groups/people: Pension funds, financial institutions, and rich individuals. These groups/people are known as “LPs”, “Limited Partners” Most funds will eventually have to close the fund and send a return to the investors. The one exception are evergreen funds VCS MAKE PROFITS THROUGH TWO ITEMS Management fee on funds managed, usually 1 to 2.5% Carry on the profits of the investment 20 to 25% Academy.wasabiventures.com @wasabiventures They invest money over 3-5 years with the hope that a fund may close in 7 to 10 years ~ 5/8 of investments lose money and go to near zero ~ 1/4 of investments basically break even ~ 1/8 of investments are homeruns and make lots of money
  9. 9. VC Money Making – An Exercise In 2018, all of the investments have reached some liquidity event • 5 went out of business and returned nothing = $0 total return • 3 returned 10% profit = $33MM total return • 2 returned 800% profit = $180MM total return • $213MM total return Academy.wasabiventures.com @wasabiventures VC Firm XYZ raises a $100MM fund in 2010 – They call it “XYZ Fund 2010 LLC” 20% carry 2% annual management fee Between 2010 and 2015 they make 10 investments for $10MM each XYZ FUND 2010 LLC’S OUTCOME: • ~$22.6 MM in Carry • $174.4 Returned to the Investors • $113 MM Gross Profit for the fund • ~$16 MM in Management Fees
  10. 10. Angels – What Makes Them Tick Angel = Probably a rich person who has usually been successful in the startup world. Unlike the VC, an Angel invests their own money Academy.wasabiventures.com @wasabiventures NOTE: A vast majority of angels do not invest to make money. They do it just so they can be part of the action or for some other alternative reasoning. 1 2 Startup raises VC money, but has built up interest into a venture-backed startup that is going to shoot for a homerun. NOTE: In many ways, they are at the same risk of dilution as the founders unless they keep investing. Two Successful Exit Scenarios For An Angel Startup might be sold quickly for a relatively smaller amount of money (i.e. single digit millions of $$$s) and the Angel can make a quick multiple on his/her money back
  11. 11. Angel And VC Equity Financing WV considers them the same from a practical standpoint Academy.wasabiventures.com @wasabiventures The key to raising equity-based capital is knowing when to raise the money Almost all startups have to raise equity- based financing KEY POINT: WV is both an Angel and/or VC
  12. 12. What Is A Strategic? Large company or organization that is in the vertical or distribution chain target for a startup (e.g. Ford would be a strategic for a startup building an automobile software-related product) They invest to help innovation and lock out competitors Academy.wasabiventures.com @wasabiventures THINGS TO THINK ABOUT: Gain instant credibility Can help with a distribution channel Can occasionally add technical help Often caps your backend potential Be careful of becoming the forgotten girl at the dance Can close off opportunities
  13. 13. Key Terms That You Will Hear CONVERTIBLE NOTE A loan that will convert into equity (with a discount and interest) with the next major financing round LOTS of Info on this in the Analyst Training Room The document that investors sign that describes the terms of the financing The capitalization breakdown of a company. Who owns what percentage of the company? How much a company is worth before a financing takes place How much a company is worth after a financing takes place An investors right to be paid back at a certain rate on a successful exit, e.g. 2X liquidity preference 1 TERM SHEET CAP TABLE5 PRE-MONEY VALUATION2 4 POST-MONEY VALUATION LIQUIDITY PREFERENCES 3 6 Academy.wasabiventures.com @wasabiventures
  14. 14. Where Does WV Fit In? Only 20% of our investments are situations where we lead Startup Farm – We educate, train, fund, and work with daily EiRs who want to build their own startup. In this capacity, we are co-founders. WV IS A: VC – We have a fund that we do all of our cash investing. In this capacity, we are like every other early stage investor. Incubator – We take on existing startups who need help in a functional area and we fill those roles. In this capacity, we are what every incubator should be and never is. 85% of our investments are done as convertible notes 32% of our deals are 100% founded by us in conjunction with our EiRs 46% of our deals involve in-kind services (i.e. engineering, sales, marketing, etc.) 15% are Series A Priced Rounds 85% 15% 46% 32% WE ARE AN ODD HYBRID WE RARELY LEAD Academy.wasabiventures.com @wasabiventures
  15. 15. The Best Way To Look At WV Academy.wasabiventures.com @wasabiventures Startup Financing CoFounder Talent
  16. 16. Academy.wasabiventures.com @wasabiventures If you are interested or know some interested in the class, email wvacademy@wasabiventures.com