Wasabi Ventures Academy: Startup Financing 101

Early Stage Startup Financing 101
Part of the Wasabi Ventures Academy –
Analyst Training
An Innovative And Dynamic Approach To Venture Capital And Incubation

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

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.
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

Debt / Bank Finance
NET-NET BANKS
ARE WORTHLESS
IN THE STARTUP
WORLD
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

Why Should I Raise Outside Capital?
> 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

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?

What Happens When You Raise Money When You Shouldn’t
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

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%
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

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
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

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
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

Angel And VC Equity Financing
WV considers them
the same from a
practical
standpoint
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

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
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

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

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

The Best Way To Look At WV
Startup
Financing
CoFounder
Talent

If you are interested or know some
interested in the class, email
wvacademy@wasabiventures.com

Wasabi Ventures Academy: Startup Financing 101

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Wasabi Ventures Academy: Startup Financing 101