Founders Institute: Fundraising

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Presentation for Founders Institute Bogota (Colombia) - August 2011

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  • Most common form\n\nEspecially non-tech\n\nPro: easy to convince them. Help get startup off ground\n\nCon: not experienced investors, recognise good vs bad deal, tough to structure\n\nCon: if things go bad, relationship suffers\n\nTough to lose their money. Make risks clear\n\nUsually small raises and 5 – 20%\n
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  • Increasing number of incubators\n\nY Combinator pioneer in Silicon Valley\n\nGaining recognition: Tech Stars, Seedcamp (Europe), local programs\n\nUsually cash for equity deal + relocation for 3+ months\n\nGenerally $10k - $30k for around 5%\n\nPros: money to eat, meeting mentors, building network, pitching angels in group\n\nCons: moving team, money runs out pretty fast\n
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  • Usually free money from state / government\n\nIncreasing number as “tech” industry = growth for governments\n\nBut hidden costs: application time, reporting time, constraints, forced partnerships\n\nGrowing in UK. Colombia?\n\nMixcloud story: first grant with QM university\n\nSecond grant with UK radio player\n\nThird grant solo\n\nInvestigate government websites\n
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  • Non equity finance\n\nCustomers just want product\n\n$ plus 4 bonuses: they give you feedback + report bugs + credibility + repeat revenue\n\nB2B usually find one big first customer. More difficult B2C\n\nChallenge: selling a product before it’s finished\n\nDanger: big customer defines product. Specific needs -> narrow market\n\nDanger: becoming a services culture company. Doesn’t scale\n
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  • AKA Convertible loans or Convertible notes\n\nThe idea is to convert debt -> equity at a later stage so you don’t need to decide on valuations now\n\nValuation decided at trigger point (usually a raise). Sometimes there is a cap for investors, and usually a discount (eg 20% lower price)\n\nThis is all specified in the terms of the deal/loan\n\nPro: legal + transaction costs usually lower, and valuation decided later\n\n From investors view, less attractive. “Less point taking equity downside without equity upside” but may want to get in deal\n\nAlso debt is senior to equity in a liquidation (although usually nothing left in startup liquidations)\n\nCompensation for investor either a warrant or a discount\n
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  • Warrant example\n\nWarrant = option to buy stock\n\n
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  • Valuation cap = fixing the maximum price early stage investors are paying for their shares.\n\nFor example the max valuation at next raise for them will be $2m\n
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  • Usually VCs invest in “preferred stock” = certain rights, privileges, and preferences to investors\n\nMeans first to get money back if startup flops\n\nDifferent preferences depends on VC, but first in will define the preferences cause none others want less preferred stock\n\nRights could be: \nboard seat\ninformation rights\nright to participate in future rounds to protect their ownership percentage (called a pro-rata right)\nright to purchase any common stock that might come onto the market (called a right of first refusal) \nright to participate alongside any common stock that might get sold (called a co-sale right)\n
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  • Raise as late as possible -> less dilution\n\nReasonable raising milestones:\nFriends n family - before day 1\nIncubators - idea stage, but often product too now\nGrants - wide range\nCustomers - as soon as possible\nConvertible debt - usually a product\nEquity - usually a product + users (+ revenue)\n\nTraction trumps everything\n\n
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  • How much to raise? For equity raise work backwards and look at market\n\nInvestors usually take 20 - 35%\n
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  • Idea to ring fence equity for future employees\n\nUsually 5 - 15%\n
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  • Network network network\n\nLook for “smart” money - not just $$$\n\nHelps if they know your space + bonus connections for you\n\nGet introductions from fellow entrepreneurs, go to events, read blogs \n\nDo the rounds. They move in packs.\n\nLead investor emerges \n\nThey will expect more due diligence the higher the raise\n
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  • "In life you don't get what you deserve, you get what you negotiate"\n\nBest negotiation tool is having many investors at the table\n\nTraction helps for B2C\n\nLetters of intent for future B2B businesses\n
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  • - The most important thing people forget to mention\n\n- Make sure investors + your incentives and motives are aligned\n\n- Ultimately more art than exact science\n
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  • Founders Institute: Fundraising

    1. 1. FundraisingFounders
Ins+tute
Bogota
–
August
2011
    2. 2. Mixcloud CofounderInternet radio platformFounded 2008 Cambridge2+ million monthly listenersBased in London
    3. 3. SUMMARY Types of financing Timeframes Finding investors Typical deals Negotiations
    4. 4. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    5. 5. ‐ Most
common
form‐ Especially
non‐tech‐ Pro:
easy
to
convince
them.
Help
get
startup
off
ground‐ Con:
not
experienced
investors,
recognise
good
vs
bad
deal,
tough
to
structure‐ Con:
if
things
go
bad,
rela+onship
suffers‐ Tough
to
lose
their
money.
Make
risks
clear‐ Usually
small
raises
and
5
–
20% 5
    6. 6. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    7. 7. ‐ Increasing
number
of
incubators‐ Y
Combinator
pioneer
in
Silicon
Valley‐ Gaining
recogni+on:
Tech
Stars,
Seedcamp
(Europe),
local
programs‐ Usually
cash
for
equity
deal
+
reloca+on
for
3+
months‐ Generally
$10k
‐
$30k
for
around
5%‐ Pros:
money
to
eat,
mee+ng
mentors,
building
network,
pitching
angels
in
group‐ Cons:
moving
team,
money
runs
out
preZy
fast 7
    8. 8. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    9. 9. ‐ Usually
free
money
from
state
/
government‐ Increasing
number
as
“tech”
industry
=
growth
for
governments‐ But
hidden
costs:
applica+on
+me,
repor+ng
+me,
constraints,
forced
partnerships‐ Growing
in
UK.
Colombia?‐ Mixcloud
story:
first
grant
with
QM
university‐ Second
grant
with
UK
radio
player‐ Third
grant
solo‐ Inves+gate
government
websites 9
    10. 10. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    11. 11. ‐ Non
equity
finance‐ Customers
just
want
product‐ $
plus
4
bonuses:
they
give
you
feedback
+
report
bugs
+
credibility
+
repeat
revenue‐ B2B
usually
find
one
big
first
customer.
More
difficult
B2C‐ Challenge:
selling
a
product
before
it’s
finished‐ Danger:
big
customer
defines
product.
Specific
needs
‐>
narrow
market‐ Danger:
becoming
a
services
culture
company.
Doesn’t
scale 11
    12. 12. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    13. 13. ‐ AKA
Conver+ble
loans
or
Conver+ble
notes‐ The
idea
is
to
convert
debt
‐>
equity
at
a
later
stage
so
you
don’t
need
to
decide
on
 valua+ons
now‐ Valua+on
decided
at
trigger
point
(usually
a
raise).
Some+mes
there
is
a
cap
for
 investors,
and
usually
a
discount
(eg
20%
lower
price)‐ This
is
all
specified
in
the
terms
of
the
deal/loan‐ Pro:
legal
+
transac+on
costs
usually
lower,
and
valua+on
decided
later‐ 
From
investors
view,
less
aZrac+ve.
“Less
point
taking
equity
downside
without
equity
 upside”
but
may
want
to
get
in
deal‐ Also
debt
is
senior
to
equity
in
a
liquida+on
(although
usually
nothing
lem
in
startup
 liquida+ons)‐ Compensa+on
for
investor
either
a
warrant
or
a
discount 13
    14. 14. Warrant 20% warrant coverage Convertible note $1m Warrant $200k Raise from VC $4m Total raise = 1.2+4 = $5.2m Note holders get $1.2m worth of equity
    15. 15. 20% discount Discount Convertible note $1mThis is 20% discount of $1.25m VC raise $3m Total raise: 1.25+3 = $4.25m Note holders get $1.25m worth of equity
    16. 16. SUMMARYVA L U AT I O N C A P bit.ly/valcapfi
    17. 17. SUMMARY
    18. 18. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
    19. 19. ‐ Usually
VCs
invest
in
“preferred
stock”
=
certain
rights,
privileges,
and
preferences
to
 investors‐ Means
first
to
get
money
back
if
startup
flops‐ Different
preferences
depends
on
VC,
but
first
in
will
define
the
preferences
cause
none
 others
want
less
preferred
stock‐ Rights
could
be:
‐ board
seat‐ informa+on
rights‐ right
to
par+cipate
in
future
rounds
to
protect
their
ownership
percentage
(called
a
 pro‐rata
right)‐ right
to
purchase
any
common
stock
that
might
come
onto
the
market
(called
a
right
of
 first
refusal)
‐ right
to
par+cipate
alongside
any
common
stock
that
might
get
sold
(called
a
co‐sale
 right) 19
    20. 20. TIMEFRAMES Friends and Family 1 week – 1 year Incubators 3 months Grants 3 months – 1 year Customers Immediately – 3 years Convertible debt 3 – 6 months Equity 3 - 9 months
    21. 21. Raise
as
late
as
possible
‐>
less
dilu+onReasonable
raising
milestones:‐ Friends
n
family
‐
before
day
1‐ Incubators
‐
idea
stage,
but
omen
product
too
now‐ Grants
‐
wide
range‐ Customers
‐
as
soon
as
possible‐ Conver+ble
debt
‐
usually
a
product‐ Equity
‐
usually
a
product
+
users
(+
revenue)‐ Trac+on
trumps
everything 21
    22. 22. Friends and Family 0 – 15% Incubators 5 – 10% Grants 0% Customers 0% Convertible debt 10 - 30% EquityDEALS 20 - 35%
    23. 23. ‐ How
much
to
raise?
For
equity
raise
work
backwards
and
look
at
market‐ Investors
usually
take
20
‐
35% 23
    24. 24. OPTION POOLS
    25. 25. Sizing Raising $1m at $3m pre-money Currently 5 employees Burn rate 5x$4k = $20k/month Before next round hire 5 more Average salary $50k/year Options = 0.1 to 1 x annual salary 1 x 50k x 5 = $250k Divide by post-money valuation 250k/4m = 6.25%
    26. 26. FINDING INVESTORS
    27. 27. ‐ Network
network
network‐ Look
for
“smart”
money
‐
not
just
$$$‐ Helps
if
they
know
your
space
+
bonus
connec+ons
for
you‐ Get
introduc+ons
from
fellow
entrepreneurs,
go
to
events,
read
blogs
‐ Do
the
rounds.
They
move
in
packs.‐ Lead
investor
emerges
‐ They
will
expect
more
due
diligence
the
higher
the
raise 27
    28. 28. NEGOTIATE
    29. 29. ‐ "In life you dont get what you deserve, you get what you negotiate"‐ Best
nego+a+on
tool
is
having
many
investors
at
the
table‐ Trac+on
helps
for
B2C‐ LeZers
of
intent
for
future
B2B
businesses 29
    30. 30. Alignment
    31. 31. ‐
The
most
important
thing
people
forget
to
men+on‐
Make
sure
investors
+
your
incen+ves
and
mo+ves
are
aligned‐
Ul+mately
more
art
than
exact
science 31
    32. 32. Flickr credits http://www.flickr.com/photos/kolix/2771340860/http://www.flickr.com/photos/expressmonorail/2390656810/sizes/l/in/photostream/ http://www.flickr.com/photos/troybthompson/44990139/sizes/o/in/photostream/ SUMMARY http://www.flickr.com/photos/polvero/3457516537/ http://www.flickr.com/photos/vodcars/4307952203/ http://www.flickr.com/photos/_sk/4292858717/sizes/l/in/photostream/ http://www.flickr.com/photos/mait/4215747174/ http://www.flickr.com/photos/beth19/4721798240/ http://www.flickr.com/photos/visualpanic/404347995/ http://www.flickr.com/photos/9619972@N08/1350940605/sizes/l/in/photostream/ http://www.flickr.com/photos/jamie_hladky/4923141271/sizes/l/in/photostream/ Valuation cap blog post from Martin (Rapportive) http://bit.ly/valcapfi
    33. 33. Twitter - @nicoperezEmail – nico@mixcloud.com

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