Fundraising debugged: When, Why & Who to Raise (and not raise) Money From

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Roy Rodenstein presentation at BarCamp Boston 5 on Fundraising for startup founders, including pros and cons of several funding sources, best practices, resources for further reading.

Roy Rodenstein presentation at BarCamp Boston 5 on Fundraising for startup founders, including pros and cons of several funding sources, best practices, resources for further reading.

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  • 1. Fundraising Debugged When, Why & Who to Raise (and not raise) Money From Roy Rodenstein @royrod BarCamp Boston 5, 4/17/2010
  • 2. You Should Starting a Kompanny!
  • 3. About Me - Roy Rodenstein http://how2startup.com @royrod royrod@gmail • OG[H] (Original Gangsta Hacker): Georgia Tech, MIT Media Lab • UI/UX Research: Xerox Palo Alto Research Labs, AT& Labs • PM/Mktg/BizDev/CEO etc: iPhrase (NLP startup), IBM, Going, AOL My Company: User-Gen Local Events + Ticketing (originally HeyLetsGo) Co-found Going.com $500k Seed Additional Funding Acquired Rejected by YC $3M Series A Quit Day Job 2005 2006 2007 2008 2009
  • 4. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 5. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 6. Source: Bootstrap Pros • No dilution • Simple, cheap, quick Cons • It ain’t OPM (Other People’s Money) • Morale impact if funds run low Bottom Line • Good to get some skin in the game • But don’t overdo it- fundraising is better than giving up
  • 7. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 8. Source: Friends & Family Pros • Low dilution • Simple, cheap, quick • Feels great if make them money! Cons • Feels horrible if lose their money! • Can complicate later rounds • “Only money” / no further help Bottom Line • Keep terms very basic, no board seats, no blocking rights... • Make sure it’s money they can afford to lose
  • 9. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 10. Source: Incubators / Seed Funds Pros • Moderate dilution • Help with Legal, IT, PR, etc. • Mentors & peers • Leg up on fundraising Cons • $12k is not a lot of money • Usually have to move temporarily Bottom Line • Great for first-timers • Post-program support differs, YMMV • Dilution is dilution
  • 11. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 12. Source: Angels Pros • Good middle ground, if pick right ones • Serious money w/o board seat • Manageable dilution e.g. convertible debt • Long-term morale, PR, etc. benefits Cons • Their money == wrong angel is trouble • Can require herding cats West: Ron Conway, Dave McClure… Bottom Line East: Dharmesh Shah, John Landry… • Right angel can be hugely valuable Groups: Founder Collective, eCoast, • Beware of getting bogged down Founders Fund… • Best or worst of both worlds
  • 13. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 14. Source: VC Pros • Real money for scale, can pay yourself • Right VCs have strategic relationship Cons • Closing VC rounds is major time sink • Board management is major time sink • Major dilution == big exit needed • Can come with strings e.g. CEO/team Bottom Line • Commitment level == getting engaged • Complex deal terms, have to know which to fight for • Key for building a big company, from FB to Xobni
  • 15. VC Fundraising Myth-Bustin’ Myth: Higher Valuation is Always Better • You can price yourself out of future rounds • “Down” rounds (valuation falls) are really, really painful Myth: Angel First, Then VC Reduces Dilution • Reality is Angel and VC valuations are not that different • Is $200k for 10% dilution better than $1M for 25% dilution? • Is 10% dilution and then 50% dilution better than 50% dilution? Myth: Control is About Board Votes and % Ownership • Good VCs will never force founders to do something • In reality, nothing ever comes down to a “vote” • “50% ownership” is a red herring, VC controls are really about dilution and sale blocking rights Myth: I Shouldn’t Talk to VCs Until I Need that Mill • Yes, you should have your story together before talking to VCs • But much of “traction” == “I’ve been talking with them for a few months and see growth”
  • 16. Q&A Time! Advanced Topics • Convertible rounds: discounts, caps, warrants • Valuation • Fostering deal competition • Deal terms e.g. pro-rata (& super), anti-dilution, etc. • Inside rounds, follow-on rounds, leading a round etc. • Managing the lawyers • Managing the board • Term sheets: comparing, exploding • Compensation across funding stages • Pitch decks • Financial modeling • Business plans (do plan, don’t do a 50-page document) • VC seed rounds • Signaling • VC fund size, fund life stages, LPs, etc.
  • 17. Further Resources Angel, Incubator, VC Lists • Xconomy: http://www.xconomy.com/boston/resources/ • Jon Pierce Boston Angels List: http://twitter.com/jonpierce/boston-angels Relevant Blogs • VentureHacks: http://www.venturehacks.com • Mark Suster: http://www.bothsidesofthetable.com • Brad Feld: http://www.feld.com • Chris Dixon: http://cdixon.org • Fred Wilson: http://www.avc.com • Paul Graham: http://www.paulgraham.com/articles.html • (me): http://how2startup.com Documents • YC Series AA Funding Docs: http://ycombinator.com/seriesaa.html • AVC Seed Docs: http://avc.com/a_vc/2010/03/standardized-venture-funding-docs.html • Wilson Sonsini Term Sheet Generator: https://dealbuilder.wsgr.com
  • 18. Image Credits http://www.whyy.org/blogs/itsourcity/files/2008/11/bag_of_money.png http://www.istockphoto.com/file_thumbview_approve/6907003/2/istockphoto_6907003-cartoon-bugs.jpg http://blogs.nyu.edu/blogs/mj11/businessofart/money.jpg http://upload.wikimedia.org/wikipedia/commons/b/b2/Coins.jpg http://eroidays.com/files/2009/05/guy-bootstrapping-400x300.jpg http://futureofmoney.com/moneyconference/wp-content/uploads/2010/02/McClure.png http://www-math.cudenver.edu/~wcherowi/sdr.gif http://i31.photobucket.com/albums/c372/ryanmediocre2/BabyChick1.jpg http://www.vcwear.com/fuck-id-fund-that/ http://kk.org/ct2/calvinhobbes_friends.jpg http://www.complete80s.com/media/ghostbusters.jpg