Overview of Startup Fundraising

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Early-stage startup fundraising overview including: types of funding, how to decide how much money you need, creating the pitch deck, negotiating valuation, and how to approach investors. Talk I gave …

Early-stage startup fundraising overview including: types of funding, how to decide how much money you need, creating the pitch deck, negotiating valuation, and how to approach investors. Talk I gave at Founder Bootcamp at Moscow State University (innovationlabs.net)

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  • 1. Introduction to Fundraising When, Why & Who to Raise (and not raise) Money From Roy Rodenstein Global Innovation Labs Moscow State University, 6/4/2011
  • 2. Who can be a successful entrepreneur? I believe anyone can… if they want it enough and get the right support
  • 3. Even Чебурашка и Гена
  • 4. Even Че Б урашка
  • 5.
    • User-Generated Local Events Content + Ticketing (originally HeyLetsGo)
    My Entrepreneurial Journey 2005 2006 2007 2008 2009 Co-found Going.com Rejected by YC Quit Day Job $500k Seed $3M Series A Additional Funding Acquired
  • 6. Companies Mentor Investor/Advisor UX researcher early employee acquired by co-founder acquired by About Me @royrod how2startup.com
  • 7. 5 Key Fundraising Topics
    • Deciding Who to Raise From
    • How Much to Raise
    • Contacting Investors
    • The Pitch
    • Negotiating Valuation
  • 8. Deciding Who to Raise From Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC
  • 9. Deciding Who to Raise From Higher chance of making $5M (~1%) Higher chance of making $0.00 (>50 %) Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC
  • 10. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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+
  • 11. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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: Bootstrap
    • Pros
    • No dilution
    • Simple, cheap, quick
    • Cons
    • It’s not OPM (Other People’s Money)
    • Morale impact if funds run low
    • Bottom Line
    • Good to get some personal involvement
    • But don’t overdo it- fundraising is better than giving up
  • 13. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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: 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
  • 15. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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+
  • 16. 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
  • 17. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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+
  • 18. 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
    • Bottom Line
    • Right angel can be hugely valuable
    • Beware of getting bogged down
    • Best or worst of both worlds
    West: Ron Conway, Dave McClure… East: Dharmesh Shah, John Landry… Groups: Founder Collective, eCoast, Founders Fund…
  • 19. Fundraising Decoder Ring Source Bootstrap aka yourself / co-founders Friends & Family Incubators / Seed Funds Angels Individuals, Groups VC Stage Idea Idea / Prototype Idea / Prototype Idea / Prototype “ Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Form Debt, Convertible Debt Convertible Debt, Equity Equity Convertible 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+
  • 20. There is No Going Back From VC So just be very sure 
  • 21. Source: VC
    • Pros
    • Real money for scale, can pay yourself
    • Right VCs have strategic relationship
    • Cons
    • Closing VC round s 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
  • 22. 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 $1M
    • 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”
  • 23. How Much to Raise
    • Make a financial model
      • add all expenses you can think of
    • This is for you , not for investors
    • Make it realistic. Make it pessimistic. Then double it.
      • make an Expected Case, and a Worst Case
    • You want 12-18 months of cash
      • Fundraising is a big distraction, don’t do it too often
      • And you need to start 3-6 months early
    • Внимание: You will get what you ask for!
  • 24. Contacting Investors
    • Research the right investors
      • Who is interested in your space?
      • Who understands your space?
      • Crunchbase, VC websites’ partner profiles
    • Find an introduction
      • Top investors get bombarded with pitches
      • Someone recommending you makes a difference
    • Or else just do it
      • But, investors want to hear of good startups
      • So you can also just contact them… but do it well!
  • 25. The Pitch examples from bit.ly/fwgoA0
    • What problem are you addressing? (“is this compelling?”)
    • How do you solve it? (“can you really fix this?”)
    • Why are you the ones to solve it? (“who are you?”)
    • Why is this a big problem? (“why should I care?”)
    • How will you make money? (“do I believe you?”)
    • How much money will you make? (“is it enough?”)
    • How much money are you raising? (“what’s the deal?”)
    • Who else is going after this opportunity? (“are you special?”)
    • What are your milestones? (“are you meeting a plan?”)
  • 26. What problem are you addressing?
  • 27. How do you solve it?
  • 28. Why are you the ones to solve it?
  • 29. Why is this a big problem?
  • 30. How will you make money?
  • 31. How much money will you make?
  • 32. How much are you raising?
  • 33. Competition
  • 34. Negotiating Valuation
    • Guidelines
    • Angel deals: $700k - $5m+
    • VC deals: $2m - $10m+
    • It’s All About Traction
    • Is your team solid?
    • Is your product built?
    • Is anyone buying it?
    • Are they paying enough?
    • But anything helps: press, partnerships, innovation
  • 35. 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.
  • 36. Further Resources
    • VC & Angel Directories
    • AngelList: http://angel.co
    • Crunchbase: http://crunchbase.com
    • 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
    • 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