Start-up financing in Singapore

THE FUNDAMENTALS OF START-UP FINANCINGHow the Hell can you raise money in Singapore? Tanguy Lesselin

Agenda• Introduction• How much do you need• Types of investors• Investment criteria• Investor pitching• Investor hook tactics• Valuation and terms

INTRODUCTION

Money is hard to find when you need it, easy to find when you don’t

Raising money is not an achievement… it is a beginning

Funding = tons of dilemma questions • How much do you really need? • What % are you willing to sell? • Raise less in order to minimize dilution? • What duration do you need to cover? • Bootstrap or raise funds now? • Will I still feel “at home” in “my” company?

At what stage are you? # companies• Idea• Initial team Valuation• Prototype• Product-market fit• Traction• Proven business model (*)• Revenue scale ($1m, $5m, $20m)* growing paying customer base with positive lifetime valuecontribution

Think of financing as several steps 01.2013 06.2014 01.2016 Seed Series A Series B Etc.Pre money valuation 1.5m 5.0m 15.0mInvestment 0.5m 2.5m 5.0mPost money 2.0m 7.5m 20.0mNew investor % 25% 25% 25%Remaining for founders 75% 56% 42% Prototype Product-market fit Scale up Founding team Early customers 2m revenue 1000 customers

HOW MUCH MONEY DO YOU NEED?

Pre revenue phase How much you burn How long you burn it Number of iterations to reach product-market fitEFFICIENCY, SPEED, DECISION-MAKING

You should hate multiplications $10k $20k $50k $100k 6 months $60k $120k $300k $600k 12 months $120k $240k $600k $1200k 18 months $180k $360k $900k $1800k 24 months $240k $480k $1200k $2400k• Salaries are almost all of it• Making the right decisions has higher value than dumb money• No fat, decide well, play fast game

Your funding need• Do your cash-driven business plan, take lowest cash point and add 30 to 50%• Do not account for revenues yet if plan to launch more than 3-6 months from now• Make sure you get enough money to reach several major milestones and still have time to raise a new round• Don’t be forced to raise at the wrong time• Enough to cover 18-24 months of burn + investments• If it is too much then iterate, because you may be able do more with less (rethink you MVP?)

Why you will always get it wrong• Underestimate costs and overestimate revenues• You only know the revenue sauce when you already make revenues Build milestones based business plans with clear go/no go decision points

INVESTORCATEGORIES

Innovation financing (Singapore) IPO Investment Valuation Private 15.0m+ 50m+ Equity Venture Capital 2.0m – 15.0m 4.0 – 50m (Series A,B,C) Business Angels / 100k – 1.0m 500k – 4.0m Seed (Series AA) 3F 30k – 0.5m 200k – 2m Incubators 10-30k 100 - 300k Grants 50 - 500 N/A You / Bootstrapping

You and your team (bootstrapping) Monthly salary Over 12 monthsFounder 1 10 000 120 000Founder 2 5 000 60 000Founder 3 5 000 60 000Founder 4 5 000 60 000TOTAL 25 000 300 000• “No salary” is the first source of financing• Salaries make 80%+ of costs in the beginning• Seek free / super low cost solutions• Get a prototype to show potential clients

Bootstrapping: how long?• As long as needed to attract investors• Pros: efficient cash management, no early dilution, customer exposure from beginning• Cons: slower (time and money constraints), may miss the big opportunity• You can get help bootstrapping (Founder Institute) Best companies get funded to take the biggest chunk of the market

Grants• 25k – 500k• Take them if easy to take• Make sure you don’t add constraints to your plan: IP vs speed to market• US VCs don’t value IP before the company has reached a stage where it good to be able to defend

Incubators• 10k – 50k for 10-20% of equity (indicative)• Mentorship / networking / accelerator over short or “long” time frame• Works for idea / prototyping / Product-Market fit• Booster for investor pitching• Great for first time entrepreneurs

3Fs: Friends, Family and Fools• 30k – 500k• They trust you and want to help you• Make sure you are serious about the project• Be very transparent on risks• Don’t be greedy on valuation• Think of protecting them in future rounds

Business Angels• 100k – 1.0m• Seek industry experts and smart money with investor connections for future rounds• Seek deep pocketed so you don’t need too many of them and they can bridge if needed• May pitch BA associations (?)

Series AA• Typically 500k• A few funds in Singapore• Convertible debt or priced

Venture Capital• 2.0 – 15m• Series A still limited in Singapore• Look also outside of Singapore

Some important trends• Government funding• Crowd funding: Kickstarter (US)• Start-up competitions, demos, prizes• Incubators: JFDI, …• Online networks: AngelList• Multi-stage funds / investors

VC INVESTMENT CRITERIA

Main criteriaIdea Team Product Traction

Idea and Market Big and Bold• 2 main investor mindsets – Disrupting an existing market – Creating a new market• Playing Big is as easy as playing Small• VCs seek the $100m revenue opportunities

Misconceptions on market size• Online travel agency is not USD XXX billion, it is only the size of commissions and fees (addressable market)• Also do a bottom-up analysis to triangulate

A winning team • A+ people • Complementary skills • Proven working relationship • Ability to recruit other top people• Ability to reach product-market fit fast• Fact-based, ego put aside decision-making

Traction and metrics Dependent on development stage • Activation & Retention • Acquisition & K factor • Revenue & Profits

Your unfair competitive advantage • Big market lead • Big technology advantage • Exclusive marketing partnership with industry leader

Criteria ranking?Traction > Team > Product > Idea Market

Don’t rate average in all criteria, beexceptional in one (except if it is the idea alone)

INVESTOR PITCHING

Process and documents• First contact via introduction – Executive summary (1-2 pages)• First meeting – Pitching presentation (10 slides) – Product demo• Before Term Sheet – Simple XLS business plan – Team CV book – Cap table – Others as required

Pitching presentation1. Elevator pitch2. Problem 10 slides3. Solution (demo)4. Market size 20 minutes5. Business Model6. Unfair advantage 30 point font7. Competition8. Marketing & Sales9. Team10.Finance and milestones

INVESTOR HOOK TACTICS

Business Angels• Fund when you can make them dream – before product development, – before launch, – before pivot implementation• Worst case: you have a product that does not (yet?) solve customers’ problem (trapped in the middle)

Business Angels• Predefine everything – Valuation – Shareholder Agreement – Process and Timing• Secure the first 30% quickly, adjust terms with the “first” investor• Create a list of targets• Get introductions and go fast

Seed / VC stages• Get PR before starting funding• Sexy and committed Advisory Board• Key people pool (20% pre money for instance)• Future team hires• Some key milestones fully achieved• No mess to clean up (leaving co-founder, …)

Approaching VCs is a lot of work• Better if they approach you (PR, competition)• Investor Relationship Management – Meet informally so you can call back later – Build a target list – Filter (investment size, geography, portfolio, fund maturity date, …) – Call portfolio companies – Test with one or two low priority and refine pitch – Introduction contact (Partner level) – Meeting 1 – Follow-on

Create a competition• You want investors to feel the pressure• Competition enables better valuation, easier terms, and faster closing

Fundraiser or not? • No for Angel / Seed stage • Potentially yes for Series A • Probably yes for later rounds (Technology oriented investment banks)Why?- The good ones know more investors and know them well- Help you package your start-up and pitching- Help negotiate and closeCost of fund raiser- Retainer (from 0 to 10k per month or lump sum)- Success fee (5-6%)

VALUATION AND TERMS

Valuation?• There is no good model (DCF, P/E, P/S…)• Comparable (check thefunded.com and other fund raising from comparable start-ups)• You have to be a compelling investment opportunity

Try to work backwards VCs want to make 10 X if successful BAs want to make 20 X if successfulPre-money valuation 120 100 100 80 60 40 20 5 10 0 Business Angel / Series A VC (In 18 Potential value at Seed (Today) months) exit (say in 7 years) Comparable: IPO, trade sales…

Terms?

You VC

What is “fair” (personal feeling)• Information rights: open books• Liquidation preference: 1X• Pro rata right of first refusal• Dragalong, tagalong• Board: try to keep control

Some of the ones you want to avoid• Some veto rights (new financing)• Forced sale in 3 to 4 years – Too short to force liquidity• Preferred dividends – Take equity-like risks if you want to own equity-like benefits• Ratchet – do not come back on agreed upon valuation• Progressive cash inflows based on milestones – Milestones are irrelevant (like budgets) in a fast moving environment

You need to do your homework

References• Financing Map Singapore: http://sgentrepreneurs.com/wp- content/uploads/2009/03/megs-20090219.png• Milestones based business plan (example): http://db.tt/fi4le3Rc• Capitalization Table (to simulate fund raising): http://db.tt/fi4le3Rc• Mint investor presentation: http://www.slideshare.net/hnshah/mintcom-prelaunch-pitch-deck• How to pitch a VC:http://www.slideshare.net/dmc500hats/how-to- pitch-a-vc-aka-startup-viagra-how-to-give-a-vc-a-hardon• Guy Kawasaki:http://www.slideshare.net/huer1278ft/the-art-of- the-start-37633• The VC perspective:http://www.slideshare.net/benholmes/venture- capital-an-entrepreneurs-manual

Tanguy Lesselint.lesselin@cartouche.sg+65 91 000 667

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Start-up financing in Singapore

by tlesselin on May 27, 2012

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