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From Bootstrapping to Venture Rounds: A Startup Case Study

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From Bootstrapping to Venture Rounds, and a real-life case study of seed stage financing.

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From Bootstrapping to Venture Rounds: A Startup Case Study

  1. 1. From Bootstrapping to Venture Rounds: a Startup Case Study Enterpreneurship Leadership Program 02.25.2016 Confidential and Proprietary - Not for Distribution
  2. 2. Confidential and Proprietary - Not for Distribution 2 Today • Managing Partner of IA Ventures, a 6-year old, $315M seed stage venture firm based in NYC but with a significant portfolio across the Bay Area and ROW • Fortunate to work with two partners from whom I learn every day and who make me better • Top decile performance across our first two funds, Fund I ($50M, 2010) and Fund II ($105M, 2012): recently began investing out of Fund III ($160M, 2016) • Led the Seed round in high-growth companies including Digital Ocean, MemSQL, Simple, Transferwise, Vectra Networks and x.ai • 6 years into a 20+ year effort to be the best seed stage firm on the planet
  3. 3. • Devoted 5 years to becoming a successful angel investor • Early investor in Buddy Media (Salesforce), Invite Media (Google), Ticketfly (Pandora), TubeMogul (IPO) and TweetDeck (Twitter) • Seeded 40 companies over a 5 year period, personally led 6 rounds and sat on 6 Boards • Went all-in on seed stage technology investing in 2005 by committing to 5 meetings a day, 5 days a week for 5 years, and devoting significant personal capital to the effort • Post-Michigan spent my first 18 years on Wall Street (Citi, Deutsche) in Capital Structuring, Derivatives and Quantitative Trading Confidential and Proprietary - Not for Distribution 3 Yesterday
  4. 4. • “Standard” engagement is an initial investment of $1-$2M, with ~$3M of total capital reserved per company before consideration of additional reserves • 24-27 companies per portfolio, with ~1/3 being classified as “Best of fund” or “Best of firm” • Almost always invest pre- product/market fit, where the goal is to help our companies determine the key hypotheses to be proven before raising a great Series A round • Ultra low-friction Seed investment: simplest docs in the business, IA pays, no Board seat; treat the initial investment as an “experiment” • No notion of “control”; it’s all about aligning on what’s important for the company and building trust Confidential and Proprietary - Not for Distribution 4 IA Model
  5. 5. • Bootstrapping • Angel round • Seed round • Venture round Confidential and Proprietary - Not for Distribution 5 Funding the startup
  6. 6. • Bootstrapping generally refers to raising no external capital; funding off of personal balance sheet plus customer receipts • Great for maximizing ownership and control • Forces intense customer focus and “colliding with the market” early and often, as well as rapid determination of what customers will actually pay for • Can work against building a scalable software business as near-term services revenue can delay “productization” • However, if a bootstrapped company can build a scalable service, it can control its destiny and choose to raise venture finance to accelerate growth in the future Confidential and Proprietary - Not for Distribution 6 Bootstrapping
  7. 7. • Angel rounds, which can include “Friends & Family”, have historically meant raising <$1M but today sometimes morph into “party rounds” of $4M+ • Great for providing the resources to recruit a small, high- performance team and to build and ship early product • Often provides 12 months of runway to demonstrate the founders’ vision, execution ability and market opportunity • Rarely enables founders’ to jump straight to a Series A, introducing the requirement to raise additional funds to achieve product/market fit and hit key performance metrics • If additional funds can’t be raised, a company is forced to either shut down or sell itself as an “acqui-hire” Confidential and Proprietary - Not for Distribution 7 Angel round
  8. 8. • Seed rounds are often in the $1-$3M range, are designed to prepare a company to raise a Series A and can sometimes preclude Angel rounds • Great for providing the financing necessary to hit critical Series A metrics, by hiring key staff as well as shipping and selling a more polished product; often serves as a bridge between an Angel round and a traditional Venture round • Unlike Angel rounds, which are generally made up of a group of small investors without a institutional lead, Seed rounds can offer institutional leadership and support well before hitting the metrics required for Venture investment • As with Angel rounds, Seed rounds either lead to a successful Series A or shut down/fire sale Confidential and Proprietary - Not for Distribution 8 Seed round
  9. 9. • Generally refers to Series A and Series B rounds, with round sizes of $7-$10M to $15-$25M • Often led by firms with fund sizes of $200M+, and sometimes upwards of $1BN • Venture financings almost always contain material governance and control provisions, presenting founders with the pros and cons that accompany “partnership” as well as larger capital commitments • Securing a great partner is more important than the brand of Venture firm; the partner will sit on your Board and be your greatest advocate, and sharpest critic, when it matters • Reporting and metrics tracking are increasingly critical as are understanding margins, payback periods and customer LTV Confidential and Proprietary - Not for Distribution 9 Venture round
  10. 10. • There is no one-size-fits-all approach to financing a technology startup • It is critical to understand your goals before taking dollar one of third-party capital • There is no glamor in raising Venture capital; only opportunity, responsibility, pressure and (sometimes) pain • Founders can build great businesses that don’t subject themselves well to Venture financing, e.g., addressing smaller markets, inherently cash-flow positive businesses that can’t (or shouldn’t) grow faster with additional funding • Perform diligence on potential investors the same way you would vet potential employees – or partners Confidential and Proprietary - Not for Distribution 10 Key take-aways
  11. 11. • The date: Q4 2009 • The Industry: Ad tech • Industry perception: Crowded and “done” • Venture appetite for new startups in the space: Scant • Location: Southern California (not many venture dollars back then) • The Public Market: Recovering from the thralls of 2008/09 but still jittery • The Venture Scene: Bruised and battered, with emerging managers/Micro VCs yet to exist and with Sequoia’s “RIP Good Times” still fresh in investors’ minds Confidential and Proprietary - Not for Distribution 11 Case study: The Trade Desk
  12. 12. • You have 30 minutes to review the presentation, discuss with your group and report back on this question: Would you invest and why? • Be prepared to provide clear, concise reasons based on the material in the presentation and the environment as I’ve depicted it • And remember – no cheating by pulling in current knowledge. Put yourself in my shoes 6.5 years ago with the information at my disposal Confidential and Proprietary - Not for Distribution 12 Case study: The Trade Desk
  13. 13. • Questions for discussion: – Market: The ad tech market, today and future trends – Product: What’s been built, positioning, differentiation, complexity to build and ship – Team: Founder structure, cap table, startup experience, domain knowledge, reputation, and diligence – Hypotheses: What must be true in order to this to be an attractive candidate for Venture financing? What are their “secrets”? – Chemistry: Are these founders I’m excited to partner with for the next 10 years? Confidential and Proprietary - Not for Distribution 13 Case study: The Trade Desk
  14. 14. • Post-mortem: – The founders did indeed have “secrets” • Explosive rise of programmatic • Aligned with, rather than competing against, agencies • Laser focus on technology, product and scalability resulting in a SaaS-like user experience • The largest buyers wanted an independent alternative to the “walled gardens” of GOOG and FB – Management built the most capital-efficient, profitable, fastest growing ad tech company on the planet – Even after demonstrating the power of the business they couldn’t raise growth capital from the “brand name” VCs Confidential and Proprietary - Not for Distribution 14 Case study: The Trade Desk
  15. 15. • Key take-aways: – Visionary founders may define a market very differently than the mainstream – Great founders have deeply-held secrets/perspectives on current offerings that may conflict with lots of smart people, including other founders and respected VCs – Startups are seldom “up and to the right” – there are lots of hiccups, mistakes and near-death experiences, even with the best companies – Dogged determination together with empathy for and understanding of your customers generally wins the day – Seeking external validation from anyone other than your customers is generally a waste of time Confidential and Proprietary - Not for Distribution 15 Case study: The Trade Desk

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