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Funding for innovative startups - Part 4 of 5


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Practical funding masterclass: a series of 5 presentations by Benno Groosman.
Session 1: Introduction to funding language + business planning.
Session 2: Determining funding need + milestone-based funding.
Session 3: Building your financial investment plan.
Session 4: Investor readiness.
Session 5: Advanced funding and wrap-up.

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Funding for innovative startups - Part 4 of 5

  1. 1. SESSION FOUR: INVESTOR READINESS Benno Groosman MScBA – –Athens, May 24, 2016 –
  2. 2. MASTERCLASS FUNDING FOR INNOVATIVE STARTUPS Benno Groosman MScBA – –Athens, May 24, 2016 –
  4. 4. MASTERCLASS SCHEDULE  Session 1: Introduction to funding language + business planning;  Session 2: Determining funding need + milestone-based funding;  Session 3: Building your financial investment plan;  Session 4: Investor readiness;  Session 5: Advanced funding and wrap-up. FUNDING MASTERCLASS
  5. 5. INTHIS PRESENTATION Scope Preparation Valuation The process (with important clauses) After the investment FUNDING MASTERCLASS
  6. 6. SCOPE This is not a presentation on negotiation tactics, but: Preparation and understanding of the process will help you in the dealmaking and negotiation You can only start negotiations if you meet the minimum requirements (the investor has to be interested, you have to be prepared) The better you present your case, the better the deal you can get FUNDING MASTERCLASS
  7. 7. PREPARATION (1/2) Business plan with financial plan   Know your funding need  Presentation / pitch deck FUNDING MASTERCLASS
  8. 8. PREPARATION (2/2) Lawyer and accountant  Build your relation before you have to review your contracts or guide the negotiations: this will save time and improve quality Other experienced entrepreneur  Before and during the investment process, find somebody with experience that can help you Timeline  When do you need the money? How do you want to go through the process?Take control! Contact multiple investors  Don’t bet on one horse  More investors can share the risk and increase the funding  Make sure they all have the same information and know the timeline FUNDING MASTERCLASS
  9. 9. VALUATION Science, art or random? FUNDING MASTERCLASS
  10. 10. VALUATION Valuation of startups is not just a numbers game. It’s more about expectations, feelings, investment limits etc. But, start to quantify your value by: Discounted cash flow; Real option pricing; Comparing to other startups. FUNDING MASTERCLASS
  11. 11. VALUATION DISCOUNTED CASHFLOW  Take the total cashflow for each year  In the 5 year prognosis at!funding/cbvu this is €18.800; € 153.500; € 87.615; -€ 14.963 € 113.460 in year 1, 2, 3, 4 and 5  The discount rate is 0,15 (15 percent)  =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(- 14963)/(1,15^4)+113460/(1,15^5)  So, the DCF is €237.878 in 5 years  This number is not totally fair, as it also includes the funding in these 5 years FUNDING MASTERCLASS
  12. 12. VALUATION REAL OPTION PRICING NPV = -1000 + 0.7*0.3*100 + 0.7*0.5*3000 + 0.7*0.2*6000 + 0.3*0 = 1471 investment 1000 succes low 1000 medium 3000 high 10000 failure 0 0.7 0.3 0.5 0.2 0.3 FUNDING MASTERCLASS
  13. 13. VALUATION COMPARINGTO OTHER STARTUPS  Find comparable startups (stage and market) and look for (public) data on the investments they made, talk with them or people in their circle.  Check websites like for this too  Valuation also depends on the investor’s previous investments, if you find that an investor takes 20-30% equity for €250k-350k this investor might look for valuations from €833k to €1.75M  Serial entrepreneur: look at your previous comparable startups (stage and market) and add a premium valuation for experience and network FUNDING MASTERCLASS
  14. 14. VALUATION OTHER Investor policy, e.g. “the maximum post-money valuation for seed money is $2M” Investor divides the numbers the entrepreneur provides by 10 … entrepreneur knows, so multiplies by 10, etc. Profit times 5, revenue times 2 (or any number), industry multipliers, β Tens of other methods FUNDING MASTERCLASS
  15. 15. THE INVESTMENT PROCESS GO / NO GO decision after every stage in the deal making process:  First contact, pitch  Personal connection  Business plan and/or presentation  Term sheet  Negotiations  Signing term sheet (exclusivity phase investor)  Due diligence  Participation contract  Deposit of money and changes of legal structure FUNDING MASTERCLASS
  16. 16. THE PROCESS 1/9 FIRST CONTACT, PITCH You can pitch when you meet an investor at an event Get an introduction from somebody who knows the investor Or select the right investors for your startup and send them an introduction email Do not send your full business plan at first contact! FUNDING MASTERCLASS
  17. 17. THE PROCESS 2/9 PERSONAL CONNECTION Be clear in your goals and expectations Listen to the investor’s perspective and ask questions First agree on mutual interest on your business Do not start to talk about valuation immediately Set goals for a next meeting FUNDING MASTERCLASS
  18. 18. THE PROCESS 3/9 BUSINESS PLAN / PRESENTATION Give a 10-15 minute presentation highlighting the most important parts of your business plan, but also working on the relationship with the investor and discussing questions together. Send your business plan. Only ask to have a NDA signed in case you disclose technology that is not patented/public yet. Propose a date for the next meeting with a clear agenda immediately. Keep in control, don’t loose momentum. FUNDING MASTERCLASS
  19. 19. THE PROCESS 4/9TERM SHEET Investor will send a term sheet in case the investor wants to proceed with the process. In the termsheet the most important investment critera and terms are defined, like: Valuation Preferred stock and influence rights IP claims Obligations founders FUNDING MASTERCLASS
  20. 20. THE PROCESS 5/9 NEGOTIATIONS:VALUATION • WithVCs it’s easier to ask more money than to give away less shares, with informal investors it’s the other way around. • Investment in multiple stages (one contract) can lead to better valuation. E.g., $200k at once will come at lower valuation than $100k upfront and $100k after first customer. • More risk for you: what if the customer comes too late? FUNDING MASTERCLASS
  21. 21. THE PROCESS 5/9 NEGOTIATIONS: SHARE HOLDERS • Drag-Along right • If big shareholders sell, small shareholders are forced to sell too • Tag-Along right • Like the previous, but small shareholders are not forced, they have the right • Pre-emption right • Before another shareholder comes in, the existing shareholders get the right to buy new shares • Right of first refusal • Like the previous, but also for existing shares and at the price offered by the potential buyer FUNDING MASTERCLASS
  22. 22. THE PROCESS 5/9 NEGOTIATIONS: GENERAL Preference rights, exit options, and penalties • What if it goes very good? • More important: what if it goes bad? • Will you lose your shares? • Will you lose your management position? FUNDING MASTERCLASS
  23. 23. THE PROCESS 5/9 NEGOTIATIONS:TAKE CONTROL • It is your business • Don’t get controlled and sucked up by the game • Be hard on the content, but soft on the relationship • Don’t get intimidated by negotiating tactics • If you don’t like the deal, take time to negotiate • Use an experienced and trusted advisor/mentor/lawyer  … and dare to walk away and cease the deal. Be nice though, it gives you credits FUNDING MASTERCLASS
  24. 24. THE PROCESS 6/9 SIGNINGTERM SHEET Be aware: after signing, the startup and investor go in an exclusivity phase: founders can not make a deal with another investor for a period of time Make sure there’s a deadline on the due diligence process defined in the term sheet: you don’t want to be exclusive a long time and not have a deal. FUNDING MASTERCLASS
  25. 25. THE PROCESS 7/9 DUE DILIGENCE In the due diligence the investor will research the founders, the books, contracts, IP and all that is or can be relevant for continuing or ceasing the deal. Make sure that all info is complete and searchable for the investor. You can also do a form of due diligence on the investor. Due diligence can be used for renegotiating by the investor in case you forgot to share something important, or can cancel the deal completely. So, be honest about the risks and difficulties before. FUNDING MASTERCLASS
  26. 26. THE PROCESS 8/9 PARTICIPATION CONTRACT In the participation contract all aspects of the investment are defined, including agreements for future events. Get your own lawyer, preferably paid from the future investment capital (not your current account) This contract takes most time to review and negotiate. After signing the deposit of money and changes of legal structure can be done. FUNDING MASTERCLASS
  27. 27. THE PROCESS 9/9 LEGAL AND FINANCIAL WRAP-UP Deposit of money (only then the deal is completed!) Changes of legal structure Changes of management freedom and board structure FUNDING MASTERCLASS
  28. 28. AFTERTHE INVESTMENT • Keep working on the relationship with your investor • Get used to an extra decision maker in your team • Prepare for more financial and strategic reporting • Use the network and time of the investor wisely • Keep looking for additional funding and investors: your investor will help with contacts and negotiating with them or provide even an additional round of funding FUNDING MASTERCLASS
  29. 29. MASTERCLASS SCHEDULE  Session 1: Introduction to funding language + business planning;  Session 2: Determining funding need + milestone-based funding;  Session 3: Building your financial investment plan;  Session 4: Investor readiness;  Session 5: Advanced funding and wrap-up. FUNDING MASTERCLASS
  30. 30. YOUR NEEDS? What do you want me to cover in the final session? FUNDING MASTERCLASS
  31. 31. FOLLOW ME Benno Groosman MScBA Experienced startup entrepreneur FUNDING MASTERCLASS