Fund Raising Tutorial for Startups


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I had the pleasure of mentoring the 2013 Founder Institute class in Chicago on fundraising for startups. Here was my presentation.

This presentation addresses the following topics. When is it realistic to raise capital for a brand new company? How should you calculate the amount of money to raise? How should you define the use of proceeds? What materials are required to fundraise? How do you identify and qualify target angel and seed stage investors? How do you find a lead investor? What do investors expect from the company? What are typical investment structures and deal terms for seed-stage financing? How do you negotiate terms?

For future lessons, please read my 101 Startup Lessons online book at the Red Rocket Blog ( And, please follow me at

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Fund Raising Tutorial for Startups

  1. 1. Fund Raising
  2. 2. About George Deeb• Managing Partner (2010 to date)• Chairman & CEO(2009-2010)• Founder & CEO (1999-2008)• Investment Banker (1991-1999)• BBA-Finance (1987-1991)
  3. 3. Agenda• When is it realistic to raise capital?• How do you calculate the amount to raise?• How should you define use of proceeds?• What materials are required for fund raising?• How to identify & qualify target angel investors?• How do you find a lead investor?• What do investors expect from the company?• What are typical investment terms?• How do you negotiate terms?
  4. 4. When Should You Raise?• Professional Investors Typically Require . . .o Product builto Proof of concept behind the business- Growing user base- Growing revenues- Profitable unit economics, high margins- Marketing tested and profitable COA- Credible Roadmap to a 10x ROI• Which Means Bootstrapping Until Theno Your cash, home equity, credit cards, etc.o Co-founders with cash or willing to work for equityo Vendors willing to provide discounts for equityo Angels, friends, family or other seed stage investors
  5. 5. How Much to Raise?• Model What You Will Need to Fund 12-18 Mos.o Technologyo Marketingo Operationso Staff & Professionals• Ask for Double The Needo Nothing ever goes perfectly to plano Leaves you a cushion for a rainy day fundo Harder to raise money later if you miss plan• Don’t Ask for Too Mucho At seed stage, $250K to $750K is reasonableo Set clear milestones to hit, for next round
  6. 6. What Use of Proceeds?• Proceeds Must Fund Future Growtho Investors do not like paying off old debts• Improvements to Product or Technologyo Not original build, but additional features from beta• Additions to the Teamo Needed mgmt or staff for next phase of growth• Sales and Marketing Planso Salespeople if B2B businesso Consumer marketing budget for B2C businesso To scale proven initiatives to date (no experiments)
  7. 7. What Materials Needed?• High Level Investor Presentationo 10-15 page Powerpoint presentationo Company, model, team, industry, financials, needso A large problem in industry, and your scalablesolution• Backup Supporting Materialso Research done on industry & competitiono Data from past marketing testso Pipeline of sales prospects to justify first year plan• Credible References from Happy Customers• Financial Modelo Two years of history plus five years of growtho Credible roadmap to 10x ROI for investors
  8. 8. How to Target Investors?• Work Your Networko Much higher odds if a trusted person introduces you• Partners at VC Firms or Angel Networkso Individuals typically used to seed stage deals• Angel Investing Networks (online or offline)o AngelList, Gust, Hyde Park Angels• Crowd Funding & Crowd Donations Siteso Kickstarter, IndieGogo, Rocket Hub, Early Shares• Strategic Investors in Your Spaceo Companies that would most benefit from your product• Key Individuals in Your Spaceo People that understand your industry—recent exits
  9. 9. Picking a Lead Investor?• Pick the Right Firmo Clear expertise with seed stage companieso Clear expertise in your industryo Big pool of fresh funds, can grow with youo Cache of brand association with that firm• Pick the Right Persono Right personality fito Executive experience preferred to financial guyo Big rolodex to bring to the tableo Happy portfolio company references• Pick the Right Termso Best valuation and least onerous terms
  10. 10. Investor Expectations?• Large Industry, Limited Competition• A Credible and Complete Mgmt Team• Well-Thought Business & Revenue Model• Product Built and Used by Customers• Tested & Profitable Go To Market Plan• Happy Customer References• Credible Roadmap to 10x ROI• Passionate, Flexible Entrepreneurs WhoUnderstand Their Goals• Established Relationship—Don’t Start withMoney Raise, Groom Over Time
  11. 11. Investment Terms?• Decide on What Structureo Don’t believe early stage companies should take ondebt, given uncertaintieso Equity or Convertible Debt are good optionso Convertibles are most flexible for future investors• Typical Equity Deal for Seed Stageo Investors to get 25-50% stake, in totalo Preferred security—paid in front of otherso Anti-dilution protectiono Board seat and control provisions• Typical Convertible Debt Dealo Valuation 20% discount to next round--$2-$4MM capo Pre-payment premium of 1.5x-2.0x of principalo Interest rate of 5%-8% (paid in kind)o 18-24 month term
  12. 12. How to Negotiate Terms?• Create High Demand, Sense of Scarcityo Get multiple investors interestedo Let them know other term sheets coming ino Play “hard to get”, like they need you more• Be Smart of What Points are Negotiableo Certain terms are set in stone, others not• Be Smart on What are Market Rate Termso Investors can be flexible within reason• Nothing is Better Than Fast Growth Bizo Investors want to jump aboard next rocket ship
  13. 13. Further Reading• Lesson #4: How to Raise Capital for Your Startup• Lesson #5: How to Find Angel Investors• Lesson #10: How to Best Approach VC’s and Angels• Lesson #32: How to Value Your Startup• Lesson #109: Equity vs. Debt vs. Convertibles• Lesson #116: Seed Investment Terms & Trends• Lesson #119: How to Screen VC’s• Lesson #125: How to Bootstrap Finance Your