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When & How to Raise Venture Capital
Frank Rimalovski gave a presentation on when and how to raise venture capital. He discussed the different types of venture investors including angels, seed funds, and venture capital funds. He explained how VC funds work using a 2-and-20 fee structure and how they aim to make returns through investing at low valuations and exiting at higher valuations through IPOs or acquisitions. Rimalovski also covered VC math through an example of startup ownership dilution over multiple funding rounds. He advised founders to seek funding after achieving product-market fit and provided tips for what VCs look for in investments.
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When & How to Raise Venture Capital
- 1. @NYUEntrepreneur When & Howto Raise Venture Capital Frank Rimalovski Executive Director NYU Entrepreneurial Institute March 7, 2015
- 2. @NYUEntrepreneur Topics u Types ofventure investors u How VC works u VC math u When to look for VC? u Q&A 2
- 3. @NYUEntrepreneur Types of VentureInvestors
- 4. @NYUEntrepreneur investor|in-ˈvestər| noun one who expendsmoney with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property…
- 5. @NYUEntrepreneur Myth: Venture Capital fundsare the primary source of startup funding
- 6. @NYUEntrepreneur Venture Funding Lifecycle 6 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem &develop MVP Seek Validation that people are interested in your product/ service Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants, Crowdfounding Competitions Founders + Credit cards I-Corps Crowdfounding Accelerators SBIR/STTR + Friends & family Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation* Source: startupcompass.co
- 7. @NYUEntrepreneur Types of VentureInvestors Stage Pre-Seed Seed/Startup Early Late Type Founder(s), friends & family Individual angels/groups & seed funds Venture Capital Funds Financial Investors Strategic/Corporate Typical Amount $5,000 to $250,000 $25,000 to $1,000,000 $2,000,000 and up Source of Funds Individuals Individuals Institutional Investors, Family Offices & Corporations Number of rounds Single Single Multi Types of investments Convertible debt & common stock Converts, common & preferred stock Preferred stock
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- 9. @NYUEntrepreneur The Basics u VCsmanage “OPM” o Pension funds, foundations, endowments, financial institutions, family offices, etc. u 10-year fund life u “2-and-20” Fund returns 5 10 15 Fund I Fund II Fund III Fund investments
- 10. @NYUEntrepreneur How VCs MakeMoney u Investing at low valuation (through multiple rounds at increasing valuations) and then…
- 11. @NYUEntrepreneur How VCs MakeMoney u Investing at low valuation (through multiple rounds at increasing valuations) and then… u Exit (a/k/a liquidity event) at a higher value o Initial Public Offering (IPO) o Merger into a Public Company o Merger into another private company o Return of capital from cash flow o Asset sale
- 12. @NYUEntrepreneur Myth: VCs make moneyon every deal
- 13. @NYUEntrepreneur 75% of startupsfail! 13 • Deals turn out badly • Shut down or sold for < money invested • Investors get all money even, though it isn’t much Strike Outs • Going mostly sideways • Turn into businesses, but only produce 1-2x gains • Investors get most of money generated Singles & Walks • Work out the way you thought • Produce 5-10x gains • Entrepreneurs generally do very well on these deals Home Runs Source: Fred Wilson
- 14. @NYUEntrepreneur VC MathNB: Figuresand sequencing are intended to be illustrative. Your mileage will vary.
- 15. @NYUEntrepreneur From idea toincorporation Inspiration & ideation $500 Prototyping Fund Grant Customer discovery Customer validation Problem-Solution Fit! Develop prototype Test prototype Receive $5k E-Team Grant Hire McCarter & English Form SLE Split founders equity Open account at Silicon Valley Bank Founders 100% Fully Diluted Ownership
- 16. @NYUEntrepreneur In search ofproduct-market-fit Accepted to Summer Launchpad Deposit $7.5k at SVB Customer discovery Customer validation Secure early adopters Product market fit! In Xconomy! Begin to craft VC pitch Commence fund raise! Founders 100% Fully Diluted Ownership
- 17. @NYUEntrepreneur Raise seed round 3months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m NYU Innovation Venture Fund, Quotidian Ventures & 2 angels complete round Founders 100% Fully Diluted Ownership
- 18. @NYUEntrepreneur Raise seed round 3months & 30 pitches later Greycroft Leads Series Seed Pre-$ $3.00m Raise 1.00 Post-$ $4.00m Deposit $1.0m with SVB Pay McCarter & English Back to work Founders 75% Seed Investors 25% Fully Diluted Ownership
- 19. @NYUEntrepreneur Hire first employees Add10% Option Pool Founders 75% Seed Investors 25% Fully Diluted Ownership
- 20. @NYUEntrepreneur Options u Definition: Rightto buy common stock at a specified price within a pre-determined time u Why use options? o Aligns incentives between parties o Saves money for the company & investors o Tax & capital efficient for employees u Dilution borne by founders & prior investors u 10-20% pool is customary 20
- 21. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 22. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 23. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 24. @NYUEntrepreneur Hire first employees Add10% Option Pool Hire first employees Identify repeatable & scalable business model In NY Times! Draft VC pitch Commence VC raise Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 25. @NYUEntrepreneur 5 months &40 pitches later Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 67% Seed Investors 23% Options 10% Fully Diluted Ownership
- 26. @NYUEntrepreneur Make room formore options! Flybridge Capital Offers Pre-$ $7.50m Raise $2.50m Options 15% * Founders 60% Seed Investors 20% Options 20% Fully Diluted Ownership
- 27. @NYUEntrepreneur Smaller piece ofa bigger pie! Post Money Value Founders $4.50m Seed 1.50 Options 1.50 Flybridge 2.50 Post-$ $10.00m u 50% step-up from Seed! u $2.5m in the bank u David Aronoff & John Elton on your board u Growing a team u Scaling a business u Life is good! Founders 45% Seed Investors 15% Options 15% Flybridge 25% $7.50m Pre-$ Fully Diluted Ownership
- 28. @NYUEntrepreneur VC Math LessonsLearned u If you raise $, you will be diluted u Options come out of your hide, not theirs u Timing of your raise will be key u Valuation nor your % ownership is everything u Focus on things that drive enterprise value, not just what maximizes your ownership
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- 30. @NYUEntrepreneur On Lawyers… u Importantto pick a very experienced one o Not the top Wall Street lawyer you can find o Not your cousin Murray o Not your patent attorney o Not the guy who did you will/mortgage refi o …someone who does venture financings daily u Doesn’t have to be local, but it helps 30
- 31. @NYUEntrepreneur When to Lookfor Funding? 31
- 32. @NYUEntrepreneur When to Lookfor Funding? 32 ① Discovery ② Validation ③ Customer Creation ④ Company Building Test assumptions about customer needs/problem & develop MVP Seek Validation that people are interested in your product/ service Begins to build demand & improve efficiency of customer acquisition Drive growth aggressively & execute business model Invention & ideation Grants, Crowdfounding Competitions Founders + Credit cards I-Corps Crowdfounding Accelerators SBIR/STTR + Friends & family Angels Seed funds Venture capital funds Leasing Factoring Vendor finance Private equity Public markets Valuation* Source: startupcompass.co
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- 34. @NYUEntrepreneur What do VCslook for? 34
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- 36. @NYUEntrepreneur VCs invest inbusinesses. Not ideas. Not technologies. Your technology/IP is only one of the many critical pieces necessary to build a business. 36
- 37. @NYUEntrepreneur What do VCslook for? u Serve unmet need in large & growing market u Differentiated solution(s) + supporting data u Customer validation of pain & gain u Scalable & repeatable business model that generates high ROI u Focused teams with proven ability to execute 37
- 38. @NYUEntrepreneur VC Dealflow Funnel 1,000150 25 5-10 Inbox Desk Meet Due Dili Deal Credenza Reject Source: Arthur Klausner
- 39. @NYUEntrepreneur Your initial goalis to get a meeting! 39
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- 41. @NYUEntrepreneur VCs are easyto meet! VCNYU Entrepreneurial Institute Respected VC or angel Present/former portco exec Well-respected entrepreneur/ exec Service providers Friend of VC partner
- 42. @NYUEntrepreneur Myth: Don’t approach VCs untilyou are ready to raise money 42
- 43. @NYUEntrepreneur Lines not Dots 43 Source:bothsidesofthetable.com
- 44. @NYUEntrepreneur Lines not Dots 44 Source:bothsidesofthetable.com
- 45. @NYUEntrepreneur Final Thoughts onFundraising u Be prepared, but remember less is more u You do not need a prospectus/biz plan u Don’t hire an agent/banker u You want professional investors 45
- 46. @NYUEntrepreneur Lessons Learned u Manysources of capital…VC comes later u VCs are professional money managers u Focus on things that drive enterprise value u Investors fund businesses, not technology u Get to know investors early in the process u It’s a complicated process…surround yourself with experienced advisors 46
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- 52. @NYUEntrepreneur52Confiden'al $200k NYUEntrepreneurs Challenge
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