Fundraising

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Lecture at the Founder Institute, Paris, France
1 February 2011
http://founderinstitute.com

(cc) BY NC SA, Rodrigo SEPÚLVEDA SCHULZ
http://www.rodrigosepulveda.com

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  • Fundraising

    1. Source: http://twistedsifter.com/2009/11/how-to-lose-193-million-in-7-hands-of-poker/FundraisingRodrigo A. Sepúlveda Schulz01 February 2011, Paris - The Founder Institute - (cc) BY NC SA
    2. http://www.RodrigoSepulveda.com
    3. Summary✤ how much to raise ?✤ what valuation ?✤ how a fund works & what VCs look for✤ risk management
    4. 1. how much to raise ?
    5. PnL projections is the basis
    6. 2.2 million
    7. insight 1 = cashflow > 0, around month 21 2.2 million
    8. insight 1 = cashflow > 0, around month 21 2.2 millioninsight 2 = the business needs about 2.2m
    9. Adjust the model for uncertainty :20-30% 2.8 million
    10. how much money? key take-aways✤ careful financial planning is necessary ✤ tells you exactly how much money is required ✤ (adjust for uncertainty with analytical tools) ✤ forces the entrepreneur to test his hypothesis and business logic ✤ gives before-hand many of the answers to investor questions✤ Allows for scenario building (high, low, target)
    11. 2. what valuation ?
    12. http://www.ownyourventure.com/equitySim.html
    13. the good (theoretically)
    14. the bad (your projections)
    15. the bad (your projections)
    16. the bad (your projections)
    17. the bad (your projections)
    18. the bad (your projections)
    19. the ugly
    20. solution: raise in tranches Series A Series B
    21. series A : 12 mo. cash, no options
    22. great execution commands higherpre-money valuation 4 next round
    23. Series B : add an option pool !
    24. example of an exit price(2x revenues, after 4-5 years) (fully diluted)
    25. valuation take-aways✤ 1st round (seed and/or series A) ✤ not a real life valuation, it’s only about how much you want to give away for the amount of money you need > implied valuation ✤ minimize dilution by raising in tranches✤ 2nd round (series B) ✤ you need to prove execution to raise at a higher valuation ✤ raise enough to reach cash-flow positive status✤ 3rd round+ : growth (organic or acquisition)
    26. specific clauses affect capital-gainsmore than valuation...✤ liquid preferences ✤ participating or not ✤ multiple or not ✤ http://privateequityblogger.com/2007/06/liquid-preference.html✤ ratchet ✤ http://www.startupcompanylawyer.com/2007/08/04/what-is- full-ratchet-anti-dilution-protection
    27. 3. how funds work& what VCs look for
    28. fund lifetime ~10 yearslet’s assume for this example a $100m fund with 4 investment professionals
    29. extension fund lifetime ~10 years up to 2 yearslet’s assume for this example a $100m fund with 4 investment professionals
    30. 10 years
    31. LPs = LimitedPartners put money in $ 10 years
    32. LPs = LimitedPartners put money in $ 10 years GPs = General Partners = the VCs : ‘manage the money’ = they invest over 4-5 years
    33. LPs = Limited money has to be returned to LPsPartners put money in with an IRR = Internal Rate of Return $ $ 10 years GPs = General Partners = the VCs : ‘manage the money’ = they invest over 4-5 years
    34. LPs = Limited money has to be returned to LPsPartners put money in with an IRR = Internal Rate of Return $ $ 10 years GPs = General Partners = the VCs : Only 50-60% is invested in ‘manage the money’ = NewCos, they invest over 4-5 years rest kept as “dry powder”
    35. ✤ there are usually investment rules: ✤ ex: only 5% of a fund in a company ✤ ex: no cross-fund in a single company ✤ which means for ex. 100*5%= 5m MAX in the life of the company from your VC ! ✤ it also means 20 companies max/fund ✤ with 4 investors, investing over 5 years, that’s 1 new company / investor per year ! ✤ statistically 60% of companies fail, 30% do just OK, 10% do great...
    36. understand why there is a liquidityclause after 5 years ! startup : 5y with VC 10 year fund investment period
    37. understand the age of the fund startup : 5y with VC 10 year fund investment period
    38. understand the age of the fund startup : 5y with VC 10 year fund investment period
    39. how LPs make money
    40. how LPs make money 1) hurdle rate ~15%, c. 4x (gross) required...
    41. how LPs make money 1) hurdle rate ~15%, c. 4x (gross) required... 100m * (1+15%)^10 = 400m
    42. how LPs make money 1) hurdle rate ~15%, c. 4x (gross) required... 100m * (1+15%)^10 = 400m 2) carried interest : any upside above the hurdle rate is shared : 80% for LPs, 20% for GPs
    43. how LPs make money 1) hurdle rate ~15%, c. 4x (gross) required... 100m * (1+15%)^10 = 400m 2) carried interest : any upside above the hurdle rate is shared : 80% for LPs, 20% for GPs there are subtleties: hurdle rate or not, on invested money or not, % might change if you are a great fund, etc.
    44. how GPs make money
    45. how GPs make money 1) management fees ~1,5-2,5% of fund/year
    46. how GPs make money 1) management fees ~1,5-2,5% of fund/year 100m * 2% = 2m/year. means 2m * 10y = only $80m left to invest
    47. how GPs make money 1) management fees ~1,5-2,5% of fund/year 100m * 2% = 2m/year. means 2m * 10y = only $80m left to invest 2) carried interest : any upside above the hurdle rate is shared : 80% for LPs, 20% for GPs
    48. how GPs make money 1) management fees ~1,5-2,5% of fund/year 100m * 2% = 2m/year. means 2m * 10y = only $80m left to invest 2) carried interest : any upside above the hurdle rate is shared : 80% for LPs, 20% for GPs there are subtleties: % on invested money or not, % might change if you are a great fund, etc.
    49. http://www.avc.com/a_vc/2008/08/venture-fund--1.html
    50. Why VCs raise more than 1 fund management fees add up, before making money on capital gains Fund I Fund II Fund III they need however to show success before raising a new fund
    51. understand you are competing for the samecash with a different risk/ return profile startup : 5y with VC high risk / high return startup : 5y with VC low risk / medium return startup : 5y with VC medium risk / medium return 10 year fund investment period
    52. understand you are competing for the samecash with a different risk/ return profile startup : 5y with VC high risk / high return startup : 5y with VC low risk / medium return startup : 5y with VC medium risk / medium return 10 year fund investment period
    53. understand you are competing for the samecash with a different risk/ return profile startup : 5y with VC high risk / high return startup : 5y with VC low risk / medium return startup : 5y with VC medium risk / medium return 10 year fund investment period
    54. VCs key take-aways✤ understand why there are liquidity clauses✤ understand the “age” of the fund : money for you or not✤ understand “dry powder” for subsequent rounds✤ understand that you are one of many startups. What matters is the performance of the fund✤ understand VCs make money only if you do really great (in the top 10%) after paying for the hurdle rate and 80% carried interest...
    55. 4. risk management
    56. it’s all about minimizing risk first✤ Execution risk => team✤ Opportunity risk => market size, market traction✤ Business model risk => business plan✤ Technology risk => prototype, launched site✤ All the rest => business plan, reference calls, due diligence✤ The only thing left should be the market risk (competition, growth)
    57. Team
    58. Target market and B-model
    59. Technology
    60. Summary✤ how much to raise ?✤ Valuation & tranches✤ how a fund works & what VCs look for✤ risk management
    61. Thank you!

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