Lecture at the Founder Institute, Paris, France 1 February 2011 http://founderinstitute.com (cc) BY NC SA, Rodrigo SEPÚLVEDA SCHULZ http://www.rodrigosepulveda.com

1. Source: http://twistedsifter.com/2009/11/how-to-lose-193-million-in-7-hands-of-poker/
Fundraising
Rodrigo A. Sepúlveda Schulz
01 February 2011, Paris - The Founder Institute - (cc) BY NC SA

2. http://www.RodrigoSepulveda.com

5. Summary
✤ how much to raise ?
✤ what valuation ?
✤ how a fund works & what VCs look for
✤ risk management

6. 1. how much to raise ?

7. PnL projections is the basis

11. 2.2 million

12. insight 1 = cashflow > 0, around month 21
2.2 million

13. insight 1 = cashflow > 0, around month 21
2.2 million
insight 2 = the business needs about 2.2m

17. Adjust the model for uncertainty :20-30%
2.8 million

18. 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)

19. 2. what valuation ?

20. http://www.ownyourventure.com/equitySim.html

21. the good (theoretically)

22. the bad (your projections)

23. the bad (your projections)

24. the bad (your projections)

25. the bad (your projections)

26. the bad (your projections)

27. the ugly

28. solution: raise in tranches
Series A
Series B

29. series A : 12 mo. cash, no options

30. great execution commands higher
pre-money valuation 4 next round

31. Series B : add an option pool !

32. example of an exit price
(2x revenues, after 4-5 years)
(fully diluted)

33. 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)

34. specific clauses affect capital-gains
more 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

35. 3. how funds work
& what VCs look for

37. fund lifetime ~10 years
let’s assume for this example a $100m fund
with 4 investment professionals

38. extension
fund lifetime ~10 years up to 2 years
let’s assume for this example a $100m fund
with 4 investment professionals

39. 10 years

40. LPs = Limited
Partners put money in
$
10 years

41. LPs = Limited
Partners put money in
$
10 years
GPs = General Partners = the VCs :
‘manage the money’ =
they invest over 4-5 years

42. LPs = Limited money has to be returned to LPs
Partners 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

43. LPs = Limited money has to be returned to LPs
Partners 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”

44. ✤ 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...

45. understand why there is a liquidity
clause after 5 years !
startup : 5y with VC
10 year fund
investment period

46. understand the age of the fund
startup : 5y with VC
10 year fund
investment period

47. understand the age of the fund
startup : 5y with VC
10 year fund
investment period

48. how LPs make money

49. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...

50. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...
100m * (1+15%)^10 = 400m

51. 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

52. 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.

54. how GPs make money

55. how GPs make money
1) management fees ~1,5-2,5% of fund/year

56. 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

57. 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

58. 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.

59. http://www.avc.com/a_vc/2008/08/venture-fund--1.html

60. 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

61. understand you are competing for the same
cash 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

62. understand you are competing for the same
cash 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

63. understand you are competing for the same
cash 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

64. 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...

65. 4. risk management

66. 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)

67. Team

68. Target market and B-model

69. Technology

70. Summary
✤ how much to raise ?
✤ Valuation & tranches
✤ how a fund works & what VCs look for
✤ risk management

71. Thank you!