Fundraising debugged: When, Why & Who to Raise (and not raise) Money From

Roy Rodenstein
Roy RodensteinEntrepreneur at Going.com
Fundraising Debugged
   When, Why & Who to Raise
   (and not raise) Money From


          Roy Rodenstein
             @royrod
     BarCamp Boston 5, 4/17/2010
You

 Should

 Starting
    a
Kompanny!
About Me - Roy Rodenstein
                http://how2startup.com       @royrod          royrod@gmail


      •   OG[H] (Original Gangsta Hacker): Georgia Tech, MIT Media Lab
      •   UI/UX Research: Xerox Palo Alto Research Labs, AT& Labs
      •   PM/Mktg/BizDev/CEO etc: iPhrase (NLP startup), IBM, Going, AOL


          My Company: User-Gen Local Events + Ticketing (originally HeyLetsGo)

Co-found Going.com    $500k Seed              Additional Funding             Acquired
     Rejected by YC         $3M Series A
             Quit Day Job




   2005               2006                 2007            2008              2009
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Source:
                         Bootstrap
Pros
• No dilution
• Simple, cheap, quick

Cons
• It ain’t OPM (Other People’s Money)
• Morale impact if funds run low

Bottom Line
• Good to get some skin in the game
• But don’t overdo it- fundraising is better than giving up
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Source:
                  Friends & Family
Pros
• Low dilution
• Simple, cheap, quick
• Feels great if make them money!

Cons
• Feels horrible if lose their money!
• Can complicate later rounds
• “Only money” / no further help

Bottom Line
• Keep terms very basic, no board seats, no blocking rights...
• Make sure it’s money they can afford to lose
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Source:
           Incubators / Seed Funds
Pros
• Moderate dilution
• Help with Legal, IT, PR, etc.
• Mentors & peers
• Leg up on fundraising

Cons
• $12k is not a lot of money
• Usually have to move temporarily

Bottom Line
• Great for first-timers
• Post-program support differs, YMMV
• Dilution is dilution
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Source:
                          Angels
Pros
• Good middle ground, if pick right ones
• Serious money w/o board seat
• Manageable dilution e.g. convertible debt
• Long-term morale, PR, etc. benefits

Cons
• Their money == wrong angel is trouble
• Can require herding cats
                                              West: Ron Conway, Dave McClure…
Bottom Line                                   East: Dharmesh Shah, John Landry…
• Right angel can be hugely valuable
                                              Groups: Founder Collective, eCoast,
• Beware of getting bogged down                       Founders Fund…
• Best or worst of both worlds
Fundraising Decoder Ring
Source       Bootstrap         Friends & Family     Incubators /       Angels                  VC
              aka yourself /                        Seed Funds      Individuals, Groups
               co-founders

                                                        Idea /
Stage            Idea           Idea / Prototype
                                                      Prototype
                                                                   Idea / Prototype         “Traction”


Amount                            $5k - 200k+        $5k - $20k+    $50k - $1M+           $500k - $10M+

                                                                     Convertible
                Debt,           Convertible Debt,
Form       Convertible Debt         Equity
                                                       Equity          Debt,                 Equity
                                                                       Equity

Dilution          0%                 5-10%             5-10%            5-20%                20-70%


Time             Days                Weeks             Weeks       Weeks - Months            Months


Cost           $0 - $1k            $500 - $5k        $500 - $5k       $2k - $10k          $10k - $50k+


Exit              Any                 Any              $5M+              $5M+                $20M+
Source:
                           VC
Pros
• Real money for scale, can pay yourself
• Right VCs have strategic relationship

Cons
• Closing VC rounds is major time sink
• Board management is major time sink
• Major dilution == big exit needed
• Can come with strings e.g. CEO/team

Bottom Line
• Commitment level == getting engaged
• Complex deal terms, have to know which to fight for
• Key for building a big company, from FB to Xobni
VC Fundraising Myth-Bustin’
Myth: Higher Valuation is Always Better
• You can price yourself out of future rounds
• “Down” rounds (valuation falls) are really, really painful

Myth: Angel First, Then VC Reduces Dilution
• Reality is Angel and VC valuations are not that different
• Is $200k for 10% dilution better than $1M for 25% dilution?
• Is 10% dilution and then 50% dilution better than 50% dilution?

Myth: Control is About Board Votes and % Ownership
• Good VCs will never force founders to do something
• In reality, nothing ever comes down to a “vote”
• “50% ownership” is a red herring, VC controls are really about dilution and sale
   blocking rights

Myth: I Shouldn’t Talk to VCs Until I Need that Mill
• Yes, you should have your story together before talking to VCs
• But much of “traction” == “I’ve been talking with them for a few months and see growth”
Q&A Time!

Advanced Topics
• Convertible rounds: discounts, caps, warrants
• Valuation
• Fostering deal competition
• Deal terms e.g. pro-rata (& super), anti-dilution, etc.
• Inside rounds, follow-on rounds, leading a round etc.
• Managing the lawyers
• Managing the board
• Term sheets: comparing, exploding
• Compensation across funding stages
• Pitch decks
• Financial modeling
• Business plans (do plan, don’t do a 50-page document)
• VC seed rounds
• Signaling
• VC fund size, fund life stages, LPs, etc.
Further Resources
Angel, Incubator, VC Lists
• Xconomy: http://www.xconomy.com/boston/resources/
• Jon Pierce Boston Angels List: http://twitter.com/jonpierce/boston-angels

Relevant Blogs
• VentureHacks: http://www.venturehacks.com
• Mark Suster: http://www.bothsidesofthetable.com
• Brad Feld: http://www.feld.com
• Chris Dixon: http://cdixon.org
• Fred Wilson: http://www.avc.com
• Paul Graham: http://www.paulgraham.com/articles.html
• (me): http://how2startup.com

Documents
• YC Series AA Funding Docs: http://ycombinator.com/seriesaa.html
• AVC Seed Docs: http://avc.com/a_vc/2010/03/standardized-venture-funding-docs.html
• Wilson Sonsini Term Sheet Generator: https://dealbuilder.wsgr.com
Image Credits
http://www.whyy.org/blogs/itsourcity/files/2008/11/bag_of_money.png
http://www.istockphoto.com/file_thumbview_approve/6907003/2/istockphoto_6907003-cartoon-bugs.jpg
http://blogs.nyu.edu/blogs/mj11/businessofart/money.jpg
http://upload.wikimedia.org/wikipedia/commons/b/b2/Coins.jpg
http://eroidays.com/files/2009/05/guy-bootstrapping-400x300.jpg
http://futureofmoney.com/moneyconference/wp-content/uploads/2010/02/McClure.png
http://www-math.cudenver.edu/~wcherowi/sdr.gif
http://i31.photobucket.com/albums/c372/ryanmediocre2/BabyChick1.jpg
http://www.vcwear.com/fuck-id-fund-that/
http://kk.org/ct2/calvinhobbes_friends.jpg
http://www.complete80s.com/media/ghostbusters.jpg
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Fundraising debugged: When, Why & Who to Raise (and not raise) Money From

  • 1. Fundraising Debugged When, Why & Who to Raise (and not raise) Money From Roy Rodenstein @royrod BarCamp Boston 5, 4/17/2010
  • 2. You Should Starting a Kompanny!
  • 3. About Me - Roy Rodenstein http://how2startup.com @royrod royrod@gmail • OG[H] (Original Gangsta Hacker): Georgia Tech, MIT Media Lab • UI/UX Research: Xerox Palo Alto Research Labs, AT& Labs • PM/Mktg/BizDev/CEO etc: iPhrase (NLP startup), IBM, Going, AOL My Company: User-Gen Local Events + Ticketing (originally HeyLetsGo) Co-found Going.com $500k Seed Additional Funding Acquired Rejected by YC $3M Series A Quit Day Job 2005 2006 2007 2008 2009
  • 4. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 5. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 6. Source: Bootstrap Pros • No dilution • Simple, cheap, quick Cons • It ain’t OPM (Other People’s Money) • Morale impact if funds run low Bottom Line • Good to get some skin in the game • But don’t overdo it- fundraising is better than giving up
  • 7. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 8. Source: Friends & Family Pros • Low dilution • Simple, cheap, quick • Feels great if make them money! Cons • Feels horrible if lose their money! • Can complicate later rounds • “Only money” / no further help Bottom Line • Keep terms very basic, no board seats, no blocking rights... • Make sure it’s money they can afford to lose
  • 9. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 10. Source: Incubators / Seed Funds Pros • Moderate dilution • Help with Legal, IT, PR, etc. • Mentors & peers • Leg up on fundraising Cons • $12k is not a lot of money • Usually have to move temporarily Bottom Line • Great for first-timers • Post-program support differs, YMMV • Dilution is dilution
  • 11. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 12. Source: Angels Pros • Good middle ground, if pick right ones • Serious money w/o board seat • Manageable dilution e.g. convertible debt • Long-term morale, PR, etc. benefits Cons • Their money == wrong angel is trouble • Can require herding cats West: Ron Conway, Dave McClure… Bottom Line East: Dharmesh Shah, John Landry… • Right angel can be hugely valuable Groups: Founder Collective, eCoast, • Beware of getting bogged down Founders Fund… • Best or worst of both worlds
  • 13. Fundraising Decoder Ring Source Bootstrap Friends & Family Incubators / Angels VC aka yourself / Seed Funds Individuals, Groups co-founders Idea / Stage Idea Idea / Prototype Prototype Idea / Prototype “Traction” Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+ Convertible Debt, Convertible Debt, Form Convertible Debt Equity Equity Debt, Equity Equity Dilution 0% 5-10% 5-10% 5-20% 20-70% Time Days Weeks Weeks Weeks - Months Months Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+ Exit Any Any $5M+ $5M+ $20M+
  • 14. Source: VC Pros • Real money for scale, can pay yourself • Right VCs have strategic relationship Cons • Closing VC rounds is major time sink • Board management is major time sink • Major dilution == big exit needed • Can come with strings e.g. CEO/team Bottom Line • Commitment level == getting engaged • Complex deal terms, have to know which to fight for • Key for building a big company, from FB to Xobni
  • 15. VC Fundraising Myth-Bustin’ Myth: Higher Valuation is Always Better • You can price yourself out of future rounds • “Down” rounds (valuation falls) are really, really painful Myth: Angel First, Then VC Reduces Dilution • Reality is Angel and VC valuations are not that different • Is $200k for 10% dilution better than $1M for 25% dilution? • Is 10% dilution and then 50% dilution better than 50% dilution? Myth: Control is About Board Votes and % Ownership • Good VCs will never force founders to do something • In reality, nothing ever comes down to a “vote” • “50% ownership” is a red herring, VC controls are really about dilution and sale blocking rights Myth: I Shouldn’t Talk to VCs Until I Need that Mill • Yes, you should have your story together before talking to VCs • But much of “traction” == “I’ve been talking with them for a few months and see growth”
  • 16. Q&A Time! Advanced Topics • Convertible rounds: discounts, caps, warrants • Valuation • Fostering deal competition • Deal terms e.g. pro-rata (& super), anti-dilution, etc. • Inside rounds, follow-on rounds, leading a round etc. • Managing the lawyers • Managing the board • Term sheets: comparing, exploding • Compensation across funding stages • Pitch decks • Financial modeling • Business plans (do plan, don’t do a 50-page document) • VC seed rounds • Signaling • VC fund size, fund life stages, LPs, etc.
  • 17. Further Resources Angel, Incubator, VC Lists • Xconomy: http://www.xconomy.com/boston/resources/ • Jon Pierce Boston Angels List: http://twitter.com/jonpierce/boston-angels Relevant Blogs • VentureHacks: http://www.venturehacks.com • Mark Suster: http://www.bothsidesofthetable.com • Brad Feld: http://www.feld.com • Chris Dixon: http://cdixon.org • Fred Wilson: http://www.avc.com • Paul Graham: http://www.paulgraham.com/articles.html • (me): http://how2startup.com Documents • YC Series AA Funding Docs: http://ycombinator.com/seriesaa.html • AVC Seed Docs: http://avc.com/a_vc/2010/03/standardized-venture-funding-docs.html • Wilson Sonsini Term Sheet Generator: https://dealbuilder.wsgr.com