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

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+

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

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

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

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

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

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

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

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