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2016 07-28-disrupt asia

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These are slides from a talk I gave in 2016 at the DisruptAsia conference in Colombo, SrI Lanka about raising money for a startup company. In addition to concepts I also went through some of the journey of WSO2 funding.

Published in: Software

2016 07-28-disrupt asia

  1. 1. Funding Journey (Or, Buckle Up, Its Going to Get Rough) Sanjiva Weerawarana, Ph.D. Founder, CEO and Chief Architect July 28, 2016 – Disrupt Asia Conference
  2. 2. Who owns your company? • Founders • Common vs. preferred stock • Vesting – Or what happens if a co-founder quits or has to be fired • Example: – 3 founders: A, B & C – 40/30/30 – Assume total of 1m shares – So A=400,000, B=300,000, C=300,000 5/19/2018 2 0% 20% 40% 60% 80% 100% A
  3. 3. Why do you need money? • To build a product • To market something you’ve built to get more customers • To have bigger parties 5/19/2018 3
  4. 4. Valuation • Or, if I’m to give you Rs. 5m for the company, how much of the company do I get for it? • Pre-money vs. Post-money valuation • Early stage (= idea + slide deck) – Random numbers .. US concept when I started was $500k/founder • Revenue generating – Revenue multiplier with appreciation for growth potential • In reality – Really random, luck, hype etc. etc. 5/19/2018 4
  5. 5. Employee Stock Options • If you want to build a world dominating company, you can’t do it alone • Share the potential for non-linear return with everyone – That’s my philosophy anyway – you as the owners get to do what you want. In WSO2, everyone is a shareholder and about ~27% of the company is owned by employees right now. • How? Create a pool of stock options and issue them to people – Strike price • Good investors will insist on this 5/19/2018 5
  6. 6. Angel / Seed Round • Friends and family or angel investors • Good model is if you can get convertible debt as you have no idea what the real value is – YCombinator SAFE • If investor refuses, you really have no choice .. If you need their money you need them – Only way to get better valuations is if there are multiple investors are interested and you can get them to fight to own a piece of your baby – Angel/seed investors may have simple benchmarks like 6%, 10% or whatever 5/19/2018 6
  7. 7. Example • Lets assume you get an offer to invest Rs. 5M at a post-money valuation of Rs. 20M and the investor also wants 10% option pool to be created • New structure of share holding – Investors: 5/20 = 25%, 384,615 shares – Reserved for stock options = 10%, 153,846 shares – Founders = 65%, 1000,000 shares • A = 400,000/1,538,461 = 26% • B, C = 300,000/1,538,461 = 19.5% 5/19/2018 7 0% 20% 40% 60% 80% 100% A
  8. 8. WSO2 Angel/Seed Round • Friend I had (James Clark): $250k • Paul’s father: $200k • Two others: $50k each • Co-founders: $25k each (x 3) • Total $625k, initial pre-money valuation: $1.5M – Investors got 625/(1500+625) = 29.4% of company 5/19/2018 8
  9. 9. The Pitch • Lots of theories on what is a good pitch – google it • Friend (Miko Matsumara) helped WSO2 with initial deck for first “institutional round” • Pitched to lots of people – Easy to get intros – people with money want to meet people with (hopefully good, FUTURE valuable) ideas • Earlier the stage the company is in the higher the risk for investor – That means return POTENTIAL must be similarly high – Pitch world domination, not Western Province domination 5/19/2018 9
  10. 10. Due Diligence • Checking out whether what you said is really what it is • Keep your legal, finance. HR house in order • Common sense, really – No need to be creative, innovative, etc. – just follow the law and keep things 100% perfectly in order • Now you have nothing to worry about in due diligence 5/19/2018 10
  11. 11. What are investor reactions? • No • No answer • No answer • No answer • No answer • No answer (And if you’re lucky) • Yes 5/19/2018 11
  12. 12. Control • Sri Lankans are hung up over 51% • In tech companies, founders have a lot of control – No matter what %ge of the company they own – E.g. Steve Jobs being fired • If you need the money, worry about that first and later about control • Good strategy: get multiple investors who are slightly not cool with each other 5/19/2018 12
  13. 13. When do you raise funds? • Matra goes “when you don’t need it” • Well duh … but you also have to run a company and deliver on the BS you told the investors (I mean vision)! • I’ve raised when I had to – Not the best strategy • It take a LOT of effort to raise funds – Unless you get lucky 5/19/2018 13
  14. 14. WSO2 Funding Rounds • Seed: $625K • A: $4M • B: $6M (including bridge conversion) • C: $10M • D: $25M (including bridge conversion) 5/19/2018 14
  15. 15. How many times have you pitched? • < 5? • < 10? • < 20? • > 20? 5/19/2018 15
  16. 16. WSO2 pitches • So far I have personally pitched > 120 times • And managed to get 5 to say yes and to actually give money 5/19/2018 16
  17. 17. 5/19/2018 17 “If at first you don’t succeed, try, try, try again.” W.E. Hickson, Author, 1803-1870
  18. 18. Does it get easier to get money? • For some, yes! • For WSO2, so far not so  – (That’s why I laugh inside when people say “you guys are so successful”) 5/19/2018 18
  19. 19. Clean Money vs. Complex Money • Investors (naturally) want to protect their money – If the company is going down they get to take whatever possible first – Founders will get nothing probably • Some also want to take more of the cake – Liquidation preferences – Ratchets – Other crap I don’t understand • WSO2 got lucky – Pradeep Tagare in Intel Capital started it – We have refused complex money – that means 27% ESOP means 27% of actual value 5/19/2018 19
  20. 20. Summary • If you need to raise money don’t hesitate • Raising money is not easy – OK at least for me – some do get damned lucky (e.g Slack) • Use the money intelligently – Watch those parties (or fish tanks) – Eventually, your shares are getting diluted • (I now own < 3% of WSO2) • Life is too short to take anything seriously – Even other people’s money 5/19/2018 20
  21. 21. 5/19/2018 21 “Don’t be encumbered by history. Go and do something wonderful.” Robert Noyce, Founder of Intel, 1927 - 1990

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