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Early stage funding
The document outlines essential strategies and considerations for early stage funding, emphasizing the importance of having a solid product, understanding the market, and building connections with potential investors. It discusses various funding sources, including friends and family, angel investors, and crowdfunding, and highlights the impact of funding timing and equity dilution. Additionally, it stresses the significance of a committed team, clear plans for capital usage, and the need for a strong network to successfully navigate the funding landscape.
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Early stage funding
- 1. KEN BERKUN, PRESIDENT LABELSTHAT TALK BERKUN@SOUNDPAPER.COM Early Stage Funding
- 2. •Me • Experienced entrepreneur •Technical background • Successfully raised both Angel and VC funds • 1 Successful exit • Working on startup #2 now • Self/Friends/Family/Angels Introduction
- 4. •A real productor service •A real understanding of the market •A real plan •Solid, committed team •Are you “all in”? •Track record •Connections •Charisma Are you fundable? Are you trendy? Investors run in herds
- 5. •Two types ofproblems 1. Need 2. Want •Aim for NEED •How do you prove it? Problem Nobody knew we needed an mp3 player
- 6. •The Sharing Economy •VirtualReality •Social networks •Clean energy •Biotech Trends
- 7. •Can you possiblybootstrap? •Once you raise money you are OWNED •Before you raise money know what it’s going to be used for and when. •How much total will you need and at what stages? •Too early is just as bad as too late. Yeah, really. Is now the right time to raise money? It’s always the wrong time. It’s always the wrong place.
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- 9. • Incubators and Accelerators •Crowd Sourcing • Crowd Funding • Debt Equity • A/R Loans • SBA Loans • Asset Loans • Self • Cash and sweat equity (bootstrapping) • Friends and Family • Individual Angels • Angel Groups • Angel Syndicates • Grants Early Stage Founding Sources
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- 12. •Unless you’re nameis Zuckerberg, start modestly •Get a success under your belt •Or make a name somehow • For instance in the open source world •Be All In •Have someone to support you •Refinance your home Starting from Scratch
- 13. • Net worthof at least one million US dollars, excluding the value of one's primary residence, • Or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) • Have the expectation to make the same amount this year. There are ways around this, but you better know what you’re doing. Accredited Investors
- 14. •% of companiesfunded “over the transom”: 0 •You need an introduction •You should have the first investor or two lined up before anAngel group pitch •This is the only way I use Linked-In •You are always selling •Your network is your success •Or pay for a fixer (risky) Connections
- 15. •These are thenew Angels •Angels are the new VCs •VCs are risk adverse •For me friendship is more important than money Friends and Family
- 16. •Find ‘em •Sell ‘em •InfoSessions •Lead Investor Individual Angels Use your six degrees of separation
- 17. •Social group thatoccasionally writes checks •YOU are the floor show •Some invest as a whole, most as individuals •You have to work the room •You must perfect your pitch •Nowadays they want to see traction Angel Groups Watch out for “service providers” people selling you things you don’t need!
- 18. Puget Sound AngelGroups Group Notes Alliance of Angels Tech focused Keirestu Forum Expensive Northwest Energy Angels Energy focused Seraph Women Focused Puget Sound Venture Club Longest running club WINGS Medical Technology Zino Rolled into K4 Seattle Angel Fund Group Fund Element 8 Clean Tech TiE Angel Group Seattle (TAGS) Very hands on Founder’s Co-op Group Fund http://startupseattle.com/2014/04/11/the-skinny-on-seattle-area-angel-groups/
- 19. • Relatively newconcept • SeedInvest, FundersClub and AngelList • A syndicate is a group of well-heeled investors (more on this later) acting as one corporate entity, commonly referred to as an SPV (special purpose vehicle), in order to invest their money into a startup. • Typically, 50 to 99 investors (the legal limit in an LLC structure) who have put in between $1,000 to $50,000 each • Indie.vc Angel Syndicates
- 20. •SBIR •NSF and NIH •Foundations •Gates • PATH Grants
- 21. • Very goodif you are at the right (early) stage • Very expensive in terms of the equity you must give up • It is what you make it • Take some equity • Small investment • Space • Lots of nurturing/Mentoring • Connections • Demo Day Incubators and Accelerators
- 22. •Crowdsourcing • Is notfunding • It’s a sales channel •Crowdfunding • Just became legal • Complicated In both cases you need a strong network to succeed. The Wisdom of Crowds
- 23. • Disadvantages • Hugepaperwork and expenses • Easily $25K to $50K – is this worth it? • You have to deal with all these investors • Must go through a portal/jump through hoops • Advantages • More evangelists • More partners • More sharing • Terms: $1M over 12 Months Crowdfunding – JOBS Act http://media.mofo.com/files/Uploads/Images/120416-PLI- Quick-Guide-JOBS-Act.pdf
- 24. •You must buildyour network •Establish your space in social media •Have investors lined up ahead of time •Work the blogosphere •Build and work your mailing list •Hit the phones Nothing happens by itself – you have to work it. Crowdfunding/Crowdsourcing/Networks Life is like a sewer: What you get out of it depends on what you put into it.
- 25. •Very common earlyinvestment form •DEBT – this is debt, OK? You owe money, OK? •Interest – it can add up •Maturity Date – investor can call the debt after this date (this can really happen) •Many options and variables: • Discounts, warrants, valuation caps, conversions Convertible Debt
- 26. •A non-debt alternativeto convertible debt •No interest •Simple (5 page agreement) •Converts to equity (at the point of any equity) •Discount and Valuation Cap •No maturity Date SAFE https://shockwaveinnovations.com/2013/12/21/reviewing-the-new-safe- investment-instrument/
- 27. •Lower “cost” thanequity funding •MUST be paid back • Can you do so? •Generally a little later than seed, you should have revenue •It’s all about cash flow •Bank loans are very hard to get today Venture Debt Funding http://nextviewventures.com/blog/what-is-venture-debt/
- 28. •Very hard toget •Must be paid back – can you do it? •Would you risk your home? • A/R or PO • Very difficult today • SBA • If you have revenue this is worth considering • Asset (your freakin’ home!) Loans
- 29. •Early on justto gain information •Practice on the ones you don’t expect to invest •Identify those who invest in your location and technology space •Make a personal connection •No one invests in over-the-transom deals When to talk to VCs
- 30. •“Smart” money •Compare companystage to funding options •What are your growth plans? •Do you fit the template for a VC funded company? •Can you even afford the legal fees? •Are you “all in”? •Do you like your friends more than their money? Who and What is right for you?
- 31. • Sales • BetaCustomers • Contracts in negotiation • Money raised already • Money of your own • Quit your day job • Your Board or Board of Advisors • Publicity • Website • Registered Copyright on your name Traction
- 32. •Trade off betweencash and dilution •But dilution is dilution •Goal: a big piece of a big pie •I will always take the cash – Cash is King •I’m OK with a small piece of a big pie. How Much to Raise?
- 33. •Spend it fastor nurse it along? •If it doesn’t move you towards revenue then don’t do it •Every time you raise money you dilute your holdings •If you don’t achieve goals the next batch of money is more expensive What do you do with the money you raise?
- 34. •Every investment costsyou something •You give away a piece of your company each time •As things go well you give a little less •As things go poorly you give away more •You may end up with a scrap of the company • And that may be OK! Dilution
- 35. Company Valuation $187,500,000 Founders’Ownership 5.81% Founders’ Value $10,898,438 Company Valuation ? Founders’ Ownership 100.00% Founders’ Value ? Company Valuation $2,000,000 Founders’ Ownership 30.00% Founders’ Value $600,000 Company Valuation $10,000,000 Founders’ Ownership 11.25% Founders’ Value $1,125,000 Company Valuation $30,000,000 Founders’ Ownership 7.27% Founders’ Value $2,179,68 Dilution
- 36. •The dreaded downround •It happens to Unicorns – it can happen to you! •Dangerous terms: • Full ratchet anti-dilution • Reverse vesting without good leaver clause • Limited exercise period • Multiple liquidation preferences • Complexity What happens when you don’t raise enough http://venturehacks.com/articles/terms-that-hurt
- 37. •Absolutely • But that’sa problem I’d enjoy having •What if you can’t deliver? •In that case – the dreaded down round •You can easily lose control and even all ownership of your company Can you raise too much?
- 38. •Out of cash •Productdoesn’t catch on •Need more money for growth •Co-founder splits •The dreaded down round When things go wrong
- 39. •90 to 99%of all funded companies fail •You can fail honorably •Or not •https://www.cbinsights.com/blog/biggest-startup- failures/ Failure is always an option From $4.5 Billion To Nothing: Forbes Revises Estimated Net Worth Of Theranos Founder Elizabeth Holmes BAD Not so bad
- 40. •You must havea credible team •If you have a co-founder you must have a lawyer •A team can be flexible •A co-founder, not so much •Limit the number of co-founders • 2 Max (IMHO) It’s all about the team
- 41. •You can’t say“I have passion” •You must demonstrate it •It is OK to show some emotion •But it is not enough About the “Passion” Word
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- 43. •You – maybe •Team– probably not •Be honest to your employees •Help them understand realistic paybacks Will you get rich / Will your team get rich?
- 44. •You must havea lawyer •You are your own best sales person • You are always selling • Your online presence matters – clean it up! •Patents •The Pitch(es) Misc.
- 45. •Have a realisticPlan •Cost to acquire customers •Average sale size •Margin •A business plan is for YOU •Know your pitch! Marketing and Sales Plans Viral is not a marketing plan
- 46. •Use Guy Kawasaki’s“10/20/30 Rule of PowerPoint” • Ten Slides • Twenty Minutes • Thirty Point Font •All pictures • No Text PowerPoint Notes http://blog.guykawasaki.com/2005/12/the_102030_rule.html 10 Point 20 Point 30 Point 36 Point 36 Century Gothic Arial Times New Roman Calibri
- 47. • Alliance ofAngels • Launch Ticker • Pitchbook • Geekwire • Angel Groups • Angel List • Founder Dating • Seattle Angel Conference • Startup Digest • Seattle Tech Startup Mailing List • Alliance of Angels • Launch Ticker • Pitchbook • Geekwire Resources
Editor's Notes
- #2 The title is a complete lie. The pitch is never perfect, you can only hope to improve it each time.
- #3 Old fart, 36 years in the industry 13 years with DEC First startup when I was 27 failed, but I paid out all debts Previous company was Singingfish.com the world’s first audio video search engine Prior to that I worked at another startup that lacked focus and burnt through more than $100 Million!
- #6 Everyone wants you to have a need but sometimes all you have is a want How do you prove you have a need when it is a new product? Only Steve Jobs knew that we did. Funders want to see a “need” It’s much harder to sell a “want” That’s why I talk about the medical uses of Soundpaper
- #19 Alliance of Angels: mostly tech-focused membership group formed in 1997; check out their helpful presentation guidelines here Element 8: cleantech focus; regional vs. just local Founder’s Co-op: just closed $10M in new investment for Fund 3; 100% IT, 80% B2B Keiretsu Forum of the Northwest: in addition to tech and consumer, this group also invests in real estate and may syndicate deals across six chapters Seraph Capital Forum: all women’s angel investment group (but doesn’t just invest in women-owned businesses!) Puget Sound Venture Club: formed in 1985, this group does 2/3 tech, 1/3 non-tech investing Seattle Angel Conference: designed to cultivate new angel investors, this bi-annual event invests about $200K per conference TiE Angel Group Seattle (TAGS): one year old, industry-agnostic angel arm of TiE WINGS in partnership with the WBBA, this group has a medical technology focus ZINO Society: in addition to their membership organization, they host industry-specific investment competitions from ZINO Life to ZINO Green
- #32 You will not be funded if you haven’t quit your day job Oh and by the way, you can’t pay yourself What is a partnership or an alliance? Better to have a simple clean landing page than no website or a site with someone else’s landing page Names are hard you’re allowed to change it as you go
- #36 https://www.andrew.cmu.edu/user/fd0n/23%20Small%20Piece%20-%20big%20pie.htm
- #37 Now we own you: Full ratchet anti-dilution Anti-dilution says “your company has no tangible value and as result I accept 20% ownership today but if we don’t create value I want some protection on potential share price reduction”. This protection is embodied in a clause called anti-dilution protection which results in additional “bonus” shares being issued where there is a down-round, i.e. a subsequent financing at a lower price per share. You can attack this clause conceptually but if VCs did not have any form of anti-dilution they would set the initial price lower. In other words, you as entrepreneur are getting less diluted today but with some ownership risk if company value goes down (at least that’s the theory, would be interesting to see how prices adjust without anti-dilution). Anti-dilution is usually mild. Broad-based weighted average anti-dilution says that a number of anti-dilution shares are issued (or the conversion price of the preference shares is adjusted) based on a formula nicely explained by Brad Feld back in 2005. Here is how you can get really screwed: there is one version of anti-dilution whereby the number of shares issued to the investor is FULLY readjusted if subsequent financings are downrounds. Say you raise $1M at $10 per share and hence issue 100,000 shares to your VC, in exchange for 10% of your company. The next round is at $5 per share; the original VC now gets an additional 100,000 shares issued; in the original cap table, he now owns 20% of your business, before the new money comes in. This gets nasty when serious money has been raised. Imagine the following happens: the pre-money valuation on your next round is less than the cash you raised previously. Say your company is in difficulty and raises $10M at $10M pre-money, having raised $10M previously. Because the anti-dilution calculation is iterative, guess what, the share price mathematically converges to… zero. Legally it will be set at the par value, say €0.0001. Your ownership just evaporated. If your VC understands how the world works, you will sit around the table and hammer out some deal. But your negotiating position is weak. If on top of that a new CEO has been hired, the rational optimisation is to keep as much equity free for the new sheriff in town and not for the original entrepreneur. You are now relying on people’s ethics, sense of fairness, or belief that long-term you don’t build venture firms by screwing entrepreneurs. In, say, 75% of cases, good luck — few people really believe in win-win in these situations. Note that there is usually a shared responsibility in full-ratchet: the entrepreneur is obsessed with maximising the headline number and accepts anti-dilution as a tradeoff (“OK, I will agree to this silly price but you better not screw up”). Often a Pyrrhic victory. “Thank You and Good Luck”: Reverse vesting without good leaver clause First, let me state that reverse vesting matters to me. I would not do a deal without some form of reverse vesting. Here’s why: I invest in three founders, two of which work hard and one of which decides to leave to open a restaurant. I (and his co-founders) are screwed. The guy or girl who left gets a free ride on the back of everyone else. He needs to be replaced, for which additional stock options are required. This is why reverse vesting exists. The usual reverse vesting that you will find in our term-sheet is: quarterly reverse vesting of founder stock over 4 years. This is watered down or adapted based on individual circumstances. I have seen cases where reverse vesting is not qualified: you leave the company, you lose your stock. That is a very toxic clause, and you should never accept it. You are now fire-able at will and there is even an economic incentive to do so. Unfair and abusive. So don’t find reverse vesting per se, but fight on the details. Can a percentage of your stock be considered yours? Probably. Make sure there is a good leaver / bad leaver clause. You get fired for cause, you lose some. You decide to leave, you lose some. The company decides it does not want you around anymore, you keep it. The need to be watchful of the details; sometimes you will be asked to sell your stock at “fair market value” when you leave, or at last round price etc. Negotiate hard.
- #42 Passion comes from being good at what you do.
- #46 The challenge is to present this in a meaningful and concise way. If you don’t have a calculation similar to the one shown then you probably don’t have a serious business.
- #47 You can see right away I am breaking all these rules. That’s because I am teaching a class not making a presentation and those are two entirely different things. These are all the fonts you’ll ever need Local boy made good.
- #48 Red Russak <red=thestartupdigest.com@mail.startupdigest.com> LAUNCH Ticker <ticker@launch.co> Organize <organize-bounces@seattletechstartups.com>