Funding basics - From Boots to Wings

Funding Basics
From Boots to Wings
Steve Carkner
stevecarkner@gmail.com

 This presentation is targeted towards budding
entrepreneurs that have a product idea – but aren’t
sure where to get the key ingredient to success –
MONEY!
Introduction

$ MONEY! $
Introduction
 “other people’s money”

$$ MONEY! $$
Introduction
 People who expect to make more money…

$$$ MONEY! $$$
Introduction
 People who expect to make more money…
 People who have legal Rights to question
many of the moves you make…

 What are you really trying to do?
 How much funding do you really need?
 How much runway do you personally have?
 Investors expect you to have significant “skin in the game”
 I have had investors say that they expect nothing less than my
own personal bankruptcy if the business fails.
 Can someone else do parts of your business better?
 What does success look like?
 What are you willing to give up?
Ask Yourself:

You do not have to be the next big thing (contrary to
almost everything you will see and hear about funding a
startup company).
 You DO need to recognize what your business is likely
to become
 Recognize what your own goals are
 Then seek funding (if it’s even needed) that matches!
Who Funds Businesses?

Friends and Family (Love Money)
 The easiest to get – at least your first time
 Patient money
 Great for “walking harvest” business opportunities
 Generally small amounts
Love Money can have difficult emotional ties.
Just because you are dealing with family doesn’t mean you
shouldn’t document the deal and outline risk factors involved.

Micro-Funding
 If you fit any special demographic there may be some easy funds
available to you
 Youth under 30, summer business, women focused, community
focused, specific job focused… many others
 Often loan based, sometimes with zero interest and occasionally
with no payback required at all if business of product fails
 Government or Charity based
 Generally small amounts (although some government programs
extend to hundreds-of-thousands)
Although not typically used for high-tech, these programs don’t
explicitly limit the use of funds or type of business.

What is an Incubator?
Business incubators are organizations geared toward
speeding up the growth and success of startup and early
stage companies. They’re often a good path to capital, but
rarely put their own hard capital into play directly.
- “Funding” is often in-kind in the form of free rent,
consulting, internet, etc.
If you have watched this show
then you know what an example
of a small incubator can look like:
(Underlying the comedy are some very real take-aways on funding a startup)

Crowd Funding
For this audience… If you haven’t heard of crowd
funding, please hang your head in shame and leave now 
What you may not realize are some of the pitfalls and
best-uses for crowd funding.

Crowd Funding - Pitfalls
From my completely unscientific analysis of crowd-
funding that targets product development:
 Funding amount is typically drastically low or non-
existent (product sale only)
 Nothing set-aside for major expenses like IP protection,
certification, safety approvals, etc. (especially critical
for IOT devices!)
 Development timelines are unrealistic and unsupported

Crowd Funding - Advantages
 Great way to gauge market interest and acceptance
 for a specific demographic
 if you are ready to follow through
 Excellent for small funding needs
 Excellent for products that only require small volumes
to justify development
 Wonderful for existing small businesses (and under-
utilized in this area)

Angel Investment
 Can come alone or as a group
 Often focused on areas that are familiar and
comfortable – in Ottawa it is easier to get
“communications” funding than “medical” for
example.
 Often focused or more interested in local growth
 Can require multiple pitches
 Organized groups often require a mentor/sponsor
 Sometimes have consultant-hooks in the deal

LONE Angel Investment
 Lone angels can be risky, especially if they have not done
many deals.
- Inflated expectations
- Emotional
- High maintenance
- Each may require their own special deal which leads to a messy
corporate structure and can hurt future investment
 Lone angels can be a benefit
- Willing to roll up their own sleeves and help
- Easier to appeal to their moral compass or personal interests

GROUP Angel Investment
 Groups vary but will often have well defined structure.
- Requirements to pitch
- Set investment requirements
- Well established legal framework
- Not everyone has to buy-in
There are some huge angel networks such as Keiretsu which are broken up
into chapters and can draw finances worldwide from over 1000 members
allowing raises in the ten-of-millions: http://www.keiretsuforum.com/
And there are small angel groups such as Ottawa’s Purple Angels, Capital Angel
Network.
The National Angel Capital Organization (which I am an original founder)
provides a wealth of information and list of angel investment groups across
Canada: http://www.nacocanada.com/

What is a Professional Angel?
A Professional Angel is someone or a group that has done
enough deals or is structured in such a way that they
closely resemble a Venture Capital company
 May only lack the official “corporate” designation as a
financier
 May actually drive a harder deal than a VC
 May be a non-financial corporation (yes, corporations can
act as angel investors especially if there are global, tax or
other hidden drivers to their behaviour… this is good!)

Venture (Vulture) Capitalists – VCs.
Although mainstream media likes to demonize VCs as greedy, they remain an excellent
source of funding provided their interests align with yours.
 Deliver what you say you can deliver
 Deliver when you say you can deliver
 Expect short pay-back horizons – if you truly believe that you are going to profitable in 12-18
months this is a great fit
 Show major returns, 10-20x is not an unreasonable expectation
 Expect difficult financing terms – if you accept them and become dilluted or sqeezed out…
then why did you accept the terms?
 The operational and legal costs of operating VCs along with an expectation to return capital
to their investors means deals have to be fairly large to make it worth it for all parties
involved
VCs are themselves funded. You may not realize that while you are making a pitch to a
VC, most VCs also have to make pitches to private investors in order to source their
fund’s capital.
YOUR pitch eventually becomes part of THEIR pitch

Banks
Banks really DO fund businesses!
 If you can show purchase orders, personal financial success or good
backers then you may be able to get access to conventional (debt)
funding
 Programs exist, especially targeted government funds, where the
government will guarantee the loan on your behalf
 International sales can be guaranteed through Canada Commercial Corp
(www.ccc.ca)
Consider the ADVANTAGES
 No ownership dillution
 Low maintenance
 No “voting rights”
 No “shareholder rights”
 Can easily scale up as orders increase

Other lesser known sources of funds – dig for them
IRAP/SRED/GRANT
 Often big R small D focused
 Sometimes repayable, royalty or combination
BCIP (Build in Canada Innovation Program)
 A buy and try program that is almost like funding
SADI or similar targeted funds
 SADI in particular provides funding for defense and aerospace
related development in the form of long-term loans
Federal, provincial or municipal - Matching Programs
 Provide funds on a matching basis with private investment
dollars (1:2 or less is typical)

A Summary of Who
Walking
Harvest
Single
product or
Hobby
Slow
growth solid
business
High growth
with
acquisition
exit
High growth
with IPO
exit
Love Money * * * * * * * * * * * * * * *
Micro
Funding * * * * * * * * *
Incubator * * * * * * *
Crowd
Funding * * * Future? Future? Future?
Angels * * * * * * * * *
Pro-Angels * * * * * * *
VCs * * * * * *
Banks * * * * * * * * * *

A few key ingredients we will cover are:
 Your Pitch
 Your Plan
 Your Model
 Your Value
This is really the minimum set of information you need to be
successfully financed from ANY source. Only the level of detail
will change depending on the source you target.
How do I get Financed?

There are LOTS of internet resources on how to create and deliver a
successful pitch:
 A pitch can be the 30-second “elevator pitch”
 A pitch can be an hour long investor presentation
Having an effective elevator pitch is very important as it provides
the hook you will use over and over again.
 The elevator pitch isn’t just for investment, you can also use it to find
new customers, to introduce your business and even to convince
suppliers to partner with you.
 Be prepared to vary your pitch to your audience. A financier will have
a different interest than a tech-guru.
First impressions are very important – Any presentation, no matter how
long, can start with the elevator pitch to build excitement right from the
start and leave your audience wanting to learn more.
The Pitch

Creating your 30-Second Pitch
 Tell A Story – removes the feel of a hard-sell
 Don’t use jargon – Unless you are SURE of your audience
 What Problem are you going to solve – NOT your solution
 Why are you so damn special?
 Invite conversation – This is how 30 seconds turns into 20
minutes
The Pitch

“A lot of soldiers are coming home early with bad backs, worn out knees and a host of medical
problems because they are so overloaded in the field. The U.S. Military knows they are overloaded and
are always looking for solutions. We have a battery technology that removes about 20 pounds from
what the soldier needs to carry. I started working with this technology almost 20 years ago for
smartphones (we called it a 2-way pager or Blackberry back then). Now I am bringing that technology
to soldier power systems.”
<pause – you don’t need to say more>
If I am talking to a military person, I would modify the pitch to make it more personal: “I really respect
how much soldiers carry into the field, I don’t know how they can lug so much around… did you know
that almost 40 pounds of that weight is batteries? We have a technology…”
There are so many opportunities for the person to now ask questions: “you were with Blackberry?”
“what’s the technology?” “how much do those medical costs add up for the government?”
NOW I am no longer “pitching”, instead I am answering questions and the potential investor feels
engaged and in control. Done well they will be the ones who eventually ask “are you looking for
funding?”
Why yes… as a matter of fact we are…
The Pitch

An Exercise
At each table: Create a quick 30-second pitch!
Business: Pick your own idea, or use one of these.
 A flashlight product
 Media streaming service
 Bacteria that can digest spilled oil
10:25 Pick your founder
10:25-10:30 Create your pitch
10:30-10:35 Give your pitch
The Pitch

At some point you will also need a full pitch presentation.
This would be a condensed version of your business plan.
Going into building a business plan and full investor pitch presentation is
beyond the scope of today’s session – but happy to give some real-world
pointers:
Who should pitch?
 The founder isn’t always the right person!
 Picking someone else shows team depth and willingness to delegate
 Passion is important
The LONG Pitch

Avoid At All Costs (how many of these did we hear?):
10 – We have the cheapest…
The LONG Pitch

9 – Everyone will want this…
The LONG Pitch

8 – We have no competitors…
The LONG Pitch

7 – Like an iPod (or like Apple or any other wildly successful product)*…
The LONG Pitch
*– it’s OK to humbly state that “we like the user interface on the iPod and would implement a similar interface on our product”

6 – Better than Facebook (or any other wildly successful website)…
The LONG Pitch

5 – The product will practically sell itself…
The LONG Pitch

4 – Everyone needs this…
The LONG Pitch

3 – We hope… (hope is not a strategy)
The LONG Pitch

2 – We will worry about monetization later…
The LONG Pitch

2 – We will worry about monetization later…
1 – We only need 1% market share…
The LONG Pitch

Getting from YES to $$$ in the bank can be a challenge.
 Structuring the deal itself will vary drastically depending on
who is investing and what type of investment is involved.
 Smaller deals can be dealt with using simpler terms if you
choose the right method.
 Be prepared by considering a few of the biggest next-step
questions
OMG – Someone Said YES!
(and you want “someone else’s money”)

Deals can be structured around a single form of compensation,
or a combination of compensation (often called “kickers”)
Straight Debt
 Probably the simplest possible deal – An exchange of funds
for a promise of repayment with interest.
 Secured, often using the founders own assets (be prepared).
 Best for “Walking-Harvest” companies
Kickers:
 Escallating interest
 Royalties / profit sharing
 Warrants for buying shares
Deal Types

Convertible Debt
 One of my personal favourites, especially for small startups.
 Reduces the need for a valuation
 An exchange of funds for a promise of equity in the company
at a rate that matches a follow-on investor.
 Eg. Invest $50K in a seed-round. When company does “A”
round for $1M, shares issue as if I invested at that round.
Kickers:
 Conversion usually at a discount to follow-on
 Interest or pay-out after a fixed time if no series “A”
 Royalties / profit sharing occasionally (rare)
 Warrants for buying additional shares
Deal Types

Equity
 An exchange of funds for part of the company.
 Requires setting a value on the company (breaks many deals)
 Usually includes seat on the board and carries significant
shareholder rights obligations
Kickers:
 Down-round protection
 Warrants for buying additional shares
 Early liquidation clause (founders beware!)
 Performance clauses (delivery, revenue, etc.)
 Dividends (for walking-harvest companies, rare)
Deal Types

Less Common Types – at least for startups
 Bonds (very similar to debt, usually with a lump payout)
 Earn-Out (used more in take-overs)
Deal Types

The best I have seen:
 Energetic, passionate, excited
 Willing to take advice
 Courteous
 Already well connected
 Prepared (competition, market, and who is your audience are top three)
The Bad that I have seen:
 Unsure of market
 Out of money / out of time
 Desperate
 Greedy
The Ugly:
 Arrogant
 Argues with a room full of people
 Won’t take advice
Good, Bad and Ugly

Harlan Sanders of KFC is often held up as a model for tenacity in the face of investors
for being turned down over 1,000 times while seeking funding for KFC.
They Said No!

I think he was a bit of an idiot… who eventually either got lucky, or just found a
dumb enough investor to join in his business.
They Said No!

I think he was a bit of an idiot… who eventually either got lucky, or just found a
dumb enough investor to join in his business. Sharpen your plan and pitch!!!
Investors are human beings – and you may not believe it, but they actually
LIKE to say yes and HATE saying No.
You will rarely get an outright “No”, it is softened with terms like “come
back”, “we will keep it in mind”, etc.
So Ask them to educate you – ask for a debrief and offer to bring muffins:
 Where did I lose you?
 What would help me engage with other investors?
 What else? What else? What else? (keep asking this until you really
understand what went wrong)
They Said No!

Your are lucky!
Finding groups, resources and advice has never been easier!
MARS Entrepreneurship 101
 Great resources on a variety of topics related to starting and running a business.
 Free registration
 Financing Unit:
 https://entrepreneurs-toolkit.schoolkeep.com/catalog/5xgabtoz/introduction-to-
investment-readiness
 Include specialized startup guidance for different industries from Digital Gaming to
Cleantech.
 Almost 600 videos from Product Development Planning to Body Language.
Resources

Your are lucky!
Finding groups, resources and advice has never been easier!
MARS Entrepreneurship 101
 Great resources on a variety of topics related to starting and running a business.
 Free registration
 Financing Unit:
 https://entrepreneurs-toolkit.schoolkeep.com/catalog/5xgabtoz/introduction-to-
investment-readiness
 Includes specialized start-up guidance for different industries from Digital Gaming
to Cleantech.
 Almost 600 videos from Product Development Planning to Body Language.
Resources

Funding basics - From Boots to Wings

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