2. Agenda
• Startup definition
• Alternative to fundraising
• Why raising fund?
• Stages of investment
• Sources of capital
• The process of fundraising
• What are investors looking for?
• Choose your investor
• How to calculate valuation & dilution
• Valuation is not the only important measure
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4. Startup
• Company designed to grow fast
• Technology enabled
• High growth potential
• <5 years old
• <10M€ revenue
• Everything else we associate with startups follows from growth
(i.e. funding)
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6. Alternative to fundraising
• Savings
• Bootstrapping
• Service
• Revenue generating product
• Customers pay for product development
• (Grants)
• Ideally combined with investment
• Non-dilutive but time consuming
=> INDEPENDANCY
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7. Why raise funds
•Net cash burn
•Opportunity to
• Develop a killer product
• Earn market shares
•Want to grow faster than you can grow
autonomously
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8. Why not raise funds
(The bad reasons to raise funds)
•Pay wages and not grow (employee of your
investors)
•Sustain moribund company
•Others : Time consuming & lack of focus
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9. Time before being profitable with 1 customer
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14. Pre-seed (<50-100k€)
•Business plan validation
•MVP development
•Convertible loans, subsidies, equity
•FFF, Incubators/Accelerators, Business angels
•High failure rate (2/3)
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15. 15
It’s becoming less expensive to start a startup but more
expensive to grow one because need to go faster
Ralf Schwartz
16. Seed (100k€-1M€)
•Product development
•First real clients’ traction and test market
•Equity or convertible loan
•Business angels, governemental funds, Seed
funds, University funds
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17. Growth (1M€)
•Business Model validated
•Extension to international markets
•Serie A, B,…
•Equity
•Venture Capital, Business angels, governmental
funds, Seed funds
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24. Friends, Family and Fools
•People
• who know/trust you
• who (sometimes) understand your business
•Emotional investment, early support
•Main goal is support (not return)
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25. Friends Family and Fools
•Dangers
• Mix business & personal life
• Not always smart money
• Be clear, they can lose their money!
•Fools
• Ex-colleagues
• Advisors
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27. Business Angels
• (Ex-)entrepreneurs, (ex-)executives
• Advice > money
• No typical ticket size (from 10-15k€)
• Emotional or rational decision
• Hobby project vs professional
• Individuals
• Main goal : return on investment
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28. Business Angels
•How to make money?
• Selling shares (few via dividends) => exit strategy
•Individuals, groups or network
•Difficult to find (under the radar)
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29. Seed funds
•Funds writing smaller tickets (100k€-1M€)
•Specific for seed rounds
•Governmental funds, university funds and few
private funds
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30. Seed funds
•Advice on technical and business problems
•Focus vs « Spray and pray »
•Goals : returns or employment (if public)
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31. Venture Capital
•Tickets > 500k€
•Sometimes VCs have a seed fund
•Raise funds from LPs (Limited Partners)
•Remuneration : 2% management fee & 20% carry
(profits from investments)
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32. Venture Capital
•Goal : return for their investors (LP’s) and
themselves
• 20% IRR at fund level
• X10 or 40% IRR at deal level
•On 10 deals : 1-2 will make return, 5 will be dead
and 2-4 will be ok
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33. Venture Capital
•Goal : return for their investors (LP’s) and
themselves
• 10X or 20% IRR
•On 10 deals : 1-2 will make return, 5 will be dead
and 2-4 will be ok
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34. Venture Capital
•Really selective (they invest in 1 out of 100-1000
startups that get in touch)
•Really agressive regarding growth and returns
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35. Venture Capital
•Different people in a fund
• Partner (GP/MP)
• Principal / Investment manager
• Associate / Analyst
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Even by being very picky, VC’s still struggle to have decent returns =>
chose the best ones / the most focused
40. Road Show
• Contacts with selected investors (industry, stage,
geography, portfolio, reputation)
• Setting up meetings
• Feedbacks from first investors
• Adaptation
• Contact with new investors
• Meetings with old and new investors
• Follow-ons
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41. Closing
•Term sheet
• First proposition
•Due diligence
• Verification of all legal/commercial/financial/
technical/HR documents
• Contact with last clients
•Shareholder agreement
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43. What investors are looking for
• People
• Smart, ambitious, vision
• Reliable
• Achieved
• Product
• Innovation
• Market
• Big
• They/you understand
• New or to be disrupted
• Dynamics of it
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44. What investors are looking for
•Competition
•Business model
• Revenue model & margins
• Strategy
• Value proposition vs Perceived Value (validated?)
•Traction (metrics&unit economics) / growth
It’s a figures/money game
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45. How to chose investor
• Your ideal investor?
• Do you want to work with her/him the next 5-10 years?
• Role of investor
• Help recruit
• Strategic decision
• Help next rounds
• Available and empathic
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46. How to chose investor
• Make your own due diligence
• Current portfolio
• Ticket size
• Fund life time
• Return for LP’s (past and current)
• Geographic, industry
• Team & network
• Follow-on investments?
• Their references?
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47. How to chose investor
• Added Value
• Brand
• No extra costs
• Fair treatment of employees
• Post-transaction
• Investor location
• Track record
• Reputation
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48. Valuation
•1st rule : there is no rule
•Rule of thumbs
•More mature more rational
• From people/potential to metrics
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50. Valuation
•(Net) Burn rate for the next 18-24 months
• Achieve milestones for next round
•Investors want to have 20-35% of the company to
have substantial returns/ impact/attention
•Multiples regarding your industry / your company
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51. Valuation
•Prefered shares & exits influence
•Prefered shares with 6-9% dividend
•Participating or not
•Milestones
•Exit value
•Timing
=> It’s a balancing act. You give, they give. Not
simple
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52. Dilution
•Pre-money
• Value of your company before investors’ money
•Investment
•Post money valuation
• Value of your company after investment
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57. Term sheet
•Pre-agreement of investor’s before due diligence
• Expenses are paid by the startup
•Non-binding contract
but 1-2month(s) exclusivity
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58. Attention points in Term sheet
•Valuation
•Voting rights
•Board members/seats
•Class of stocks (prefered vs common)
• 6-8% prefered dividends
•Employee pool
•Warranties
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59. Attention points in Term sheet
•Anti-dilution protection
•Good leaver / Bad leaver
•Vesting
•Preemptive rights / Rights of first offer
•Drag along / Tag along
=>Make sure that all (!) items are in the TS!
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60. Want to get investor ready?
• Www.Startups.Be/fundraising
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Thibaut Claes
thibaut@startups.be
@thibclaes
Editor's Notes
15-20% IRR on fund level; this requires > 40% IRR per company on average to cover costs and failures. (if here is no chance based upon our analysis that VCs cannot make 5x on their investment (i.e.: 2 million investment, so 10 million exit and a 30 million company valuation at exit) they will not invest! How many exits are there (in the Benelux) that have exit > 30 million? ……..
Patrick Polak
Valuation is in essence a reflection of (future) profitability. This includes components as growth, risk and time. i.e. a pre-revenue seed investment with a huge market potential: no validation, super opportunity: risk versus upward. Or a stable 0-growth firm with a 25% EBITDA margin in a stable market: low risk versus a low upward potential (no growth, no improvement in EBITDA margin).
The more validation of the value proposition, the less risks, the higher valuations, and better terms and conditions (no Preference shares etc.)
Entrepreneurs always (and rightly so) think about the upside, the opportunity. The investors think in risk/returns.
Patrick Polak
VC’s can structure ANY deal. It is way more complex than “1 million for 25%”= post money 4 million.
My advice is: always make a calculation on distributions to shareholders
I certain conditions: i.e. exit value at 5 million, 10 million, 15 million, etc. (and sometimes also with a time factor: 4 years, 7 years, 9 years): i.e. with preference shares a VC with 25% stake can have 80% of the distributions if the exit is after 10 years with a “low” valuation….. and still make 12% IRR…..