Raising Capital For Your Startup
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Have a great idea, but not sure how to get funding to turn it into a business? This presentation highlights the many ways to find funding and focuses on the pros & cons of using venture capital to launch.
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Raising Capital For Your Startup
- 1. Ways to Raise Capital For Your Startup By Melissa Fisher, Managing Partner www.PeakRoadPartners.com 1 @MelissaFisher7 www.linkedin.com/in/melissafisher7 MelissaFisher7@gmail.com Entrepreneur Conference
- 2. • What investor options are there? • Is my industry appealing to venture investors? • Is my business appealing to venture investors; and • if so, various ways for attracting capital for your business? IN TODAY’S SESSION WE WILL TACKLE:
- 3. OPTIONS FOR FUNDING: Debt / Credit Cards Family & Friends Crowdfunding Your Customers Grants Seed Accelerator Venture Capital Angel Investors
- 4. Upside: • Don’t have to give up equity • Available to companies that can’t get equity funding Downside: • Must pay interest • Limited networking or “business savvy” value • May require personal collateral such as home Debt / Credit Cards Family & Friends Grants http://www.startupnation.com/articles/financing-options-small-businesses/ Upside: • Convenient, no nonsense • Fewest contractual strings attached • Available quickly Downside: • Limited one-time source of funding • Be ready for an ugly Thanksgiving dinner at your in-laws if you lose their money Upside: • Free money • Investors love the “leverage” that grants provide Downside: • Highly competitive • How you use the funds is strictly defined
- 5. Upside: • Don’t have to give up equity Downside: • Very public • Doesn’t fund until you raise set goal Crowdfunding Your Customers Upside: • Believe in your ability • Continued sales commitment Downside: • May require collateral (Personal or built business value) • Insight into margins Angel Investors Upside: • More than money, they invest business smarts and networking opportunities • Relatively patient about their investments Downside: • Often difficult to find • Can be hard to manage the divergent interests of a large group of angels
- 6. 5 Phases: awareness, application, program, demo day, post demo day Upside: • Access to resources, mentoring, fundraise-readiness and collaboration • If government funded they take no equity Downside: • Must be a “fast growth” startup business • May have to give up equity % • Must “graduate” within a short period of time. Seed Accelerator
- 7. Upside: • Invest smarts and networking in addition to money • Typically have more money if you need more to grow Downside: • Must be a “fast growth” startup business • Must be interested in selling the business or going public within 3-5 yrs • Must be prepared to share control Venture Capital
- 8. JOHN BORTHWICK “Remember that funding is a means to an end, not an end in of itself. The end is building a product, building a community and building a business. Raising money can be a challenge – just remember it’s not the end. It’s the beginning, it’s the starting point. Now you have to build.”
- 9. How Venture Capital Works VC Firm (General Partner) VC Fund (Limited Partnership) Paid 2% fee + 10-20% of Profits Limited Partners (public pension funds, corporate pension funds, insurance companies, high net-worth individuals, family offices, endowments, foundations, fund-of-funds, sovereign wealth funds, etc.) Investment 1 (Ownership %) Investment 2 (Ownership %) Investment 3 (Ownership %) Fund Management Ownership of Fund
- 10. WHAT IS A SEED STAGE? Series A, B, C+ $2.5M - $10M+ Out of ScopeIn Scope Institutional Seed $500K - $1.5M+ Accelerator $20K-$150K Angel $25K-$250K The seed is the “setup” round(s) where a person or startup venture approaches an angel or a VC firm for funding their product / idea.
- 11. VC will help you scale but it absolutely will not validate your product and market. Raise to accelerate growth. “The other time not to raise money is when you won’t be able to. If you try to raise money before you can convince investors, you’ll not only waste your time, but also burn your reputation with those investors.” Paul Graham
- 12. VC’s Reasons To Raise Funds With VC FundingWithout VC Funding Market Timing Expand Network Grow Faster
- 13. 1. Use your network 2. Set your fundraising goal 3. Welcome feedback 4. Be penny-pinching 5. Be bold & bootstrap Remember that an investor invests in your business to share your profits. So make your idea attractable and sellable. Getting your business funded starts with having a reasonable plan.
- 14. IT TAKES MORE THAN SIX YEARS TO EXIT Source: http://www.cbinsights.com/blog/trends/venture-capital-exit-timeframe-tech
- 15. WHAT YOU CAN EXPECT Fast – Scary – Thrilling
- 17. HUGE EXITS ARE RARE
- 18. HERE’S THE PROOF The average successful US startup has raised $41M and exited at $242M The average successfully acquired US startup has raised $29.4M and sold for $155.5M The average IPO- bound startup raised $162M before going public Source: http://info.crunchbase.com/2013/12/16
- 19. VCS ARE RAISING CASH Source: Preqin Special Report: US Venture Capital Industry (October 2013)
- 20. SEED DEAL VOLUME REMAINS STEADY Source: http://www.cbinsights.com/blog/trends/2013-seed-venture-capital
- 21. DOLLARS INVESTED ALSO REMAIN CONSISTENT Source: http://www.cbinsights.com/blog/trends/2013-seed-venture-capital
- 22. SIZE OF SEED ROUNDS ARE GROWING! Source: http://www.cbinsights.com/blog/trends/2013-seed-venture-capital
- 23. INVESTORS FOCUSING ON NEW FRONTIERS Cloud Compute Social Platforms Digital Currency WearablesConnected HomeContext Compute Connected Cars UAVs Mobile ServicesPrivate Space Bioinformatics Industrial Internet
- 24. HURDLES TO CROSS WHEN ASSESSING YOUR STARTUP BUSINESS Are you B2C focused or B2B focused? Are you a sales driven or marketing driven company? Do you need $1MM or $25MM to succeed? Do you have one time revenues, or a recurring revenue model? Are you the first mover in your market or entering a highly-competitive space? Is your technology patentable or not? Is your business easily and cheaply scalable, or does it have heavy overhead investment along the way? Are you serving a $1BN market, or a $100MM market? Is my forecasted ROI going to be a 10x return or 3x return? Is it a first time CEO, or an established veteran? How deep is the management team? Has there been proof of concept, with revenues or site traffic to date? and more…
- 26. ACCELERATORS A three to six month “startup boot camp” that provides mentoring, office space and access to capital in exchange for 3-6% of common stock.
- 27. NOTABLE SEED FUNDS Seed funds tend to invest $50K - $750K in an institutional seed round which is usually up to $1.5M. These funds invest together as a syndicate.
- 28. VCs w/ SEED DEALS VCs typically lead $3M-$10M+ Series A rounds but some invest $50K - $1M in seeds to back great founders and / or learn about emerging tech.
- 29. CORPORATE VCs Corporations often have funds that invest in startups for strategic and / or financial reasons. These funds typically focus on Seed and Series A.
- 30. “Try not to fall in love with a firm – focus more attention on the partner leading the deal. Ultimately that partner will be the person you have to deal with so raising from a great firm but putting someone on your board that you don’t love won’t end up working out.” 30 Ben Lerer
- 31. Raising any amount of capital is never easy. You’ll hear “no” more than you’ll hear “yes.” For many of you it will be a long but rewarding process. IN SUMMARY VC is just one financing option to consider Investors come in difference sizes and flavors Raise to accelerate growth Prepare, work your ass off and hustle Take advantage of resources on the web The real work begins after you raise
Editor's Notes
- Of all the consulting inquiries I receive at Peak Road Partners, fund raising is by far the biggest need of these startups. And, the problem is, not all startups are viable for venture funding for a variety of reasons, which we will discuss. In today’s session we will tackle: 1. What investor options you have for your startup 2. is my industry appealing to venture investors; 3. is my business appealing to venture investors; and if so, various ways for attracting capital for your business.
- Investors are typically segmented by life-cycle stage of the business: angel investors or friends and family typically get a business off the ground from a piece of paper to a working prototype;
- Seed accelerators are fixed-term, cohort-based programs, that include mentorship and educational components and culminate in a public pitch event or demo day.[1] While traditional business incubators are often government-funded, generally take no equity, and focus on biotech, medical technology, clean tech [2] or product-centric companies, accelerators can be either privately or publicly funded and focus on a wide range of industries. The main differences between business incubators and accelerators are:[3] The application process is open to anyone, but highly competitive. Y Combinator and TechStars have application acceptance rates between 1% and 3%. A seed investment in the startups is usually made, in exchange for equity. Typically, the investment is between US$20,000 and US$50,000 (or GB£10,000 and GB£50,000 in Europe[4]) The focus is on small teams, not on individual founders. Accelerators consider that one person is insufficient to handle all the work associated with a startup. The startups must "graduate" by a given deadline, typically after 3 months. During this time, they receive intensive mentoring and training, and they are expected to iterate rapidly. Virtually all accelerators end their programs with a "Demo Day", where the startups present to investors.[5] Startups are accepted and supported in cohort batches or classes (the accelerator isn't an on-demand resource[6]). The peer support and feedback that the classes provide is an important advantage. If the accelerator doesn't offer a common workspace, the teams will meet periodically. The primary value to the entrepreneur is derived from the mentoring, connections, and the recognition of being chosen to be a part of the accelerator. The business model is based on generating venture style returns, not rent, or fees for services. Seed accelerators do not necessarily need to include a physical space, but many do. The process that startups go through in the accelerator can be separated into five distinct phases: awareness, application, program, demo day, post demo day.[
- Series A venture capitalists will put in $1-$5MM after there has been a preliminary proof of concept, based on revenues, pipeline, site traffic or some other metric; and Series B venture capitalists will put in $10-$50MM to hit the accelerator after the model is finely tuned and scaling. So, when you are approaching the investment community, make sure you have thoroughly researched not only their industry focus, but their stage of business focus as well.
- Each investor views the world differently so this guide is far from definitive. I couldn’t include every accelerator, angel or VC. I’m not a lawyer so consult with one before you raise. The focus for today’s talk is “seed funding” but many lessons apply for Series A. These slides are used for a class I teach at General Assembly.
- 1. Use your network Your network is your biggest and best asset to meet investors. It’s like a Pandora’s box that needs to be explored properly at the right time in the right way. So make your network work for you. Attend and participate in startup meetups and talks held in your area; this will help you connect and meet investors and other entrepreneurs in a jiffy. Remember, opportunity never comes to you; you need to seize it! 2. Set your fundraising goal Before meeting an investor, ensure that you have done your homework. Make sure you have researched and figured out an amount that you believe will develop your business and be a good investment for the investor. For example, plan the amount you’ll need to shell out on basic office infrastructure, salaries, marketing, and product development; otherwise, you might end up wasting a lot of money. Only raise the amount that you need to execute your business in the right way. Don’t indulge in extravagant activities at this time: eat moderately, rather than starving or overeating. 3. Welcome feedback When you meet an investor, stay open to feedback. Don’t indulge in arguing or be rude. On the other hand, don’t try to please them so much that things get out of hand. If they reject you, don’t leave coldly; instead, make sure to be polite and ask for their feedback. Accept it, improve it, follow up, and try approaching for a second round of discussions. 4. Be penny-pinching Investors often believe that startups waste money. So make sure you allocate cash properly for your product development, organization building, and advertising. Always remember that you are a startup, who needs to scale, so never be extravagant with your accounts. 5. Be bold to bootstrap Yes, I really mean it. All investors would admire you for bootstrapping your venture to a certain extent. This demonstrates your commitment towards your business and is widely appreciated among seed funders and angel investors. Early-stage venture funds always trust startups that have already raised angel money, and they will keep investing with you. Finally, remember that an investor invests in your business to share your profits. So make your idea attractable and sellable. Getting your business funded starts with having a reasonable plan.
- But, even if your industry is in one of the more active venture markets, there are still numerous hurdles to cross in assessing your specific business. So, as you can see, lots of hurdles to get over to get an investors' attention for your business. Now, lets assume you are one of the lucky 5-10 in 200 that has a venture backable business. How do you typically phase in investment. You can't simply show up at a big Silicon Valley venture firm with your piece of paper idea and say cut me a $10MM check.
- Alexis Ohanian David Rose San Francisco Bill Tai Ariel Poler Othman Laraki Semil Shah Marc Benioff David Sacks Jennifer Lum Joe Caruso Nicole Stata Jennifer Lum Dave Balter Andy Palmer Will Herman Gene Hammond Wayne Chang David Chang Clark Landry Paige Craig Vivi Nivo Troy Carter Ashton Kutcher Paul Bricault David Lerner Jared Hecht Steve Martocci Josh Stylman Peter Hershberg
- Matrix
- CAA Samsung
- Once the term sheets start flowing in, how do you ultimately decide who to move forward with?
- At the end of the day, you need to follow your gut. Who is going to be the best partner for my business, bringing a Rolodex of relationships to the table? Who is going to be the most pleasant to work with around the board table, especially when things start to go wrong (as they always do)? Who has the deepest pockets to invest additional monies in follow-on rounds? Who is giving me the best valuation? Whose term sheets are more or less onerous than others in terms of liquidation preferences and anti-dilution ratchets? So, hopefully, what you are hearing is, not all venture capital is the same shade of green, and it is important you do your homework upfront, to avoid misery down the road. And, if you are not clear you are making a good decision on your own, ask an advisor to help you. But, overriding all of this, if you can figure out a way to fund your business, with no outside capital, that is the preferred model. It preserves the founder's 100% control of the company's equity, board control and the timing of a sale (or not), at terms 100% satisfactory to the founder. Don't get romanced by the idea of raising venture capital, because it certainly has its strings attached, given the reasons already stated. But, if you think you have the next big idea at the scale of a Google, Facebook or Groupon, the venture community will be your best partners, having funded several of those similar businesses and navigated the various pitfalls along the way.