An insider's guide to raising early-stage capital. An explanation of the key things to think about when raising early-stage funding from angels, angel groups, and venture capital firms.

1.
The
“Real
Deal”
Behind
Early-­‐Stage
Fundraising
JANUARY
2014
Nnamdi
Okike,
Founder,
645
Angels
Presenta9on
to
the
Startup
Leadership
Program

2. The
Early-­‐Stage
Fundraising
Process
In
One
Slide
Raising
early-­‐stage
capital
is
not
too
much
different
than
this
Source:
Dilbert
2

3. Introduc9on
• Personal
Background:
– 8
years
experience
as
a
venture
investor,
specializing
in
Internet
and
soKware
companies
– Worked
on
over
20
venture
investments,
including
FolhamaPc
(sold
for
$300m),
Hitwise
(sold
for
$240m),
and
Astaro
(acquired
by
Sophos)
– Founder
of
645
Angels,
an
NYC-­‐based
angel
fund
focusing
on
Internet
investments
• Goals
of
this
Presenta9on:
– Provide
recommendaPons
on
how
to
best
approach
the
process
of
raising
seed/early-­‐stage
capital
– Provide
advice
on
how
to
deal
with
investors
– DemysPfy
the
venture
funding
process
– Provide
advice
on
how
to
meet
your
personal
objecPves
in
an
investment
process
and
opPmize
your
outcome
– Answer
any
quesPons
that
you
have
3

4. Agenda
§ Why
raise
funding
at
the
early
stage?
§ Angels,
angel
groups,
and
venture
funds
§
§
§
§
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
4

5. Why
Raise
Funding
at
the
Seed/Early
Stage?
• Quiz:
– If
we
don’t
raise
early-­‐stage
funding,
we
won’t
be
taken
seriously
– That’s
a
dumb
quesPon.
If
we
don’t
raise
capital
now,
we’ll
run
out
of
cash
– A
good
investor
can
bring
skills/connecPons/advice
to
the
table,
and
can
provide
value
beyond
the
money
– Investment
capital
will
enable
us
to
execute
on
key
objecPves/
reach
key
milestones
that
will
create
barriers
to
entry
and
enable
us
to
capture
market
share
more
quickly
5

6. Why
Raise
Funding
at
the
Seed/Early
Stage?
• If
we
don’t
raise
early-­‐stage
funding,
we
won’t
be
taken
seriously
• That’s
a
myth.
Many
great
companies
never
raise
early-­‐stage
equity
capital.
Companies
such
as
Oracle
and
Spanx
are
two
good
examples
• That’s
a
dumb
quesPon.
If
we
don’t
raise
capital,
we’ll
run
out
of
cash
• Fair
enough.
Some
businesses
require
more
capital
than
others.
No
one
has
ever
bootstrapped
a
semiconductor
plant
• A
good
investor
can
bring
skills/connecPons/advice
to
the
table
beyond
just
money
• Excellent
answer.
Make
sure
to
tell
prospec9ve
investors
that
• Investment
capital
will
enable
us
to
execute
on
key
objecPves/reach
key
milestones
that
will
create
barriers
to
entry
and
enable
us
to
capture
market
share
more
quickly
• Good
answer.
An
early-­‐stage
investment
can
be
very
helpful
when
markets
are
evolving
quickly
and
crea9ng
barriers
to
entry
is
important.
Think
Amazon
in
the
early
days
of
e-­‐commerce
6

7. Key
Issues
to
Think
About
When
Deciding
Whether
to
Raise
Capital
• Minimizing
Dilu9on:
How
can
you
minimize
diluPon
in
early
rounds?
This
becomes
important
later
on
if
you
have
to
raise
more
capital
• Control/Economic
Rights:
What
control/economic
rights
are
you
willing
to
give
on?
Do
you
want
the
investor
to
sit
on
your
board?
Are
you
ok
with
preferred
stock?
• Value-­‐Add:
What
key
skills
can
a
prospecPve
investor
bring
to
the
table?
– Ability
to
help
with
hiring
–
rolodex
– Ability
to
provide
strategic
advice
re:
market
entry,
posiPoning,
compePPon,
etc
– Industry
contacts
• Cash
Curve:
What
are
the
projected
cash
needs
of
your
business?
The
cash
curve
will
drive
your
investment
requirements
and
the
staging
of
investment
• What
type
of
investor
would
be
best-­‐suited
for
your
business?
Consider
angels,
angel
groups
and
venture
funds
7

8. Agenda
§ Why
raise
funding
at
the
early
stage?
§ Angels,
angel
groups,
and
venture
funds
§
§
§
§
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
8

9. Angels,
Angel
Groups,
and
Venture
Funds
Solo
Angels
Angel
Groups/
Networks
Early-­‐Stage
Venture
Funds
Examples
Industry
veteran
Former
entrepreneur
Your
rich
uncle
NY
Angels
AsPa
Common
Angels
Flybridge
GreycroK
Partners
Lerer
Ventures
Level
of
Sophis9ca9on
Varies
significantly
Moderate
to
high
level
of
sophisPcaPon
Highly
sophisPcated,
this
is
all
they
do
Investment
Process
Angel
likes
the
business,
does
some
diligence,
writes
you
a
check
You
send
a
business
plan,
you
present
to
the
angel
group,
they
evaluate,
their
members
decide
if
they’re
interested,
they
make
a
proposal
You
get
referred
to
the
fund,
you
meet
them,
you
present,
they
do
diligence,
they
give
you
a
term
sheet,
you
negoPate
Terms
Most
entrepreneur-­‐
friendly
In
between
solo
angels
and
venture
firms
Less
entrepreneur-­‐friendly
Value-­‐Add
Depends
on
the
angel
Moderate
value-­‐add,
good
networks
Generally
high
value-­‐add
Investment
Amount
Varies
widely
depending
on
the
angel
-­‐
$10k
to
$500k
is
ballpark
$100k
to
$1m
$500k
to
$5m
at
early-­‐stage
9

10. Angel
Investors
• Angel
investors
vary
widely
in
terms
of
their
sophis9ca9on,
average
investment
size,
and
what
they
seek
from
the
investment
– Some
do
it
for
fun,
some
are
professionals.
Angels
can
range
from
a
wealthy
former
entrepreneur
who
likes
working
with
early-­‐stage
startups
to
your
wealthy
aunt
Jane
who
always
believed
in
your
potenPal
– As
a
result,
they
will
vary
widely
in
their
ability
to
help
you
beyond
giving
you
money
• Pros
and
cons
of
raising
money
from
solo
angels
– Pros:
Less
restricPve
terms,
easier
deal
process,
less
immediate
pressure
to
perform
post
investment
– Cons:
Need
to
manage
many
of
them,
low
average
value-­‐add,
smaller
average
investment
than
angel
groups
and
venture
funds
• Typical
angel
investment
terms:
– ConverPble
note
structure
(with
discount
to
price
of
future
equity
round)
– Minimal
control
rights,
generally
not
seeking
board
seat
• How
to
find
them:
– Tap
your
personal
network
– Akend
angel
events
(Angel
Vine
in
NYC
is
a
good
example)
10

11. Angel
Groups
• How
angel
groups
work:
– Angel
group
members
pay
a
fee
to
be
part
of
the
angel
group
and
get
access
to
its
deal
flow
– Group
members
don’t
invest
in
all
deals,
can
choose
which
deals
they
want
to
invest
in
– Angel
funds
may
specialize
in
certain
types
of
companies
(for
example,
AsPa
focuses
on
female-­‐founded
companies)
• The
angel
group
inves9ng
process:
– The
staff
at
the
angel
group
will
vet
inbound
business
plans
and
choose
the
best
companies
to
present
to
the
group
– AKer
you
present,
if
there
is
interest
from
the
group,
a
member
of
the
group
will
become
the
“lead”
and
will
round
up
investors
– They
will
then
present
you
with
a
term
sheet.
The
member
lead
will
then
manage
the
due
diligence
process,
which
will
include
reference
checks,
compePPve
analysis,
and
market
analysis
• Angel
group
pros
and
cons:
– Pros:
Larger
average
investment
than
individual
angels,
they
oKen
have
large
professional
networks
that
you
can
uPlize
– Cons:
Longer
process
than
solo
angels,
venture-­‐like
terms
without
as
much
of
the
venture
firm
value-­‐add
11

12. Venture
Capital
Firms
I
Source:
Dilbert
12

13. Venture
Capital
Firms
II
• Venture
capital
firms
are
dedicated
pools
of
capital
that
typically
focus
on
a
specific
stage
and
type
of
investment
(for
example,
early-­‐stage
Internet
deals)
– Keep
their
focus
in
mind
as
you
assess
which
funds
might
be
a
good
fit
• Venture
funds
are
typically
made
up
of
partners,
principals/VP’s,
and
associates/analysts.
– Partners
and
principals
will
lead
deals,
associates/analysts
will
primarily
help
with
deal
veong
and
due
diligence
• Most
venture
funds
have
an
established
process
by
which
they
source
and
evaluate
deals
– Most
early-­‐stage
funds
source
their
deals
via
referrals
– Some
will
read
inbound
business
plans,
but
they
won’t
do
many
deals
from
this
pool
• Typical
early-­‐stage
venture
process:
– You
get
referred
to
the
venture
fund,
or
you
send
in
a
business
plan
– IniPal
phone
call/meePng
where
you
present
your
business
– If
the
fund
is
interested,
this
is
followed
by
one
or
mulPple
follow-­‐up
meePngs
– A
term
sheet
is
presented.
You
negoPate
the
terms
–
valuaPon,
investment
amount,
security,
etc.
Due
diligence
is
ongoing
and
conPnues
post
term
sheet
signing
– Lawyers
draK
the
final
docs
and
you
close
the
deal
13

14. Venture
Capital
Firms
III
• Pros
and
cons
of
raising
money
from
a
venture
firm:
– Pros:
§ Venture
firms
can
typically
invest
larger
amounts
of
capital
than
solo
angels/
angel
groups
§ Venture
firms
are
generally
well-­‐connected,
with
ability
to
help
with
hiring,
strategic
partnerships,
business
strategy
§ An
investment
from
a
good
fund
can
be
a
posiPve
signal
to
the
market
– Cons:
§ They
desire
more
control
rights/protecPons:
preferred
stock,
blocking
rights,
drag-­‐along
rights,
board
representaPon
§ A
bad
venture
investor
can
make
your
life
difficult
• Ques9ons
to
ask
venture
funds:
– What
types
of
deals
does
the
firm
specialize
in?
Have
they
invested
in
similar
companies
before?
– What
is
the
firm’s
typical
deal
process
(Pming,
due
diligence
requests,
etc)
– Which
partner
at
the
firm
will
I
be
working
with?
Will
they
provide
porqolio
references?
– What
is
the
firm’s
typical
approach
to
follow-­‐on
investments?
14

15. Agenda
§ Why
raise
funding
at
the
early
stage?
§ Angels,
angel
groups,
and
venture
funds
§
§
§
§
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
15

16. What
to
Look
for
in
a
Good
Investor
• When
it
comes
to
venture
investors,
the
quality
of
the
investor
can
have
a
major
impact
on
your
future
success.
The
following
are
ques9ons
to
ask
yourself
as
you
evaluate
a
poten9al
investor:
– Do
I
get
along
well
with
this
person/group?
Do
I
get
a
good
vibe
from
them?
Would
I
want
to
work
with
them
when
Pmes
are
tough?
– Do
they
understand
my
business?
Are
they
asking
the
right
quesPons?
– Will
the
investor
provide
references,
and
if
so,
what
do
they
say
about
the
investor?
– What
is
this
investor’s
track
record?
Have
they
invested
in
similar
companies?
Have
those
companies
been
successful?
– What
relevant
connecPons
does
this
investor
have?
Can
they
(and
will
they)
introduce
me
to
people
that
can
help
me?
– What
is
the
firm’s
reputaPon
in
the
marketplace?
– What
is
this
investor’s
Pme
horizon
to
exit?
16

17. Agenda
§ Why
raise
funding
at
the
early
stage?
§ Angels,
angel
groups,
and
venture
funds
§
§
§
§
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
17

18. How
to
Pitch
Your
Company
• Rules
of
Thumb:
– Everyone
pitches
differently.
Be
yourself
and
present
your
company
in
the
way
in
which
you
feel
comfortable.
Investors
can
see
through
B.S.
– Be
able
to
explain
what
your
company
does
and
its
value
proposiPon
in
a
concise
way,
ideally
in
a
few
sentences
–
Think
about
what
quesPons
the
investor
is
likely
to
have,
and
have
answers
prepared
– Don’t
make
wild
claims/projecPons
that
you
can’t
support
–
prospecPve
investors
will
see
through
those
sooner
or
later
Source:
Dilbert
18

19. Things
to
Think
About
in
Your
Pitch
• Be
able
to
answer
the
following
ques9ons
in
an
ini9al
mee9ng:
– What
problem
is
your
company
solving
and
why
is
it
important?
§ Why
is
your
approach
to
solving
this
problem
either
beker/faster/
cheaper
than
alternaPves?
– Who
is
your
compe99on?
§ Why
are
you
beker
than
your
compePtors?
– How
large
is
your
market?
§ What
segment
of
the
market
is
addressable
by
your
product/service
today.
– What
is
your
product
development
plan?
§ If
you
are
pre-­‐product
today,
when
are
you
planning
to
release
your
product?
– What
does
your
financial
plan
look
like?
§ What
is
your
revenue
plan
for
the
year?
How
much
cash
will
you
burn
this
year?
When
will
you
hit
break-­‐even?
– What
is
your
sales
and
marke9ng
plan?
– How
much
capital
do
you
plan
to
raise
and
what
is
the
use
of
proceeds?
19

20. How
to
Pitch
Your
Company
• The
VC
pitch
process:
– First
call/mee9ng:
This
is
really
a
“get
to
know
you”
session.
The
investor
is
trying
to
get
a
read
on
your
company
and
whether
it
is
a
fit
for
their
fund.
Provide
your
company
teaser/execuPve
summary
deck
and
use
it
as
a
guide.
Expect
to
get
interrupted
frequently
with
quesPons
– Second
mee9ng:
There
will
likely
be
more
people
from
the
venture
fund
in
the
room.
Be
prepared
to
go
into
more
detail
–
you
should
have
a
more
detailed
business
presentaPon
deck
(20
to
30
slides)
§ You
will
likely
be
asked
to
present
to
all
of
the
firm’s
partners
or
a
subset
of
the
partners
before
they
sign
a
term
sheet.
This
may
happen
in
a
second
or
later
meePng,
depending
on
the
firm’s
process
– Materials
to
prepare:
§ Company
teaser/execuPve
summary
that
is
15
slides
or
less,
that
you
can
send
to
prospecPve
investors
and
use
in
your
iniPal
meePngs
§ More
detailed
business
plan/investor
memorandum
that
you
can
use
for
the
more
detailed
pitch
meePngs
§ Financial
projecPons
that
you
can
provide
to
investors
– I
prefer
to
see
key
assumpPons
in
order
to
sanity-­‐check
the
figures
20

21. Agenda
§ Why
raise
funding
at
the
early
stage?
§ Angels,
angel
groups,
and
venture
funds
§
§
§
§
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
21

22. The
Deal
Nego9a9on
Process
Source:
Dilbert
22

23. Nego9a9ng
Terms
• General
advice:
– VC’s
do
this
for
a
living.
Make
sure
you’re
fairly
well-­‐versed
in
the
terms
they
use
so
that
you
can
even
the
playing
field
§ If
you’re
negoPaPng
with
a
venture
investor
or
angel
group,
hire
a
lawyer
that
has
experience
with
the
specific
of
deal
you’re
doing
– Growth-­‐stage
deal
terms
are
different
than
early-­‐stage
deal
terms
– Venture
investors
will
ask
for
more
control
rights
that
angels
– You
want
to
understand
what
is
“market”
for
your
specific
type
of
deal
§ Read
up
on
deal
terms
if
you
have
some
Pme.
Good
resources
include
Brad
Feld’s
“Venture
Deals”
and
Alex
Wilmerding’s
“Deal
Terms”
and
“Term
Sheets
and
ValuaPons”
– Think
about
what
deal
terms
are
most
important
to
you:
§ How
important
is
valuaPon?
§ What
terms
are
you
willing
to
give
on?
§ Try
to
figure
out
what
terms
the
VC
is
flexible
on
– The
term
sheet
is
the
template
for
the
final
deal
docs:
§ Term
sheets
are
generally
not
binding,
but
they
are
the
guidelines
for
the
final
investment
agreement
that
is
created
in
the
definiPve
documentaPon
23

24. Nego9a9ng
Terms
• Valua9on
– Much
more
art
than
science
§ Having
a
finished
product,
customers
and
revenues
will
increase
your
valuaPon
§ Think
pre-­‐money
and
post-­‐money
valuaPon,
they
are
different
§ Think
percentages
and
investment
amounts:
– For
example,
We’re
looking
for
$500k
and
we’re
not
looking
to
give
up
more
than
than
10%
of
equity
– Think
about
the
amount
the
investor
typically
invests
and
tailor
your
pitch
to
that
– How
to
negoPate
valuaPon:
§ Investors
will
ask
you
what
valuaPon
you’re
expecPng
– One
strategy
is
to
be
somewhat
aggressive
but
not
unreasonable,
factoring
in
that
VC’s
will
negoPate
you
down
– Another
strategy
is
to
say
that
you’re
leong
the
market
price
the
round
§ Be
prepared
for
some
back
and
forth
§ Both
valuaPon
and
structure
are
important.
Contract
a
common
equity
deal
vs.
a
parPcipaPng
preferred
deal
at
the
same
valuaPon
24

25. Nego9a9ng
Terms
• Investment
Amount:
– Raise
enough
capital
to
give
you
runway
(with
a
cushion)
to
reach
key
milestones,
where
you
can
then
raise
more
money
at
a
higher
valuaPons
if
you
so
choose
– Think
about
the
cash
curve
• Form
of
security:
– Venture
investors
typically
will
insight
on
preferred
stock
– Be
careful
with
giving
them
more
than
that:
parPcipaPng
preferred,
dividends
on
preferred,
etc
• Control
rights:
These
include
blocks
on
sale
of
the
company,
drag-­‐along
rights,
approval
rights
for
key
hires,
maximum
capital
expenditures,
etc
• Board
Seats:
– VC’s
will
usually
(but
not
always)
want
at
least
one
board
seat
25

26. Agenda
§ Why
raise
funding
at
the
early
stage?
§
§
§
§
§
Angels,
angel
groups,
and
venture
funds
What
to
look
for
in
a
good
investor
How
to
pitch
your
company
Nego9a9ng
terms
Due
diligence
and
closing
the
deal
26

27. Due
Diligence
and
Closing
the
Deal
• Amount
of
due
diligence
undertaken
will
depend
on
the
investor.
Venture
funds
will
typically
do
the
most
diligence,
although
angel
groups
may
also
do
detailed
diligence
– Due
diligence
is
an
opportunity
for
investors
to
validate
their
key
assumpPons
and
make
sure
there
are
no
surprises
– You
can
also
do
your
own
due
diligence
on
the
venture
firm
in
the
form
of
porqolio
company
references
• Typical
due
diligence
requests:
– Requests
to
speak
with
your
customers
– Detailed
technology
analysis
(some
venture
funds
may
do
this)
– Founder
references
– Detailed
financial
projecPons
and
discussion
around
key
growth
assumpPons
– Total
addressable
market
(TAM)
discussion
and
analysis
– Review
of
sales
and
markePng
plan
• One
strategy
is
to
make
more
informa9on
available
as
you
see
more
commitment
from
the
prospec9ve
investor
– For
example,
no
need
to
provide
customer
references
unPl
you
see
that
the
investor
is
serious,
to
avoid
wasPng
your
customers’
Pme
27

28. Final
Advice:
Try
to
Avoid
Situa9ons
Like
This
One
Prospec9ve
Investor
You
“You
look
a
lot
different
than
your
website
photo”
Source:
Ibusinessangel
28

29.
Thank
You!
Contact
Email:
nokike@gmail.com
29