The document discusses venture capital financing options for entrepreneurs. It describes different types of equity financing like common shares, preferred shares, and convertible loans. It outlines the pros and cons of taking equity financing including giving up some control. It also describes different types of investors like angels and venture capitalists, and explains their typical investment stages and expectations. Examples are provided for valuing a company during seed and Series A financing rounds. Resources for finding investors and fundraising are listed.

1. Venture Capital for Entrepreneurs
Daniel Drouet
McGill X-1
July, 2016

2. About me
Twitter: mtlluo
Email: drouetd@gmail.com

3. Financing options
 Right tool for the job
• Self-finance (Bootstrapping)
• Government grants
• Loans
• Selling Equity
 Options available depend on
• Stage the company is at
• Type of business

4. What is Equity Financing?
 Trading shares of your company for cash
 Taking on a new partner!
 When to consider it
• Up front costs not fundable from cash flow
• Need to move fast
• Unique product or technology with large potential
market
• Exit possible in 5-7 years for $30M+

5. Equity Types
 Common shares
• Simple
• Founders and investors have similar rights
 Preferred shares
• Can be complex, typically used by VCs
• Provides special rights
 Convertible Loan
• Simple and avoids valuing the company
• For Seed or Bridges

6. Equity financing pros and cons
 Pros
• Have resources to move quickly
• Help with strategy, critical hires, fundraising,
partnerships, exits, etc.
 Cons
• Give up control
• Locked in for the next four years
• Higher rate of failure
• Give up possibility of lucrative small exit
• Give up possibility of running lifestyle business

7. Angel investors
 Successful business people
 Invest their own money often in groups
 Typically more involved than VC
 Usually only invest at Seed level
 Small exits can be wins

8. Venture Capital (VC)
 Raise funds that have 10 year lifespan
 Risk reduction based on
• Funding over multiple rounds
• Portfolio approach
 50% investments lose money
 20% break-even
 20% make some money
 10% make lots of money
 Large funds require large exits
• Swing for the fences

9. VC fund example (simplified)
 $100M fund. Goal is $250M or 2.5x
 20 investments. Aim for 20% ownership at exit
• 50% (10) = 0x (written off)
• 20% (4) = 1x (break even)
• 20% (4) = 2x - 3x
• 10% (2) = 10x or more!
 $250M / 2 = $125M per company
 Own 20% => Need two $625M exits!!!

10. Investment stages
Startup Seed Early Stage
(Series A, B)
Late Stage
(Series C, D, E)
Mezzanine /
Buy-Out
$0 - $50K < $500k $1M - $5M $5M - $30M > $50M
Friends &
Family, Angels
Friends &
Family, Angels,
Seed Funds
Angel Groups,
VC
VC, Expansion
funds
Specialized
funds
Validate idea,
Prototype
Launch Beta Build team,
grow users,
first revenues
Ramp up
growth, sales
Exit or remain
private

11. Investors are looking for:
 Team
• Doers
• Complementary
• Deep knowledge of sector
• Coachable or experienced
 Technology / Product
• Unique, disruptive
• Defendable is nice
 Market
• Big to huge
• Growing fast or ripe for disruption
• Traction, Traction, Traction!!!

12. What you should look for
 Has funds to invest
 Invests in your sector
 Complement existing portfolio
 Track record / reputation
 Share common vision
 Good relationship with Partner
* Take “Smart Money” with a grain of salt.

13. Approaching investors
 Do your homework
• Shortlist of investors
• Get an introduction through your network
• Show how you would be a good fit
 It’s like dating
• Compatibility matters
• You can’t force it
 Build the relationship before you need it

14. Fundraising process
Initial Meetings Term Sheet Closing
What’s involved Short list investors,
Prep deck and
other docs.
Get introductions
Agree on roadmap
and use of funds,
Lots of back and
forth over terms,
Some due diligence
Legal and financial
due diligence,
Reference checks,
Haggling over
details
Goal Get investor excited Get signed term
sheet
Close, i.e. cash the
cheque!
Time 3 weeks to prep
3 weeks for mtgs
6 weeks 6 weeks

15. Valuation
 Driven by the investors
• How much money they think you need
• Percentage they want to own
 Entrepreneur controls one thing
• How much risk has been removed from the business
 Miscellaneous
• Pre and Post Money
• Option Pools
• Avoiding valuation with Convertible Debt

16. Valuation example: Seed
Shareholders (Founding) Money In Common shares %
Jack $0 500,000 50
Jill $0 500,000 50
Total $0 1,000,000 100
Shareholders (Seed) Money In Common shares %
Jack $0 500,000 35
Jill $0 500,000 35
Angels (pre $1M, post $1.25M) $250,000 286,000 20
ESOP n/a 143,000 10
Total $250,000 1,429,000 100

17. Valuation example: Series A
Shareholders (Seed) Money In Common shares %
Jack $0 500,000 35
Jill $0 500,000 35
Angels (pre $1M, post $1.25M) $250,000 286,000 20
ESOP n/a 143,000 10
Total $250,000 1,429,000 100
Shareholders (Series A) Money In Common shares %
Jack $0 500,000 26.3
Jill $0 500,000 26.3
Angels (pre $1M, post $1.25M) $250,000 286,000 15
ESOP n/a 143,000 7.5
VCs (pre $6M, post $8M) $2,000,000 476,190 25
Total $2,250,000 1,905,190 100

18. Resources
 Finding investors
• http://www.cvca.ca/membership/member-directory/
• http://www.nacocanada.com/directory
• http://angesquebec.com/fr/investisseurs/profils-
membres/
 Fundraising
• http://www.slideshare.net/startupcfo/investor-readiness-
workshop
 Pitching investors
• http://venturehacks.com/pitching
 Understanding Term Sheets
• http://www.feld.com/wp/archives/2005/08/term-sheet-
series-wrap-up.html