nyu startup school - when & how to raise venture capital

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  • @NYUEntrepreneur

    When & How to Raise Venture CapitalFrank RimalovskiExecutive Director, Entrepreneurial InstituteManaging Director, Innovation Venture FundNov 1, 2016

  • @NYUEntrepreneur

    Topics

    u Types of venture investors

    uHow does VC works?

    uVC math

    uWhen to look for VC?

    u Fundraising tips

    uQ&A

    2

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    Types of Venture Investors

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    investor|in-vestr|nounone who expends money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property

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    Myth: Venture Capital funds are the primary source of startup funding

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    Venture Funding Lifecycle

    6

    Discovery

    Validation

    Customer Creation

    Company Building

    Test assumptions aboutcustomer needs/problem & develop MVP

    SeekValidation that people are interested in your solution

    Begins to builddemand & improve efficiency of customer acquisition

    Drive growth aggressively & execute business model

    Invention & ideation

    Grants, Competitions Founders + Credit cards

    GrantsCrowdfounding

    CustomersSBIR/STTR + Accelerators

    Friends & family

    Angels Seed funds

    Venturecapitalfunds

    LeasingFactoring

    Vendor financePrivate equityPublic markets

    Valuation*

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    Types of Venture InvestorsStage Pre-Seed Seed/Startup Early LateType Founder(s),

    friends & family

    Individualangels/groups &

    seed funds

    Venture Capital FundsFinancial Investors

    Strategic/Corporate

    Typical Amount $5,000

    to$250,000

    $25,000to

    $1,000,000

    $2,000,000and up

    Source of Funds Individuals Individuals

    Institutional Investors, Family Offices &

    Corporations

    Number of rounds Single Single Multi

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    How VC works

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    The Basicsu VCs manage OPM

    o Pension funds, foundations, endowments, financial institutions, family offices, etc.

    u 10-year fund lifeu 2-and-20

    Fund returns

    5 10 15

    Fund IFund II

    Fund III

    Fund investments

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    How do VCs Make Money?u Investing at low valuation (through

    multiple rounds at increasing valuations) and then

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    How do VCs Make Money?u Investing at low valuation (through

    multiple rounds at increasing valuations) and then

    u Exit (a/k/a liquidity event) at a higher value

    o Initial Public Offering (IPO)

    o Merger into a Public Company

    o Merger into another private company

    o Return of capital from cash flow

    o Asset sale

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    Myth: VCs make money on every deal

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    75% of startups fail to return investors capitalShikhar GhoshHarvard Business School

    #nyuef

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    VC MathNB: Figures and sequencing are intended to be illustrative. Your mileage will vary.

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    From idea to incorporation

    Accepted to SLP!!!Define risky hypothesesCustomer discoveryProblem-Solution Fit!Design MVPTest MVPRetain McCarter & EnglishForm SLESplit founders equityOpen account at Silicon Valley Bank

    Founders100%

    Fully Diluted Ownership

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    In search of Product-Market-Fit

    Continue to test MVPs

    Customer discovery

    Customer validation

    Secure early adopters

    Product market fit!

    In TechCrunch!

    Begin to craft seed pitch

    Commence fund raise!

    Founders100%

    Fully Diluted Ownership

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    Raise seed round3 months & 30 pitches later

    Greycroft Leads Series SeedPre-$ $3.00mRaise 1.00Post-$ $4.00m

    NYU Innovation Venture Fund & 3 angels complete round

    Founders100%

    Fully Diluted Ownership

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    Raise seed round3 months & 30 pitches later

    Greycroft LeadsSeries SeedPre-$ $3.00mRaise 1.00Post-$ $4.00m

    Deposit $1.0m with SVBPay McCarter & EnglishBack to work

    Founders75%

    Seed Investors

    25%

    Fully Diluted Ownership

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    Hire first employees

    Add 10% Option Pool

    Founders75%

    Seed Investors

    25%

    Fully Diluted Ownership

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    Hire first employees

    Add 10% Option Pool

    Hire first employees

    Founders67%

    Seed Investors

    23%

    Options10%

    Fully Diluted Ownership

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    Hire first employees

    Add 10% Option Pool

    Hire first employeesIdentify repeatable & scalable business model

    Founders67%

    Seed Investors

    23%

    Options10%

    Fully Diluted Ownership

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    Hire first employees

    Add 10% Option Pool

    Hire first employeesIdentify repeatable & scalable business modelIn NY Times! Founders

    67%

    Seed Investors

    23%

    Options10%

    Fully Diluted Ownership

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    Hire first employees

    Add 10% Option Pool

    Hire first employeesIdentify repeatable & scalable business modelIn NY Times!Draft VC pitch Commence VC raise

    Founders67%

    Seed Investors

    23%

    Options10%

    Fully Diluted Ownership

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    6 months & 40 pitches later

    Flybridge Capital OffersPre-$ $7.50mRaise $2.50mOptions 15% *

    Founders67%

    Seed Investors

    23%

    Options10%

    Fully Diluted Ownership

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    Make room for more options!

    Flybridge Capital OffersPre-$ $7.50mRaise $2.50mOptions 15% *

    Founders60%

    Seed Investors

    20%

    Options20%

    Fully Diluted Ownership

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    Smaller piece of a bigger pie!

    Post Money ValueFounders $4.50mSeed 1.50Options 1.50Flybridge 2.50Post-$ $10.00mu 50% step-up from Seed!u $2.5m in the banku John Elton & David Aronoff

    on your boardu Growing a teamu Scaling a businessu Life is good!

    Founders45%

    Seed Investors

    15%

    Options15%

    Flybridge25%

    $7.50mPre-$

    Fully Diluted Ownership

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    VC Math Lessons Learnedu If you raise $, you will be diluted

    u Options come out of your hide, not theirs

    u Timing of your raise will be key

    u Valuation nor your % ownership is everything

    u Focus on things that drive enterprise value, not just what maximizes your ownership

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    A Complex Process

    28

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    On Lawyersu Important to pick a very experienced one

    o Not the top Wall Street lawyer you can find

    o Not your cousin Murray

    o Not your patent attorney

    o Not the guy who did you will/mortgage refi

    o someone who does venture financings daily

    u Doesnt have to be local, but it helps

    u We are happy to recommend several

    29

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    When to Look for VC?

    30

  • @NYUEntrepreneur

    When to Look for VC?

    31

    Discovery

    Validation

    Customer Creation

    Company Building

    Test assumptions aboutcustomer needs/problem & develop MVP

    SeekValidation that people are interested in your solution

    Begins to builddemand & improve efficiency of customer acquisition

    Drive growth aggressively & execute business model

    Invention & ideation

    Grants Competitions Founders + Credit cards

    Angels Seed funds

    Venturecapitalfunds

    LeasingFactoring

    Vendor financePrivate equityPublic markets

    Valuation*

    You are here

    GrantsCrowdfounding

    CustomersSBIR/STTR + Accelerators

    Friends & family

  • @NYUEntrepreneur

    Why defer raising money?u A time consuming, distracting process

    u Minimize dilution (when your valuations low)

    u Hard to stop spending once you start

    u You will spend it on the wrong things

    u 1st round raised on the promise2nd on the progress

    u If youre wrong (and dont hit your milestones), youre dead

    u Many other non-dilutive sources of $$$

    32

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    Getting Funded Tips

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    What do VCs look for?

    34

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    Myth: VCs Invest in Technology

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    VCs invest in businesses.Not ideas. Not technologies.Your technology/IP is only oneof the many critical pieces necessary to build a business.

    36

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    What do VCs look for?u Serve unmet need in large & growing market

    u Differentiated solution(s) + supporting data

    u Customer validation of pain & gain

    u Scalable & repeatable business model that generates high ROI

    u Focused teams with proven ability to execute

    37

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    VC Dealflow Funnel

    1,000 150 25 5-10

    Inbox

    Desk

    Meet

    Due Dili Deal

    Credenza

    Reject

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    Your initial goal is to get a meeting!

    39

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    Myth: Raise money when you need it!

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    Raise money when you can raise it!

    41

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    Running out of money is not a milestone!

    42

  • @NYUEntrepreneur

    Myth: VCs are hard to meet!

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    VCs are easy to meet!

    NYU Entrepreneurial

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