overview of startup fundraising

Introduction to Introduction to FundraisingFundraising

When, Why & Who to Raise

(and not raise) Money From

Roy Rodenstein

Global Innovation Labs

Moscow State University, 6/4/2011

Who can be a successful entrepreneur?

I believe anyone can…

if they want it enough

and get the right support

2

Even Чебурашка и Гена

3

Even Че Бурашка

4

User-Generated Local Events Content + Ticketing (originally HeyLetsGo)

2005 2006 2007 2008 2009

My Entrepreneurial Journey

Co-found Going.com

Rejected by YC

Quit Day Job

$500k Seed

$3M Series A

Additional Funding Acquired

5

Companies Mentor Investor/AdvisorUX researcher

early employee

acquired by

co-founder

acquired by

About Me@royrod how2startup.com

6

5 Key Fundraising Topics

1. Deciding Who to Raise From

2. How Much to Raise

3. Contacting Investors

4. The Pitch

5. Negotiating Valuation

7

Deciding Who to Raise From

Bootstrapaka yourself /

co-founders

Friends & Family Incubators / Seed Funds

Angels

Individuals, Groups

VC

8

Deciding Who to Raise From

Bootstrapaka yourself /

co-founders


Angels

Individuals, Groups

VC

Higher chance of making $5M (~1%)

Higher chance of making $0.00 (>50 %)

9

Source Bootstrapaka yourself /

co-founders


Angels

Individuals, Groups

VC

Stage Idea Idea / PrototypeIdea /

PrototypeIdea / Prototype “Traction”

Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%

Time Days Weeks Weeks Weeks - Months Months

Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+

Exit Any Any $5M+ $5M+ $20M+

Fundraising Decoder Ring

10


co-founders


Angels

Individuals, Groups

VC



Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%


Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+



11

Source:Bootstrap

Pros• No dilution• Simple, cheap, quick

Cons• It’s not OPM (Other People’s Money)• Morale impact if funds run low

Bottom Line• Good to get some personal involvement• But don’t overdo it- fundraising is better than giving up

12


co-founders


Angels

Individuals, Groups

VC



Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%


Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+



13

Source:Friends & Family

Pros• Low dilution• Simple, cheap, quick• Feels great if make them money!

Cons• Feels horrible if lose their money!• Can complicate later rounds• “Only money” / no further help

Bottom Line• Keep terms very basic, no board seats, no blocking rights...• Make sure it’s money they can afford to lose 14


co-founders


Angels

Individuals, Groups

VC



Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%


Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+



15

Source:Incubators / Seed Funds

Pros• Moderate dilution• Help with Legal, IT, PR, etc.• Mentors & peers• Leg up on fundraising

Cons• $12k is not a lot of money• Usually have to move temporarily

Bottom Line• Great for first-timers• Post-program support differs, YMMV• Dilution is dilution

16


co-founders


Angels

Individuals, Groups

VC



Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%


Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+



17

Source:Angels

Pros• Good middle ground, if pick right ones• Serious money w/o board seat• Manageable dilution e.g. convertible debt• Long-term morale, PR, etc. benefits

Cons• Their money == wrong angel is trouble• Can require herding cats

Bottom Line• Right angel can be hugely valuable• Beware of getting bogged down• Best or worst of both worlds

West: Ron Conway, Dave McClure…

East: Dharmesh Shah, John Landry…

Groups: Founder Collective, eCoast, Founders Fund…

18


co-founders


Angels

Individuals, Groups

VC



Amount $5k - 200k+ $5k - $20k+ $50k - $1M+ $500k - $10M+

Form Debt,

Convertible Debt

Convertible Debt,

EquityEquity

Convertible Debt,

EquityEquity

Dilution 0% 5-10% 5-10% 5-20% 20-70%


Cost $0 - $1k $500 - $5k $500 - $5k $2k - $10k $10k - $50k+



19

There is No Going Back From VC

So just be very sure

Source:VC

Pros• Real money for scale, can pay yourself• Right VCs have strategic relationship

Cons• Closing VC rounds is major time sink• Board management is major time sink• Major dilution == big exit needed• Can come with strings e.g. CEO/team

Bottom Line• Commitment level == getting engaged• Complex deal terms, have to know which to fight for• Key for building a big company, from FB to Xobni 21

VC Fundraising Myth-Bustin’

Myth: Higher Valuation is Always Better• You can price yourself out of future rounds• “Down” rounds (valuation falls) are really, really painful

Myth: Angel First, Then VC Reduces Dilution• Reality is Angel and VC valuations are not that different• Is $200k for 10% dilution better than $1M for 25% dilution?• Is 10% dilution and then 50% dilution better than 50% dilution?

Myth: Control is About Board Votes and % Ownership• Good VCs will never force founders to do something• In reality, nothing ever comes down to a “vote”• “50% ownership” is a red herring, VC controls are really about dilution and sale

blocking rights

Myth: I Shouldn’t Talk to VCs Until I Need $1M• Yes, you should have your story together before talking to VCs• But much of “traction” == “I’ve been talking with them for a few months and see growth”22

How Much to Raise

• Make a financial model– add all expenses you can think of

• This is for you, not for investors• Make it realistic. Make it pessimistic. Then double it.

– make an Expected Case, and a Worst Case

• You want 12-18 months of cash– Fundraising is a big distraction, don’t do it too often– And you need to start 3-6 months early

• Внимание: You will get what you ask for!

23

Contacting Investors

1. Research the right investors– Who is interested in your space?– Who understands your space?– Crunchbase, VC websites’ partner profiles

2. Find an introduction– Top investors get bombarded with pitches– Someone recommending you makes a difference

3. Or else just do it– But, investors want to hear of good startups– So you can also just contact them… but do it well!

24

The Pitchexamples from bit.ly/fwgoA0

1. What problem are you addressing? (“is this compelling?”)

2. How do you solve it? (“can you really fix this?”)

3. Why are you the ones to solve it? (“who are you?”)

4. Why is this a big problem? (“why should I care?”)

5. How will you make money? (“do I believe you?”)

6. How much money will you make? (“is it enough?”)

7. How much money are you raising? (“what’s the deal?”)

8. Who else is going after this opportunity? (“are you special?”)

9. What are your milestones? (“are you meeting a plan?”)

25

What problem are you addressing?

26

How do you solve it?

27

Why are you the ones to solve it?

28

Why is this a big problem?

29

How will you make money?

30

How much money will you make?

31

How much are you raising?

32

Competition

33

Negotiating Valuation

Guidelines

• Angel deals: $700k - $5m+

• VC deals: $2m - $10m+

It’s All About Traction

• Is your team solid?

• Is your product built?

• Is anyone buying it?

• Are they paying enough?

• But anything helps: press, partnerships, innovation

34

Q&A Time!

Advanced Topics• Convertible rounds: discounts, caps, warrants• Valuation• Fostering deal competition• Deal terms e.g. pro-rata (& super), anti-dilution, etc.• Inside rounds, follow-on rounds, leading a round etc.• Managing the lawyers• Managing the board• Term sheets: comparing, exploding• Compensation across funding stages• Pitch decks• Financial modeling• Business plans (do plan, don’t do a 50-page document)• VC seed rounds• Signaling• VC fund size, fund life stages, LPs, etc. 35

Further Resources

VC & Angel Directories• AngelList: http://angel.co • Crunchbase: http://crunchbase.com

Relevant Blogs• VentureHacks: http://www.venturehacks.com • Mark Suster: http://www.bothsidesofthetable.com • Brad Feld: http://www.feld.com • Chris Dixon: http://cdixon.org • Fred Wilson: http://www.avc.com • Paul Graham: http://www.paulgraham.com/articles.html

Documents• YC Series AA Funding Docs: http://ycombinator.com/seriesaa.html • AVC Seed Docs: http://avc.com/a_vc/2010/03/standardized-venture-funding-docs.html • Wilson Sonsini Term Sheet Generator: https://dealbuilder.wsgr.com

36

overview of startup fundraising

Business

equity equity convertible

equity equity dilution

form debt

bootstrap pros

makesureits money

key fundraising topics

quick cons

peoples money morale