‘succeed in raising capital’

‘Succeed in Raising Capital’

A Primer on Due Diligence

Columbia Technology Ventures2020

NOT FOR DISTRIBUTION ProCapital


BE ORGANIZED FROM THE START

2

What investors need:

– “Due Diligence” is not one thing - It’s a process.

– Organization - Have all docs ready to be seen.

– Logical approach - Business must make sense.

– Consistency and Congruency.

Reality of the “Rat Race”:

– Investors are looking for an excuse to disqualify.

– Simple and easy to understand MATTERS.

– Nothing worse than an unprepared founder.

– Getting interest is hard but sustaining it is even harder.

– DO NOT LEAVE ANYTHING TO CHANCE.


What is Generally Needed….The Minimum

3

1) Investor Pitch Deck

- 10-20-30 rule – Guy Kawasaki (10pages, 20 minutes, 30pt font (this is 10pt BTW))

2) Business Plan

- The document everyone needs but nobody reads…

3) Pro Forma Projections

- The “4Bs”: Believable, Bull, Bear and Break-Even case.

4) Term Sheet + 1 Pager

- Don’t Be Greedy. Cap it if convertible on next round.

5) Risk Disclosure, Reg-D & Subscription Agreement

- CYA, CYA, & Where do I wire my money


The Pitch Deck:

4

Investor Pitch Deck Dos and Don’ts…

– Bullet Points and Pictures…not “War and Peace”.

• People DO NOT READ so limit text and use pictures to back up your points.

• You have 10-15 secs to hold their attention for 110 secs until the next page.

– Be graphically pleasing but don’t obscure your message.

• Don’t use black/dark background – you will burn out all my toner!

• Don’t use a fancy graphical background that distracts from text and pictures.

– Get to the point!

• By page 5 show how much the company will be generating in cash by year 5.

• Their ROI is all they really care about. Its your baby, not theirs.


The Business Plan:

5

Why do a Business Plan?

– The business plan is for you… NOT them.

• If you don’t have one your investor deck is based on S.U.P.O.O.Y.A.

• The document every company needs but nobody reads. Gatekeepers will!

– “Working document” business plan for you.

• All ideas, all failures, all contacts, all pivots, all comps….keep appendix ii

• Start with Liveplan.com if you are new, then export and modify often.

– “Abbreviated” business plan for them.

• A “pretty” 15-20-page document highlighting key sections with PICTURES!

• Full financial model and a graphical P&L - KNOW YOUR BREAKEVEN!


Financial Projections:

6

a.k.a. Your Business Model?

– “Your Projections are Fantasy” so make them believable.

• Know where you break even is. Project from prior sales if possible.

• Have a bull case, bear case and a break-even case. This builds trust.

– Numbers are scary for most people, so make them easy to read.

• Show the numbers in detail for yourself in the business plan.

• Show “rolled up” version in PDeck, ExecSumm, and Abbreviated BP.

– Go out 5 years and do a valuation that is reasonable.

• How can you price the offering if you don’t know the Terminal Value?

• Look at comps but don’t assume you get x% of market…you’ll be wrong.


Executive Summary + Term Sheet:

7

First look and value proposition?

– Everyone wants to see a “one pager” first. - “Just send me the 1 pager.”

• It’s a test to see if they can understand your company in 1-2 paragraphs.

• Have the offering terms on the “one pager” (it’s always 2 pages, BTW).

– Add Pictures!

• If I am going to cut a check, I want to see a picture of my purchase!

• Show revenues graphically and what year you break-even.

– Make it readable and compelling

• Don’t use a 4-point font! Rich people hate reading and wear bifocals.

• It is your first and only chance to impress someone. Make it compelling.


Subscription Agreement and Risks:

8

• Getting their Money and how you will might lose it– Wire instructions.

– How much are they buying.

– Any terms of conversion.

– Investor Questionnaire (suitability).

– Escrowed or Direct to company.

– Capitalization table of other stock-holders.

– How they receive shares and when.

– A whole boatload of risks:

• Stating the obvious of a risky investment.

• Not a liquid investment.

• No control of the company.

• Further Dilution.

• Acts of God and whoever Murphy is….

• On and on and on. You should definitely engage a lawyer. We know some.


Do I need to File “Reg D” exception with the SEC?

9

• YES! Both SEC form D and each State’s Blue Sky filing.

– 43 States have electronic filing.

– In NY you MUST file BEFORE you take $$.

– Other states you have 15 days to file after you take $$$.

• Filing an Exemption with the SEC:

– Avoids problems in Due Diligence of subsequent offerings.

– Helps avoid committing a Felony!

– Various Offering type and rules of who can invest.

– Amount you are raising can determine offering type.

– 506b and 506b: the two most common private exempt offering types.

– Broker Dealer or Securities Lawyer + Experienced Consultant.


Date Warehouse: What and Why?

10

• Data Warehouse:

– Allows access by all parties while you build out materials.

– Password protected. You can start with dropbox, etc..

– Start this now. Maintain this often and with vigilance.

– Docsend.com or other service to tack who reads what, how often and when.

– Make a limited number of folders (no blank folders when investors visit).

• Offering Materials Contents:

– Investor Presentation

– One Pager

– Term Sheet

– PPM / Risk Disclosure

– Subscription Agreement

• Other DD Materials Contents:

– Patents

– Articles of Organization

– Meeting Minutes

– Capitalization Table

– White Papers

– 3rd Party Valuations

– Business Plan

– Etc.


Other Items and Helpful Tips

11

• Some other items for due diligence:

– Prior offering docs

– Company formation docs, meeting minutes and bank statements

– Patents, trademarks, licenses

– Background checks and “Bad Actor” disclosures

– NO commissions paid to unlicensed “finders”

– 3 party technology valuation and or validation

– 40+ other items I don’t have time to discuss here.

– Leases

– Contracts with Suppliers and or Customers.

– Trademarks

– Regulatory Permits

– 21 other possible items you may be required to prove depending on industry.


• Some Ways to get early stage capital:

– Bootstrapping your startup business “Just Do It”™

• Fund it from Savings/Cashflow and the 3 F’s (Friends, Family, Fools)

– Crowdfunding As A Funding Option

• 506(b) and 506(c), Need to File Reg D exemption with the SEC.

– Angel Investment In Your Startup

• National and regional angel groups. Usually $1mm or less.

– Venture Capital For Your Business

• Usually “B” or “C” round. Can sometimes be onerous terms

– Business Incubators & Accelerators

– Raise Funds By Winning Contests/Grants

Funding Options To Raise Startup Capital

12


Appendix: “Reg D”

13

506(b) 506(c)

General

Solicitation?

No. Issuers must have a pre-existing

relationship with all investors.

Yes. Issuers may openly market their

offering to any accredited investor.

Investor

Requirements?

Accredited investors, plus up to 35

non-accredited investors.Accredited investors only.

Investor

Verification?

Issuers may rely on investor self-

certification.

Issuers must verify that investors

are accredited.

Document

Disclosure?

Must provide non-accredited

investors with disclosure documents.No disclosure documents required.

• “Reg D” Exempt Security: Offering Types and Differences


END OF PRESENTATION

(This is 30pt font BTW)

Funding Options To Raise Startup Capital

14

‘succeed in raising capital’

Documents