Overview of Startup Fundraising
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Transcript of 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
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Even Чебурашка и Гена
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Even Че Бурашка
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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
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Companies Mentor Investor/AdvisorUX researcher
early employee
acquired by
co-founder
acquired by
About Me@royrod how2startup.com
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5 Key Fundraising Topics
1. Deciding Who to Raise From
2. How Much to Raise
3. Contacting Investors
4. The Pitch
5. Negotiating Valuation
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Deciding Who to Raise From
Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
Angels
Individuals, Groups
VC
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Deciding Who to Raise From
Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
Angels
Individuals, Groups
VC
Higher chance of making $5M (~1%)
Higher chance of making $0.00 (>50 %)
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Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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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
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Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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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
Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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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
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Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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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…
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Source Bootstrapaka yourself /
co-founders
Friends & Family Incubators / Seed Funds
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
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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!
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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!
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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?”)
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What problem are you addressing?
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How do you solve it?
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Why are you the ones to solve it?
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Why is this a big problem?
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How will you make money?
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How much money will you make?
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How much are you raising?
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Competition
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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
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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
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