Raising VC
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@iainmcdtweet
Iain McDougall
December 11, 2012
Raising Your First Round of Capital
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Tech & Biotech
CONTEXT
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Gloves translate sign language into speech
OK YOU’VE GOT A BIG IDEA
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DECEMBER 11th 2012
BUT HOW TO GET FUNDED
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3-OPTIONS
Bootstrap Customers Raise $$+ =
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Angel or VC
Finding Investors
How to Pitch Them
Valuation Math
Negotiating Deal Terms
Demystify the VC Angel World
GOAL FOR TODAY
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VC’S vs ANGELS
Will want some control (voting, board, veto)
Will want to own 20-30%
Actively engaged (they get paid to do this!)
Can add tremendous value and be great business partners
Can be total disasters
Typically rational actors, commercially-driven, but if inexperienced…
May want some control (“send me an annual email”)
Will want to own 1-10%
Maybe engaged or not (often a hobby, sometimes a personal mission)
Can add tremendous value and be great business partners
Can be total disasters
Typically rational, but if unsophisticated: naïve irrational, emotional
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Deep Pockets:High risk tolerance and additional funding for
follow-on rounds
WHY RAISE VC
Value-Add:VCs provide domain experience, industry
contacts, and strategic planning
Experience Matters:VCs have “seen the
movie” over and over again and can help avoid
pitfalls to find the path to success
Swing Big:VCs don’t invest in niches,
they invest in transformative ideas that can build large companies
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1Does my business fit?
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Typical Investment Criteria
Tangible things investors like to see: Very big market (> $500m) Unfair advantage (why you? why now?) Attractive business model (recurring, high gross margin) Unique technology or business model approach
Intangible things investors like to see: “Pied Piper” – an ability to recruit and retain a great team,
partners Interpersonal chemistry Movie, not a snapshot
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Great Idea
Huge Markets
Massive Gross Margin
Unique & Protectable
But People Trumps Everything
PEOPLE MATTERS
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PEOPLE MATTERS
Ideas are a dime a dozen
Having a world-class team is golden
Laser focus of the young entrepreneur is very powerful
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2Am I Prepared?
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Raising Money is Really, Really, Really Tough
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300 : 1LONG ODDS
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12months - 2 years..!
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Prospect List
Executive Summary
Investor Deck
Business Plan
Financial Model
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3Getting the 1st Meeting
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FIND THE SWEET SPOT
Scope out the firm – size matters, as does the individual
Arrange for a warm introduction
Prepare, be brief (VCs Blink)
Don’t downplay risk
Mutual due diligence is fair play
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Most VCs and Angels have ADD – operate on “BLINK” instincts Want to SEE everything, but DO very, very few
deals Make their decision within the first 10-15 minutes
Typical VC and angel will invest in one out of every 300-500 deals they see Long odds – you need to really stand out Like college applicants – triage quickly
Context About VCs and Angels
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Investor’s Decision Tree
Worth 3 minutes (email, phone)?
Worth 30 minutes (phone, in person)?
Worth 60-90 minutes (in person)?
Worth 2nd mtg (in person)?
Ignore
Pass gracefully
Pass but stay In touch
Serious due diligence Pass but be helpful
No
No
No
No
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4The Pitch
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3 MUST DO’S
1 2 3Be gracious, personable
Be crisp & on point
Personal intro should take < 5 minutes. Team introduction 10 minutes
Make it relevant – don’t go off on tangents
If you can’t show good summarization skills, how will you handle a board room?
Know your stuff
You will be pushed and tested
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DO NOT...
1 2 3Exaggerate
Everything you say will be verified in due diligence
Assume the listener is a cynic and a professional Bull-shit detector
This is about Team not You
There is no I.
If you are self-aggrandizing, investors will assume you can’t build teams
Name Drop
No one is going to be impressed with who you know unless the relationships are both realand relevant.
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5Another Meeting
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So You’ve Had a Good Meeting… Then What?
Treat fundraising like a sales process – build a pipeline, work people through the pipeline, build up to crescendo
VCs get distracted – typically only pursue 2-3 high priority new investment opportunities at any given time
Stay connected, top of mind, build a sense of momentum Need to sell the individual “champion”, then the help
them sell the partnership Address objections with specific data
Make the investment case for them Give them tools/materials to share with their partners
13#
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6Full Partner Meeting
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7Term Sheet - Finally
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Term Sheet Time Frequently Asked Questions…
Should I include VCs in my first round or just angels? How big should the option pool be? How should I think about valuation?
“Promote” definition - http://bit.ly/8NpdM Should I do a convertible note with a cap, no cap or a
priced round? How should I think about control?
15#
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Aligning Interests
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ECONOMICS CONTROL
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PRICE
A + B = CPre-MoneyValuation
Investment Post-MoneyValuation
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PRICE
£400k + £100k = £500k
Pre-MoneyValuation Investment
Post-MoneyValuation
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EQUITY
C Post-MoneyValuation
Investment
%age Equity
B=
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EQUITY
£100k= 20%£500k
£400k + £100k = £500kPre-MoneyValuation
InvestmentPost-MoneyValuation
Looking to Raise For X% of my
business
You Value your business as
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What Is Market?
Rough Numbers (vary slightly by coast and sector): Seed: $500k-$2m raise on $3-5m pre-money (or cap) Series A: $3-6m raise on $6-10m pre-money Series B: $8-12m raise on $15-20m pre-money
Option pool: 10-20% The smaller the pool, the more confidence in the
founding team Do an “option pool budget” to determine the right pool
17#
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8MONEY IN THE BANK
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MUST READS
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Who’s Ready to Raise Money?
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THANK YOUFeel free to ask questions
or
Follow-up @iainmcdtweet