Wasabi Ventures Academy: Startup Financing 101

Early Stage Startup Financing 101 Part of the Wasabi Ventures Academy – Analyst Training

An Innovative And Dynamic Approach To Venture Capital And Incubation

Two Buckets Of Financing Options

NON-EQUITY FINANCING

Self-Financing/Bootstrapping Angel Financing

EQUITY FINANCING

1

2

1

2

3

Debt/Bank Financing

Strategic Financing

Venture Capital

Academy.wasabiventures.com @wasabiventures

Self-financing/Bootstrapping

Financing growth from cash flow and personal funds or sometimes family

Example in the portfolio – Peku Publications pekupublications.com

Often good bootstrapped companies emerge from a service or consulting companies that are productizing their offering

Example in the portfolio – SocialToaster socialtoaster.com KEY POINT: Second time, successful startup people often self-finance or bootstrap the Early Stage.


THINGS TO THINK ABOUT:

Bootstrapped companies almost always spend cash more effectively than equity financed companies – WV loves to work with bootstrappers!

If they are coming out of service business in the same vertical, they should understand the market

No outside influences driving startup to places the business shouldn’t/doesn’t want to go

Resources for product and market dev constrained by cashflows or size of pockets, but this is a good thing

May miss a big opportunity if other players raise finance and invest heavily, but this is mostly a head fake

A founder has to take on all/most of the risk

Debt / Bank Finance

NET-NET BANKS ARE WORTHLESS IN THE STARTUP

WORLD


Relatively limited funds are available

Banks only lend to businesses they can understand and they

understand very little in the startup

world

Process is slow and painful

Almost always need a personal

guarantee

Why Should I Raise Outside Capital?


> You Believe in Your Offering

> You Believe in Your Team

> The Opportunity is MASSIVE (i.e. over $100MM valuation)

> You have outside investors who have different goals

> The pie to split is smaller

> Speed is now more important than ever

> Financing to execute

> Credibility

> Access to partners

> Hopefully some guidance and direction

ALL OF THIS LEADS TO A BIG WIN FOR YOU

RAISING MONEY RAISES THE BAR

WHAT YOU GET

The Opportunity is Too Small

Is this a vitamin or an aspirin?

Is this a company or a feature?

Money is Not Your Primary Focus

“I want to make the world a better place.”

Would this better be served as a non-profit

You Don’t Want it to be BIG

You don’t want a massive number of employees

You like having your hands involved in every aspect

When To Not Raise Outside Equity Financing?


What Happens When You Raise Money When You Shouldn’t


You let people into your business who are not aligned with your goals and dreams

You will be working at something you may not like for 3 to 7 years and doing it for little pay

You have lost control of the business when you didn’t want to

Can’t do a small exit and call it a win

Almost always means you will be raising money forever

Venture Capital – What Is A VC?

Raise a fund from groups/people: Pension funds, financial institutions, and rich individuals. These groups/people are known as “LPs”, “Limited Partners” Most funds will eventually have to close the fund and send a return to the investors. The one exception are evergreen funds VCS MAKE PROFITS THROUGH TWO ITEMS

Management fee on funds managed, usually 1 to 2.5%

Carry on the profits of the investment 20 to 25%


They invest money over 3-5 years with the hope that a fund may close in 7 to 10 years

~ 5/8 of investments lose money and go to near zero

~ 1/4 of investments basically break even

~ 1/8 of investments are homeruns and make lots of money

VC Money Making – An Exercise

In 2018, all of the investments have reached some liquidity event

• 5 went out of business and returned nothing = $0 total return

• 3 returned 10% profit = $33MM total return

• 2 returned 800% profit = $180MM total return

• $213MM total return


VC Firm XYZ raises a $100MM fund in 2010 – They call it “XYZ Fund 2010 LLC”

20% carry

2% annual management fee

Between 2010 and 2015 they make 10 investments for $10MM each

XYZ FUND 2010 LLC’S OUTCOME:

• ~$22.6 MM in Carry

• $174.4 Returned to the Investors

• $113 MM Gross Profit for the fund

• ~$16 MM in Management Fees

Angels – What Makes Them Tick

Angel = Probably a rich person who has usually been successful in the startup world.

Unlike the VC, an Angel invests their own money


NOTE: A vast majority of angels do not invest to make money. They do it just so they can be part of the action or for some other alternative reasoning.

1 2 Startup raises VC money, but has built up interest into a venture-backed startup that is going to shoot for a homerun. NOTE: In many ways, they are at the same risk of dilution as the founders unless they keep investing.

Two Successful Exit Scenarios For An Angel

Startup might be sold quickly for a relatively smaller amount of money (i.e. single digit millions of $$$s) and the Angel can make a quick multiple on his/her money back

Angel And VC Equity Financing

WV considers them the same from a

practical standpoint


The key to raising equity-based

capital is knowing when to raise the

money

Almost all startups have to

raise equity-based financing

KEY POINT: WV is both an

Angel and/or VC

What Is A Strategic?

Large company or organization that is in the vertical or distribution chain target for a startup (e.g. Ford would be a strategic for a startup building an automobile software-related product) They invest to help innovation and lock out competitors


THINGS TO THINK ABOUT:

Gain instant credibility

Can help with a distribution channel

Can occasionally add technical help

Often caps your backend potential

Be careful of becoming the forgotten girl at the dance

Can close off opportunities

Key Terms That You Will Hear

CONVERTIBLE NOTE

A loan that will convert into equity (with a discount and interest) with the next major financing round

LOTS of Info on this in the Analyst Training Room

The document that investors sign that describes the terms of the financing

The capitalization breakdown of a company. Who owns what percentage of the company?

How much a company is worth before a financing takes place

How much a company is worth after a financing takes place

An investors right to be paid back at a certain rate on a successful exit, e.g. 2X liquidity preference

1 TERM SHEET

CAP TABLE 5

PRE-MONEY VALUATION 2

4

POST-MONEY VALUATION

LIQUIDITY PREFERENCES

3 6


Where Does WV Fit In?

Only 20% of our investments are situations where we lead

Startup Farm – We educate, train, fund, and work with daily EiRs who want to build their own startup. In this capacity, we are co-founders.

WV IS A:

VC – We have a fund that we do all of our cash investing. In this capacity, we are like every other early stage investor.

Incubator – We take on existing startups who need help in a functional area and we fill those roles. In this capacity, we are what every incubator should be and never is.

85% of our investments are

done as convertible notes

32% of our deals are 100% founded

by us in conjunction with our EiRs

46% of our deals involve in-kind

services (i.e. engineering,

sales, marketing, etc.)

15% are Series A Priced Rounds

85% 15% 46% 32%

WE ARE AN ODD HYBRID

WE RARELY LEAD


The Best Way To Look At WV


Startup Financing

CoFounder Talent


If you are interested or know some

interested in the class, email

[email protected]

Wasabi Ventures Academy: Startup Financing 101

Business

Transcript of Wasabi Ventures Academy: Startup Financing 101