Founders Institute: Fundraising
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Presentation for Founders Institute Bogota (Colombia) - August 2011
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Founders Institute: Fundraising
- 2. Mixcloud Cofounder Internet radio platform Founded 2008 Cambridge 2+ million monthly listeners Based in London
- 3. SUMMARY Types of financing Timeframes Finding investors Typical deals Negotiations
- 5. ‐ Most common form ‐ Especially non‐tech ‐ Pro: easy to convince them. Help get startup off ground ‐ Con: not experienced investors, recognise good vs bad deal, tough to structure ‐ Con: if things go bad, rela+onship suffers ‐ Tough to lose their money. Make risks clear ‐ Usually small raises and 5 – 20% 5
- 7. ‐ Increasing number of incubators ‐ Y Combinator pioneer in Silicon Valley ‐ Gaining recogni+on: Tech Stars, Seedcamp (Europe), local programs ‐ Usually cash for equity deal + reloca+on for 3+ months ‐ Generally $10k ‐ $30k for around 5% ‐ Pros: money to eat, mee+ng mentors, building network, pitching angels in group ‐ Cons: moving team, money runs out preZy fast 7
- 9. ‐ Usually free money from state / government ‐ Increasing number as “tech” industry = growth for governments ‐ But hidden costs: applica+on +me, repor+ng +me, constraints, forced partnerships ‐ Growing in UK. Colombia? ‐ Mixcloud story: first grant with QM university ‐ Second grant with UK radio player ‐ Third grant solo ‐ Inves+gate government websites 9
- 10. TYPES Friends and Family Incubators Grants Customers Convertible debt Equity
- 11. ‐ Non equity finance ‐ Customers just want product ‐ $ plus 4 bonuses: they give you feedback + report bugs + credibility + repeat revenue ‐ B2B usually find one big first customer. More difficult B2C ‐ Challenge: selling a product before it’s finished ‐ Danger: big customer defines product. Specific needs ‐> narrow market ‐ Danger: becoming a services culture company. Doesn’t scale 11
- 12. TYPES Friends and Family Incubators Grants Customers Convertible debt Equity
- 13. ‐ AKA Conver+ble loans or Conver+ble notes ‐ The idea is to convert debt ‐> equity at a later stage so you don’t need to decide on valua+ons now ‐ Valua+on decided at trigger point (usually a raise). Some+mes there is a cap for investors, and usually a discount (eg 20% lower price) ‐ This is all specified in the terms of the deal/loan ‐ Pro: legal + transac+on costs usually lower, and valua+on decided later ‐ From investors view, less aZrac+ve. “Less point taking equity downside without equity upside” but may want to get in deal ‐ Also debt is senior to equity in a liquida+on (although usually nothing lem in startup liquida+ons) ‐ Compensa+on for investor either a warrant or a discount 13
- 14. Warrant 20% warrant coverage Convertible note $1m Warrant $200k Raise from VC $4m Total raise = 1.2+4 = $5.2m Note holders get $1.2m worth of equity
- 15. 20% discount Discount Convertible note $1m This is 20% discount of $1.25m VC raise $3m Total raise: 1.25+3 = $4.25m Note holders get $1.25m worth of equity
- 16. SUMMARY VA L U AT I O N C A P bit.ly/valcapfi
- 17. SUMMARY
- 18. TYPES Friends and Family Incubators Grants Customers Convertible debt Equity
- 19. ‐ Usually VCs invest in “preferred stock” = certain rights, privileges, and preferences to investors ‐ Means first to get money back if startup flops ‐ Different preferences depends on VC, but first in will define the preferences cause none others want less preferred stock ‐ Rights could be: ‐ board seat ‐ informa+on rights ‐ right to par+cipate in future rounds to protect their ownership percentage (called a pro‐rata right) ‐ right to purchase any common stock that might come onto the market (called a right of first refusal) ‐ right to par+cipate alongside any common stock that might get sold (called a co‐sale right) 19
- 20. TIMEFRAMES Friends and Family 1 week – 1 year Incubators 3 months Grants 3 months – 1 year Customers Immediately – 3 years Convertible debt 3 – 6 months Equity 3 - 9 months
- 21. Raise as late as possible ‐> less dilu+on Reasonable raising milestones: ‐ Friends n family ‐ before day 1 ‐ Incubators ‐ idea stage, but omen product too now ‐ Grants ‐ wide range ‐ Customers ‐ as soon as possible ‐ Conver+ble debt ‐ usually a product ‐ Equity ‐ usually a product + users (+ revenue) ‐ Trac+on trumps everything 21
- 22. Friends and Family 0 – 15% Incubators 5 – 10% Grants 0% Customers 0% Convertible debt 10 - 30% Equity DEALS 20 - 35%
- 24. OPTION POOLS
- 25. Sizing Raising $1m at $3m pre-money Currently 5 employees Burn rate 5x$4k = $20k/month Before next round hire 5 more Average salary $50k/year Options = 0.1 to 1 x annual salary 1 x 50k x 5 = $250k Divide by post-money valuation 250k/4m = 6.25%
- 27. ‐ Network network network ‐ Look for “smart” money ‐ not just $$$ ‐ Helps if they know your space + bonus connec+ons for you ‐ Get introduc+ons from fellow entrepreneurs, go to events, read blogs ‐ Do the rounds. They move in packs. ‐ Lead investor emerges ‐ They will expect more due diligence the higher the raise 27
- 28. NEGOTIATE
- 29. ‐ "In life you don't get what you deserve, you get what you negotiate" ‐ Best nego+a+on tool is having many investors at the table ‐ Trac+on helps for B2C ‐ LeZers of intent for future B2B businesses 29
- 30. Alignment
- 32. Flickr credits http://www.flickr.com/photos/kolix/2771340860/ http://www.flickr.com/photos/expressmonorail/2390656810/sizes/l/in/photostream/ http://www.flickr.com/photos/troybthompson/44990139/sizes/o/in/photostream/ SUMMARY http://www.flickr.com/photos/polvero/3457516537/ http://www.flickr.com/photos/vodcars/4307952203/ http://www.flickr.com/photos/_sk/4292858717/sizes/l/in/photostream/ http://www.flickr.com/photos/mait/4215747174/ http://www.flickr.com/photos/beth19/4721798240/ http://www.flickr.com/photos/visualpanic/404347995/ http://www.flickr.com/photos/9619972@N08/1350940605/sizes/l/in/photostream/ http://www.flickr.com/photos/jamie_hladky/4923141271/sizes/l/in/photostream/ Valuation cap blog post from Martin (Rapportive) http://bit.ly/valcapfi
- 33. Twitter - @nicoperez Email – nico@mixcloud.com
Notas del editor
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- Most common form\n\nEspecially non-tech\n\nPro: easy to convince them. Help get startup off ground\n\nCon: not experienced investors, recognise good vs bad deal, tough to structure\n\nCon: if things go bad, relationship suffers\n\nTough to lose their money. Make risks clear\n\nUsually small raises and 5 – 20%\n
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- Increasing number of incubators\n\nY Combinator pioneer in Silicon Valley\n\nGaining recognition: Tech Stars, Seedcamp (Europe), local programs\n\nUsually cash for equity deal + relocation for 3+ months\n\nGenerally $10k - $30k for around 5%\n\nPros: money to eat, meeting mentors, building network, pitching angels in group\n\nCons: moving team, money runs out pretty fast\n
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- Usually free money from state / government\n\nIncreasing number as “tech” industry = growth for governments\n\nBut hidden costs: application time, reporting time, constraints, forced partnerships\n\nGrowing in UK. Colombia?\n\nMixcloud story: first grant with QM university\n\nSecond grant with UK radio player\n\nThird grant solo\n\nInvestigate government websites\n
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- Non equity finance\n\nCustomers just want product\n\n$ plus 4 bonuses: they give you feedback + report bugs + credibility + repeat revenue\n\nB2B usually find one big first customer. More difficult B2C\n\nChallenge: selling a product before it’s finished\n\nDanger: big customer defines product. Specific needs -> narrow market\n\nDanger: becoming a services culture company. Doesn’t scale\n
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- AKA Convertible loans or Convertible notes\n\nThe idea is to convert debt -> equity at a later stage so you don’t need to decide on valuations now\n\nValuation decided at trigger point (usually a raise). Sometimes there is a cap for investors, and usually a discount (eg 20% lower price)\n\nThis is all specified in the terms of the deal/loan\n\nPro: legal + transaction costs usually lower, and valuation decided later\n\n From investors view, less attractive. “Less point taking equity downside without equity upside” but may want to get in deal\n\nAlso debt is senior to equity in a liquidation (although usually nothing left in startup liquidations)\n\nCompensation for investor either a warrant or a discount\n
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- Warrant example\n\nWarrant = option to buy stock\n\n
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- Valuation cap = fixing the maximum price early stage investors are paying for their shares.\n\nFor example the max valuation at next raise for them will be $2m\n
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- Usually VCs invest in “preferred stock” = certain rights, privileges, and preferences to investors\n\nMeans first to get money back if startup flops\n\nDifferent preferences depends on VC, but first in will define the preferences cause none others want less preferred stock\n\nRights could be: \nboard seat\ninformation rights\nright to participate in future rounds to protect their ownership percentage (called a pro-rata right)\nright to purchase any common stock that might come onto the market (called a right of first refusal) \nright to participate alongside any common stock that might get sold (called a co-sale right)\n
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- Raise as late as possible -> less dilution\n\nReasonable raising milestones:\nFriends n family - before day 1\nIncubators - idea stage, but often product too now\nGrants - wide range\nCustomers - as soon as possible\nConvertible debt - usually a product\nEquity - usually a product + users (+ revenue)\n\nTraction trumps everything\n\n
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- How much to raise? For equity raise work backwards and look at market\n\nInvestors usually take 20 - 35%\n
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- Idea to ring fence equity for future employees\n\nUsually 5 - 15%\n
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- Network network network\n\nLook for “smart” money - not just $$$\n\nHelps if they know your space + bonus connections for you\n\nGet introductions from fellow entrepreneurs, go to events, read blogs \n\nDo the rounds. They move in packs.\n\nLead investor emerges \n\nThey will expect more due diligence the higher the raise\n
- \n
- "In life you don't get what you deserve, you get what you negotiate"\n\nBest negotiation tool is having many investors at the table\n\nTraction helps for B2C\n\nLetters of intent for future B2B businesses\n
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- - The most important thing people forget to mention\n\n- Make sure investors + your incentives and motives are aligned\n\n- Ultimately more art than exact science\n
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