10 Surprising Things About Raising Money by: Michael Blake

10 Surprising Things about Raising
p
g
g
g
Money
Michael S. Blake, CFA, ASA, ABAR
Community Steward, StartupLounge
Director of Valuation Services, Habif,
Director of Valuation Services Habif
Arogeti & Wynne
mike@startuplounge.com
@unblakeable

About HA&W
 Largest independent accounting firm in GA
 Established 1952
300 professionals in tax, audit, valuation,
 300+ professionals in tax, audit, valuation,
litigation, due diligence, information assurance
 Clients range from startups to public companies
Clients range from startups to public companies
 20 languages spoken
 Valuation practice named Best in Georgia by
Valuation practice named Best in Georgia by
Acquisition International (2013)
Habif, Arogeti & Wynne Educational Material
michael.blake@hawcpa.com

2

• 501(c)(6) non‐profit
• We are Venture Communists
• Goal is to facilitate early‐stage
venture development in Georgia
t
d l
ti G
i
– Educating entrepreneurs (Office
Hours, PitchCamp, StartupSeminars)
– “Safe” networking meetings for
entrepreneurs (StartupLounge
Atlanta, Savannah, Athens)
Atlanta, Savannah, Athens)
– “Safe” networking for angel investors
(Angel Lounge)

All FREE

3

IT S NOT WHAT YOU DON T KNOW
IT’S NOT WHAT YOU DON’T KNOW
THAT KILLS, IT’S WHAT YOU DON’T
KNOW THAT YOU DON T KNOW…
KNOW THAT YOU DON’T KNOW


4

#1 Companies Run Out of Time Before
Capital


5

 Assume 6‐9 months to raise capital.
 6‐9 months of burn (call that $500K)
 6‐9 months of management distraction (at 20
,
,
,
hours a week, that is 1,000‐1,500 hours of
time lost
 6‐9 months of eating Ramen noodles and
6 9 months of eating Ramen noodles and
hitting happy hours
 What can competitors do in 9 months?
What can competitors do in 9 months?


6

How Does Time Kill a Venture?
 Idea isn’t scalable
 Pivots kills a business over
time
 Team must have financial
runway/Red Bull supply to
/R d B ll
l t
be focused and work crazy
hours
 One person shows are
much harder to make
work
 Too long to get to market
 Failure to recognize MVP
Failure to recognize MVP

Are you making the most of
your runway?


7

Startups Can Take a Long Time before
being Capital Ready
being Capital Ready
 Customer traction
Customer traction
 Assembling the
management team
g
 Development of
technology
gy
 Developing (not writing)
the business plan
Don’t waste time raising money for a startup that isn’t ready.

8

#2 If it Takes Longer than 12 Months to
Raise Money, You Probably Will Fail
Raise Money You Probably Will Fail


9

Is Your Deal This?
Is Your Deal This?


10

Or This?
Or This?


11

When companies don’t gain traction right away,
that’s often a sign of a tough fundraising road ahead.
th t’ ft
i
f t
hf d i i
d h d

 Unless the market
U ess t e a et
changes.
g
 Unless something
fundamental to the
business changes.
 Sometimes, the fish
aren’t biting.
 “H d
“Hard problems” are
bl
”
hard to raise money for.
 Deals get stale
Deals get stale.

12

Why Do Money Raises Fail?










You’re in the wrong city
g y
Selling the product/idea and not the ROI
Unprepared
Capital not really needed
Founder(s) appear hard to work with
Raising an unrealistic amount
Poor networking
Too little risk borne by the founders
T li l i k b
b h f
d
The opportunity isn’t very financially attractive

13

The Funding Gap
The Funding Gap
It is MUCH tougher to find capital between $1 MM to $5 MM

$0

$100 MM
$100 MM

$1 MM
$

$5 MM
$

$1 B
$1 B

Don’t manufacture a need for more
money

Angels don’t have the capital
Venture funds don t have the interest
Venture funds don’t have the interest
•

Too many deals

•

Too expensive to manage lots of small deals

•

No skill set for deals that small

14

#3 Valuation is Not That Big a Deal


15

 In Atlanta pre money tech startup valuations
In Atlanta, pre‐money tech startup valuations
generally range $1.25 ‐ $2.5 MM.
 Chances are you can’t really sell your shares and
Chances are you can t really sell your shares and
cash out
If your company is really worth more than $0, you
 If your company is really worth more than $0, you
are doing better than 90% of your peers
 Terms matter a lot more than valuation
 Value can be determined credibly but it’s arcane
y
y
 Matters more to you if someone makes you
determine value (stock options, financial
reporting, 83b elections)

16

Terms that Make You Poor








Liquidation preferences
Liquidation preferences
Participation features
Dividends
i id d
Convertibility
Board seats
Redeemability
Antidilution rights

17

Keys to Thinking about Valuation
 When you exit will you earn enough cash to
When you exit, will you earn enough cash to
make it worth your while?
 Target between 10 30% ownership at the time
Target between 10‐30% ownership at the time
you exit.
 If
If you walk away, do you have realistic
lk
d
h
li i
financing alternatives?


18

#4 Even a Low Valuation is a Lot of
Money


19

$1 MM is a lot of Money






You can buy 50 cars
You can buy 50 cars
You can buy an AMRAM missile
McLaren F1 (0‐200 mph in 7.6 seconds)
(0 200
hi
6
d)
2 fire engines
Breakfast for the city of Richmond, VA


20

$1 MM isn’t a Lot of Money
 New York City apartment
New York City apartment
 It is *not* enough to retire early on for most
people
 4 private college degrees


21

#5 Atlanta Investors Fear Technology
Risk Most of All
k
f ll


22

 M ti
Most investors aren’t engineers
t
’t
i
 Customer validation is, by definition,
technology validation
 Technology risk almost impossible to manage
 Validating technology can take years.
Validating customers takes weeks.
Validating customers takes weeks.
 Demonstrated ability to innovate drives
investor excitement
investor excitement
 Hold on to this thought for #9

23

#6 Paying Someone to Raise Startup
Money Is Usually Dumb
ll
b


24

 Raising money is selling. If you can’t sell, you
g
y
g y
,y
can’t grow a startup.
 Most of the audience at pay to pitch events
Most of the audience at pay to pitch events
aren’t actual investors.
 Many investors will refuse to pay the
Many investors will refuse to pay the
brokerage fee.
 Raising early money is too important to
ii
l
i
i
outsource.
 Don’t let a consultant wish your problems
away.

25

#7 If You Have to Explain Your Business
to an Investor, You Have Already Failed
to an Investor You Have Already Failed


26

 It’s like having to explain a joke or a Halloween
costume
 Pitching a deal shouldn’t be like trying to win
g
an argument
 Entrepreneurs with a track record can raise
money for almost anything
money for almost anything
 Investor has to get the story right away
S
Smart investors only invest in deals they
i
l i
i d l h
understand

27

#8 If Investors Weren’t Arrogant, They
Couldn t Do What They Do
Couldn’t Do What They Do


28

 Investors only make money if they really are
smarter than anyone else
 Much of the investment model defies financial
and portfolio theory
 “Maybe I don’t know anything.” means “I do
y
y
know more than you but you’re not worth
arguing with and I just want out of this
conversation.”


29

VC and Other Returns (Annual %)
80

Source: National Venture Capital Association. VC returns per Cambridge
Associates LLC’s U.S. Venture Capital Index.

70
60

Early Stage

50

Russell 2000

40
S&P 500

30
20

Barclay's Government
Bond Index
B dI d

10
0
1 Year
1 Year

5 Years
5 Years

15 Years
15 Years

25 Years
25 Years


30

Upper Quartile & Median Returns (%)
Net to Limited Partners – Source – National Venture Capital Association
25
20
15
Upper Quartile

10

Median

5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
‐5
5

31

A 30% Return is Lousy
 A: $10 MM fund makes 10 $1 MM investments
:$ 0
u d a es 0 $
est e ts
 5 years: 3 go bust, 5 break even, 2 do well
30% fund RoR $37 MM value in 5 years (10 x
 30% fund RoR = $37 MM value in 5 years (10 x
(1.3)5)
$ ;
$
,
$
 3 inv = $0; 5 inv = $5 MM, need $32 MM to hit
return goal
 2 investments must go from $ 2MM to $32 MM
in value (100% rate of return) for fund to meet
30% return goal.

32

#9 Jockeys Raise More Money, Horses
Make More Money
Make More Money


33

 I
Investors almost always say they bet on the jockey
t
l
t l
th b t th j k
 Empirical data says that the horse makes more money*
 It’s easier to change jockeys than it is to change a
It s easier to change jockeys than it is to change a
fundamental technology
j
y
y
 Good jockeys limit downside but are constrained by a
mediocre technology
 You still need good jockeys
 Good technologies have the greatest upside
 Good jockeys are easier to spot than good horses
 E
Examples – eBay, Google, Cisco
l
B G
l Ci
* Kaplan, Steven N., Berk A. Sensoy, and Per Strömberg. "Should Investors Bet on the Jockey or the
Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies." The
y
p
Journal of Finance 64.1 (2009): 75‐115. Print.

34

Think About…
 Why don’t professional
services firms (CPA, law,
marketing) obtain VC
funding?
 Why do very few services
Why do very few services
firms go public?
 We have “key person”
insurance – why not “key
technology” insurance?
 Why are most lifestyle
Why are most lifestyle
businesses labor‐intensive
and/or service‐related?

35

Good Isn t Good Enough
Good Isn’t Good Enough
$1 MM Profit to Cisco
$1 MM Profit to Cisco
• Cisco’s cost of capital = 5%
• Capitalized value = $1
Capitalized value $1
MM/5%
• Value = $20 MM

$1 MM Profit to Startup
$1 MM Profit to Startup
• SU cost of capital = 50%
• Capitalized value = $1
Capitalized value $1
MM/50%
• Value = $2 MM


36

Contests and Awards Really Don’t
Matter
 Awards aren’t given out by customers
g
y
 Many awards are given out by people who have
never run a company and will never be a
customer or investor
customer or investor
 A decent sized customer is better than almost any
award
 Is it really worth your time to go through the
contest/award process
 Goal should be to make contacts and build core
management skills

37

#10 Crowdfunding is Important


38

 The JOBS Act didn’t create crowdfunding –
simply allowed you to sell stock with it
 Total of $2.6 billion total raised through 2012
 Pebble smartwatch raised over $10 MM
 Kickstarter raised over $145 MM in 2012
raised over $145 MM in 2012
 LendingClub raised over $75 MM per month in
2012
 9 states considering laws similar to Georgia to
enable crowdfunding
 Equity‐based campaigns are raising the most

39

Thanks!
h k!
Questions?

Michael S. lake, CFA, ASA, A AR
Michael S. Blake, CFA, ASA, ABAR
Community Steward, StartupLounge
Director of Valuation Services, Habif, Arogeti & Wynne
mike@startuplounge.com
@unblakeable

Your Venture is Much More Important
to You than to any Potential Investor
to You than to any Potential Investor
 If you fail to raise money your company could
If you fail to raise money, your company could
be in trouble now. If an investor fails to invest,
they may never be in trouble.
they may never be in trouble
 Investors suffer worse consequences for
making bad investments than missing good
making bad investments than missing good
ones
 Th
The more desperate you seem, the less
d
h l
interested the investor becomes

41

It’s not in the Investor’s Interest to say
“No”
No
 By saying “no” they lose any option to invest
By saying no they lose any option to invest
later if your deal changes
 It costs them nothing to say “maybe”, or “not
It costs them nothing to say maybe or not
now”
 Wh
When they do say, “no”, they really d ’
h d
“ ” h
ll don’t want
to talk to you again…


42

VCs Having a Harder Time Raising
Money
$
$ Billions
o s
40
35
30
25
20
15
10
5
0
2004

2005

2006

2007

2008

2009

2010


2011

2012

1H
2013
43

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