How to rasie money in Silicon Valley from an international entrepreneur prospective

1. BRUSSELS INVEST & EXPORT
Eric Gabrys
Trade & Investment Commissioner
california@brusselsinvestexport.com
155 Montgomery Street Suite 409
San Francisco CA 94104
M +1 (415) 866 40 22
T +1 (415) 291 01 30
F +1 (415) 291 01 25
Skype: bie-siliconvalley
www.brussels-in-usa.com
Raising Money in Silicon Valley
October 2016

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RaisingMoneyinSiliconValley–October2016
1 Introduction to Venture Capital in the US: Facts
and figures
There is little doubt that the reason Silicon Valley has become the main hub for
innovation in the world lies in its complex ecosystem where VCs and angel investors
play a critical role in funding the riskiest asset class that a startup represents.
Because of the difference in the American approach to valuing risky investments in
startups (even more strikingly so in SV) compared to Europe, it is understandable
that Belgian entrepreneurs are tempted by the opportunity to raise venture capital in
the US. However, this endeavor does not come without challenges and entrepreneurs
will be faced with new risks and constraints.
Despite its large impact on US economic growth, VC investment is a relatively small
business as an asset class.
Venture capitalists invested $59.8 billion in 4,535 deals in 2015, according to the
MoneyTree™ Report by PricewaterhouseCoopers LLP (PwC) and the National Venture
Capital Association). Total investments by angel investors in 2015 were $24.6 billion,
a slight increase of 1.9% over 2014, according to the Center for Venture Research at
the University of New Hampshire. A total of 71,110 entrepreneurial ventures received
angel funding in 2015, a decline of 3.1% over 2014 investments.
The two financing sources target different financing stages: Angels usually take the
very early bets (seed funding) and VCs focus on later stage financing for the most
part (growth capital). Another difference is that Angel Investors invest their own
money while VC firms are professional investors who invest their fund money on
behalf of their Limited Partners (L.P.’s).
Venture capitalists invested $59.8 billion in 4,535 deals in 2015, marking the second
highest full year total in the last 20 years. In terms of deals over the prior year, this
amount of investment reflects a 17.25% increase. Though the average deal size from
2014 to 2015 increased by 5.1%, the deal valuation decreased by 13/1%.
Representing a three-year trend in decline in valuations, and indicating that a market
correction may be gaining momentum. Data for angel investments is not yet
available for the first two quarters of 2016.
Software (18%), healthcare (16%), biotech (13%), industry/energy (11%), retail
(10.6%), and media (9%) companies together received 77.6% of all angel group
dollars, according to the Center for Venture Research at University of New Hampshire.
California alone makes up over 50% of VC US dollars.
VC investment is not a particularly transparent asset class but the average return on
investment is an impressive 0%, reflecting the fact that the vast majority of venture
capitalists failed to return the initial investment to their Limited Partners such as a

3. RaisingMoneyinSiliconValley–October2016
university endowment, pension funds, or large corporations that want to invest some
of their capital into startups. The VC firm invests the fund money into promising
startups for three or four years and then harvests the returns for the remainder of
the fund’s eight to ten-year term in exchange for a fee. The typical V.C. fee structure
is “two and twenty”: two per cent of the fund each year as a “management fee” and
twenty per cent of the exit profits also referred to as the “carry”. These are average
figures as top notch firms are known to be able to negotiate up to a 30% “carry”
while second tier firm partners will be offered less by their LP’s and under stricter
conditions.
Fig.1 Investments by region – 2015 and 2014
(Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report)
San Francisco has definitely defined itself as the epicenter of Silicon Valley by
attracting most of all Series A Investments (first round of institutional investors’
money) year-over-year in 2014, 2015; as well, for first two quarters in 2016 has
received highest level of funding for all regions with $13.1 billion.

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RaisingMoneyinSiliconValley–October2016
Despite its relatively small size, VC investment has a strong impact on the economy
and job growth. The Kauffman Foundation data shows that fast-growing young
firms in the US, while comprising less than 1 %of all companies, generate roughly
10 %of new jobs in any given year.
As reported by Marianne Hudson from the Angel Capital Association, the U.S.
Census Bureau and the Ewing Marion Kauffman Foundation in 2009 and 2010 found
that businesses that were less than five years old created all of the net new jobs in
the United States over the last 25 years. The majority of these jobs came from
innovative businesses that grew exponentially, with angel-backed company
examples such as Google, Facebook, and Starbucks.
2 Funding process in the US: A Silicon Valley
prospective
Generally VCs are not interested in seed funding while business angels primarily
focus on seed funding. One of the most relevant criteria used to differentiate VCs is
the size of their current fund. Their investment must return a significant part of the
fund in order to be considered in their deal flow. When the rate of success in VC
funding is less than 50%, a VC will only bet on a company that can return a
significant part of their current fund. Other criteria to select your VCs should
include:
 industry focus
 network and contacts - VCs are often referred to as recruiters on steroids
which is not a bad thing in a very competitive environment where people
assets will be key to your success
 personal chemistry with the VC partner who will sit on your board
Seed funding from Angel investors, as well as from the three Fs (friends, family,
and fools), is usually tapped into in order to complement your own funding. Unlike
in Belgium, you must be considered as an accredited investor (you own over 1 M
liquid assets or your disposable income is over 200k/year, see more on
http://www.sec.gov/answers/accred.htm) to be able to invest in startups as an
individual. Very wealthy individuals - usually successful former entrepreneurs - act
more like micro VCs by making angel investment their full time job. Shark Tank, a
very popular ABC prime time show, has been epitomizing this type of angel
investor.

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A typical start-up in the Silicon Valley/SF will undergo the following steps of
funding:
 Your own money together with money from 3Fs (Fools, Friends and Family);
entrepreneurs should expect investors to ask about the skin they have in the
game.
 Angel investing from accredited investors or seed money from accelerators or
incubators. Seed funding typically ranges from 150k to 1.5M USD. Seed
funding is generally focused on evaluating soft skills like the founder’s team
expertise and experience, together with the potential market for the
proposed solution or product.
 VC investment (1 to 4M USD deals), called Series A, as well as follow-up
rounds: Series B, C, D, etc. The amount raised can be up to and even over 1
Billion as we saw in Uber’s series E. Not all companies will make it through
all these stages. Series A and above will primarily focus on facts and the
founder’s ability to execute. Series A funding often creates the feeling of a
funding crunch among entrepreneurs; this is referred to by investors as the
“valley of death” for a startup, as this particular funding round reflects on the
founder’s ability to execute or properly pivot to gain significant market
traction at a time when additional funding will require data and proper
execution to be justified.
Fig.2 Typical funding process
Bootstrap/Self
Grants
Angel investors
Super angels
Seed funds
Crowdfunding
Incubators &
accelerators
Series A
Venture Capital (incl.
Venture debt)
Series B
Series C, D,...
0- 1 M 1-5 M 5 M +

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RaisingMoneyinSiliconValley–October2016
VCs expect to get to an exit through an IPO or more likely via an acquisition within
5-7 years of their initial investment. There is a recent trend for startups to remain
private by tapping additional funding from private equity funds. It remains to be
seen if this becomes a more permanent trend or just the sign of a bubble in the
mobile/social media software industry.
Over 140 companies have soared to a $1 billion valuation or higher, based on
funding. These startups are commonly referred to as “Unicorns”, a term coined by
VC Aileen Lee in his TechCrunch post in November 2013. See
techcrunch.com/2013/11/02/welcome-to-the-unicorn-club
As indicated earlier, 71,000 companies were funded by Angel Investors in 2015
while less than 4,600 received funding from VCs during the same year. Seed
funding remains an extremely risky investment and most startups fail. However, a
few successful ventures create so much value that the average IRR for diversified
angel investment is estimated to be between 20% and 30% according to the
ACA/Kauffmann foundation.
3 VC Incubators
Incubator programs are another means of accessing funding for your startup, and
more and more of those founded in Silicon Valley welcome international startups
into their programs. The programs are designed to be collaborative and highly
selective, with the ultimate goal of helping start-ups succeed by providing (1)
access to a pool of funders usually at the angel, seed, or Series A level (2) business
education and mentorship (3) access to a business-tech network (4) access to peer
networks.
 Successful incubators in the San Francisco Bay Area
Founders Space
http://www.foundersspace.com/
Dedicated to helping exceptional entrepreneurs grow their startups, get funded
and go global. According to Forbes Magazine, is the #1 incubator for startups
coming from all over the world to Silicon Valley.

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Y Combinator
https://www.ycombinator.com/
Provides seed funding for startups in return for small takes in the startup
companies. Notable alumni include AirBnB, Dropbox, Stripe, Optimizely,
Mixpanel, Docker, Reddit, Instacart
Plug & Play Tech Center
http://plugandplaytechcenter.com/
A global innovation platform, to connect startups to corporations and invest in
over 100 companies every year. The have 22 locations across the world. Notable
alumni include PayPal, Dropbox, SoundHound, Lending Club.
US Market Access Center (USMAC)
http://www.usmarketaccess.com/
Provides international tech companies with fast and successful access to the US
and global markets via Silicon Valley
500 Startups
http://500.co/
A leading global venture capital seed fund and startup acclerartor. Manages
$200 million in assests and invests in ,300+ technology start-ups. Notable
alumni include RealtyShares, Dollar Beard Club, Twilio, CreditKarma, SendGrid
RocketSpace
http://www.rocketspace.com/
A technology campus located in San Francisco. Since 2011, has been helping
tech entrepreneurs, startups and corporate professionals bring the future to
market. The company offers services to its members including programming,
consulting, events, and office-as-a-service, which together create the perfect
ecosystem and community for innovation to thrive. Notable alumni include Uber,
Spotify, Hootsuite, Practice Fusion, and Weebly
The Batchery
http://batchery.io/
The Batchery is a Berkeley-based global incubator for seed stage startups ready
to go from idea to launch at lightning speed. We are a community of 50 veteran
investors and advisors ready to provide you with ideas, insights, and networks.
We are the global gateway to Silicon Valley, with the best in office space, tools,
and partnerships for entrepreneurs in the Bay Area, around the US, and
internationally.

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The Runway
http://www.runway.is/
Runway is an incubator and co-working space, home to high-caliber startups
located in the Twitter building in downtown San Francisco. With over a dozen
partnerships with Fortune 2000 brands and an international network of cutting-
edge startups, Runway is the home of innovation.
Discount Code: TEDxSF
Blackbox
http://blackbox.vc/about/blackbox/
Bring motivated founders with great ideas from every corner of the world to
Silicon Valley to learn from and connect with successful entrepreneurs,
experienced venture capitalists and other resources to accelerate their global
expansion.
GSV Labs
http://gsvlabs.com/
Empowering entrepreneurs and partners to accelerate global innovation
4 Tools & term sheets
In the early life stages of a startup in Silicon Valley, investment is usually made via
convertible promissory notes. A convertible promissory note is a financial
instrument in a form of a discounted debt that will be automatically converted into
convertible preferred stock at the next (qualifying) financing round. This is a great
tool to avoid lengthy discussions about the startup valuation and to keep the
financing accessible and low-cost. You can easily find examples of a convertible
promissory note sheet on the web (e.g. www.startuplawblog.com/wp-
content/uploads/2012/07/Term-Sheet-Seattle-Angel.pdf ) or in the enclosed
appendix A.
Business angel funding often relies on a lead investor who will bring a group of
investors with him (together with their respective market expertise). You can find
a list of such key business angels on www.businessinsider.com/sv-angel-50-2012-
7?op=1 .

9. RaisingMoneyinSiliconValley–October2016
In addition to traditional ways of funding, Crowdfunding should certainly be
considered as a new funding source and is particularly relevant for startups active
in a B-to-C product or service. It can also help finalize a financing round for any
startup (e.g. to finalize the last 20% of the round). We always recommend
entrepreneurs to be listed on platforms such as gust (gust.com), AngelList
(angel.co), Dreamfunded (dreamfunded.com), Kickstarter (kickstarter.com),
GoFundMe (gofundme.com), or Circleup (circleup.com) even before actually looking
for funding as this can be a great tool to meet with mentors, advisors, and of
course as an alternative new funding source. Thanks to Title II of the JOBS Act,
accredited investors can now invest small amounts directly into startups or
indirectly via syndicates (a few hundred or thousand, much less than the typical
minimum of 25k for a traditional angel investment). This is also a great tool to
promote your startup to potential investors. As Tim Draper, a long-time VC in the
valley, stated, “…equity crowdfunding gives entrepreneurs access to a new group of
investors who might be great assets to their business. I welcome investing in
crowdfunded companies. It means that a company has a large number of
promoters before I even invest.” From the investor point of view, these are great
tools to reach diversification, which is critical for long–term success in angel
investment.
5 Equity Crowdfunding
Investing in the US has traditionally been heavily concentrated in Fortune 500
Companies through the regulated Wall Street Stock Exchanges, yet half of jobs and
economic output in the US is from startups and small businesses. As a reaction to
this need, crowdfunding platforms began to spring up, leveraging the Internet and
social media to provide project or venture funding with no equity exchange. Global
crowdfunding raised $34.4 billion in 2015, and could surpass venture capital
funding in 20161
.
Given the funding and investing potential here, entrepreneurs and early-stage
investors took an interest in this approach as a means to: (1) validate a product or
service in the market (2) provide a new pool of capital for entrepreneurs (3) make
early-stage investing more accessible to non-accredited investors. Policymakers
within the Venture Capital and Entrepreneur Community began lobbying
Washington D.C. to allow crowdfunding as a means to raise funds in exchange for
equity to unaccredited investors. On May 16, 2016 the US Securities and Exchange
Commission (SEC) adopted Regulation Crowdfunding, i.e. Title III of JOBS Act.
1
http://dazeinfo.com/2016/01/12/crowdfunding-industry-34-4-billion-surpass-vc-2016/

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Under this regulation, early stage startups and small businesses are able to raise up
to $1 million through investments as low as $100 per person.
All Provisions on the Regulation Crowdfunding can be found here:
https://www.sec.gov/rules/final/2015/33-9974.pdf. A summary of intentions and
helpful context on Regulation Crowdfunding can be found in this SEC Press Release
from Q42015: https://www.sec.gov/news/pressrelease/2015-249.html
6 Challenges & tools to overcome them
Most investors and VC funds will invest in companies with (at least part of) a
management team based in the US and in companies incorporated in the US (often
in Delaware because of its legal framework), hence it is a real challenge to attract
US investment into your Belgium based startup and very few funds invest in foreign
based companies. A decision to tap into US venture capital must be mature as it
will have numerous consequences on the company operations and prospects. In
order to attract investor attention, you will be asked to pitch your ideas and provide
an investor deck (PowerPoint presentation) in addition to your business plan and
executive summary (typically a 2-page document). Your investor deck
(presentation for investors) should include the following slides: Your mission/vision,
problem/solution, market/opportunity, market strategy, technology, your
competition, your finances, the funding requirements, milestones and a
presentation of the management team.
Your differentiators (or unfair competitive advantages as we like to call them in SV)
and initial market traction are also key information to your prospective investors.
 BI&E San Francisco can provide you with an investor deck template upon
request.
One of the most common fears among European entrepreneurs is having their idea
stolen when pitching about their new endeavor. It is important to stress the fact
that most Business Angels/VCs are more focused on your ability to execute your
plans than on how great your idea is. Still, Belgian entrepreneurs often come to the
Valley being very cautious that their idea might be stolen/copied; this is usually an
unfounded fear. The probability of someone else having the exact same idea as
you is close to 100%; the execution (strength of the team, results, ability to pivot,
etc.) is what matters most to your success and to your investors; as Derek Sivers

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stated on http://sivers.org/multiply, “the most brilliant idea with no execution is
worth $20; the most brilliant idea takes great execution to be worth $20,000,000”.
We cannot stress enough the fact that Business Angels and VCs are looking for
companies with a very high potential market. The hard reality for entrepreneurs
(and their investors) is that most startups fail (over 50% or more depending on the
study). As an investor, you need big hits in the exit of some companies in order to
cover the losses experienced in a majority of your investments and to make a
decent return on your funds. This can only happen if your market is big enough to
return a multiple of your initial investment. Keep in mind that, from an investor
point of view, this is one of the most risky asset classes and most expect an
average of 20% to 30% ROI in return of taking these huge early risks. If investor
expectations and risk perception vary along the business cycle, it is always
preferable to indicate the largest addressable market for your products/services. A
large and fast expanding market is indeed a key factor in VCs and Business Angels
decision process. Entrepreneurs should also have an idea about exit strategies for
their initial investors while keeping in mind that investors are only a mean to a
goal; Investors move away quickly from deals if they feel that the entrepreneur
considers his company a lifestyle company.
Venture money is certainly an expensive source of financing for entrepreneurs but
remains a key component of the SV eco-system’s success along with universities,
service providers, government, customers and… you, the entrepreneur.

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7 Bibliography & useful resources
Angel Investing by David S. Rose - An interesting view on seed funding from the
business angel prospective
Venture deals by Brad Feld and Jason Mendelson - It explains in full detail the
financing process for an entrepreneur in the US.
Terms sheet and valuations by Alex Wilmerding - A line by line look at the
intricacies of Term Sheets & Valuations
Mastering the VC Game by Jeffrey Bussgang - Its blurb says it all : A venture
Capital insider reveals how to get from start-up to IPO on your terms
http://www.angelcapitalassociation.org/ A reliable source of information about
angel investment and useful, practical information can be found in their knowledge
center for prospective entrepreneurs
https://www.pwcmoneytree.com/ The MoneyTree™ Report is a quarterly study of
venture capital investment activity in the United States
https://paulcollege.unh.edu/research/center-venture-research/cvr-analysis-reports
University of New Hampshire Center for Venture Research