1. Raising Seed Capital
Luke Liem
Private Investor, USA

2. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

3. Objectives
The lecture and case discussions are designed
to help you develop the skills to:
1. Raise your first seed investment
2. Find the right investors
3. Make some good money and people decisions

4. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

5. Startup Financing
• It comes in 2 flavors:
– Equity (Common and Preferred Shares)
– Debt (Typically convertible bond)
• Financing is typically provided by:
– Angel Investor at an early stage(Seed and Series A)
– Venture Capital at a later stage(Series A, B, C, D....)

6. Angel Investors – Who are They?
– Rich individuals, Ex-entrepreneurs, or both
– Motivated by wealth or their interests and passions in
startups
• Most of them really wants to help entrepreneurs
– Many are organized by networks (e.g. Keiretsu Forum, Band-
of-Angels, etc).
• They invest as a syndication (e.g. 10 angels investing $100K each to
fund a $1 million round)
– Super-Angels (Peter Thiel, Mark Andreessen) have their own
venture funds, but also invest individually as angels.
• Peter Thiel’s fund – Founders Fund
• Mark Andreessen’s fund - Andreessen Horowitz
• Look them up on https://www.crunchbase.com

7. Marc Andreessen – Angel Investor

8. Andreessen Horowitz

9. Angel Investors – Advantages
– Typically ask fewer questions
– Invest in earlier stage (Seed, Series A,..)
– Willing to get involved early:
• Give advice about your business and your market
• Sit on your Board of Directors
– Many are well-connected and can introduce you to
good lawyers, accountants, VPs and CEOs, venture
capitalists.
– Depending on the angel, may have lower expectations
than VCs.
– Can have a longer time horizon than VCs.

10. Venture Capitalists
– Institutional Investors – a number of partners who have
raised $100 million to $1 billion from foundations,
insurance companies, retirement funds.
– Typically not interested in making “smaller” $100-500K
investments at the seed stage.
– Their rule of thumb:
• Their goal is to grow the fund 3X
• To do that, each investment must have the potential to return 10X
their investment (Series B, C, D investments can have lower
returns)
• Expect only 1 out of 5 of their investments to do very very well

11. Venture Fund TimeLine
– Most VC funds are designed for ten year lifetimes
– Invest in year 1-4, Harvest in year 5-10
J-curve
Invest
Exits – IPOs
& Acquisitions

12. Venture Capitalists Disadvantages
(Early Stage)
• Short Time Horizon - Depending on where the fund on the J-Curve, VC firms may
want to push the startup to grow too quickly so that they can get their investment
back within three to five years.
• Forced Management Change - For the majority of venture capital agreements,
management additions (Either CEO or COO) are a requirement to receiving funding.
• Loss of Equity - Venture capitalist requires large equity stake in the company to
safeguard his or her initial investment.
• Loss of Decision Making Autonomy – By holding seats in the Board of Directors,
business owners are required to consult with the venture capitalist prior to making
any key decisions in capital spending, expansion and personnel changes.
• Staged release of funding - business owners need to hit milestones prior to
receiving the financing they initially requested.

13. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

14. Google Case Discussion
Who is Andy Bechtolsheim?
– Born 1955 near Ammersee, in the
German Bavaria.
– Technology enthusiast since a child
– Left Stanford University in 1982 to
found Sun Microsystems, as employee
#1.
– Left Sun to found Granite System.
Bought by Cisco for $200M (he owns
60% of the company).

15. Google Case Discussion
Andy Bechtolsheim as an Angel Investor
– Co-founded HighBAR Ventures, an early-stage
venture capital investment firm, along with two
Sun colleagues.
– As an angel, he invested $100K in Google  $1.7B
in Mar 2010 (GOOGL @$300 per share). This is his
best investment.

16. Google Case Discussion
Why is Andy an angel investor?
• He is at the core an engineer and technologist:
o passionate about the power of technology
o love finding new ways to solve problems
• As a former founder, he was helped by angel
investors. Now he wants to give back.
• He wants to be involved with an extremely
valuable enterprise.

17. Google Case Discussion
What is Andy’s investment philosophy?
• His General Approach:
- Ideas that solved real problems he could
understand
- Businesses with the potential to produce real
profits
- Bright, passionate, and capable founders.

18. Google Case Discussion
How did Google’s founders gain Andy’s trust and
investment?
• Referral from a Trusted Source - They have been referred
to him by David Cheriton, a professor at Stanford
University, a friend who is in his “circle of trust”.
• Working Prototype and Demo - The team has a working
prototype and successfully demo their search engine. Andy
became convinced that he had seen and understood the
demo of a better technology with potential to address a
real problem.

19. Google Case Discussion
How did Google’s founders gain Andy’s trust and
investment?
• Believable Path to Profitability - Instead of making money through
advertising, they proposed that the company can make money by
licensing their superior search technology to portal companies.
• Good Impression - They Impressed Andy :
- They explained Google’s engineering approach to producing
superior search results, that they need money to build their own
inexpensive computers and networks to create the search database.
- They wanted to build a valuable superior product that “speaks for
itself” instead of wasting money on marketing and advertising.

20. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

21. FaceBook Case Discussion
Who is Peter Thiel?
– Born 1967 in Frankfurt am Main, West
Germany. Emigrated to the USA
– Attended Stanford University. Philosophy
undergrad and JD (Law).
– Formed friendships with other students at
Stanford (e.g. Keith Rabois, David O. Sacks, and
Reid Hoffman). Some later worked together at
PayPal (co-founded by Thiel) and became part
of the PayPal Mafia.

22. FaceBook Case Discussion
Who is Peter Thiel?
– Career in law, investing, then Paypal.
– In 1998 Thiel co-founded PayPal with Max
Levchin. The company later merged with
X.com, then headed by Elon Musk. PayPal was
sold to eBay for $1.5 billion later that year
(Thiel owned 3.7% or $55M).
– A technologist, investment genius and social
critic. Not a hardcore engineer.

23. FaceBook Case Discussion
Peter Thiel as an Angel Investor
– In 2005 Thiel created Founders Fund, a San
Francisco-based venture capital fund.
– In 2004, Thiel made a $500,000 angel investment in
Facebook for 10.2% of the company and joined
Facebook's board. He sold most of his shares
during the FB IPO in 2012 for $1B.

24. FaceBook Case Discussion
How did the Facebook team gain Thiel’s investment?
• Referral from a Trusted Source - They were referred to him by Reid
Hoffman, a member of the “PayPal Mafia”. The two had worked together
at PayPal.
• Working Product that is Scaling - The team were able to demonstrate :
- When a new school joins Facebook, it captures all the students
within a few days, and 80% of them return to the site daily. These
statistics demonstrate (1) Virality, (2) User Engagement.
-The website only allows people with .edu email address to register.
- Schools are begging to join the site.

25. FaceBook Case Discussion
How did the Facebook team gain Thiel’s investment?
• Previous Experience in the Sector:
- Peter Thiel understands the economics of social networks through
his previous investments in LinkedIn and Friendster.
- He knows Sean Parker
• Good Impression:
Peter Thiel is impressed with Mark Zuckerberg – introverted, technical,
visionary, asks questions, willing to admit when he does not know
something.

26. FaceBook Case Discussion
FaceBook’s Seed Round:
Convertible Loan
Pre-Money
Common
Shares
Convertible
Note Post-Money Ownership
Peter Thiel $500,000 10.2%
Founders $4,400,000 89.8%
$4,400,000 $4,400,000 $500,000 $4,900,000 100.0%
Seed Round
(After
Conversion)
Pre-Money
Common
Shares
Convertible
Note
Preferred
Shares Post-Money Ownership
Peter Thiel $0 $500,000 10.0%
Reid Hoffman &
Others $100,000 2.0%
Founders $4,400,000 $4,400,000 88.0%
$4,400,000 $0 $600,000 $5,000,000 100.0%

27. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

28. Cap Chart.xlsx

29. Key Takeaways
• It is better for Founders to take no salary or
very low salary until Series A (VC funding).
• An option pool should be created for
attracting new employees.
• The less you need the money, the more the
investors want to give money to you and
accept a higher pre-money valuation.

30. Agenda
This lecture will be structured as followed:
1. Financing Options and Investors
2. Case Discussion #1 – Google’s First US$100K
3. Case Discussion #2 – FaceBook’s First $500K
4. Cap Table and Venture Funding Rounds
5. Valuing the Business

31. Key Takeaways
• Valuation is meaningless during Founding Stage.
• At Seed Stage, valuation is based more on negotiation
between angel investors and the company:
– If company has revenue, valuation can be a multiple of
revenue (3-10x).
– If there is no revenue, the investors will project how much
the company can be sold for or IPOed for, than work
backward so that they get a 10-50x return.
• A US Silicon Valley startup is typically valued at $1.0-5.0
million pre-money at Seed and Series A stages.

32. Q&A