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Founders Institute: Fundraising

Presentation for Founders Institute Bogota (Colombia) - August 2011

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Founders Institute: Fundraising

  1. 1. FundraisingFounders
Ins+tute
Bogota
–
August
2011
  2. 2. Mixcloud CofounderInternet radio platformFounded 2008 Cambridge2+ million monthly listenersBased in London
  3. 3. SUMMARY Types of financing Timeframes Finding investors Typical deals Negotiations
  4. 4. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  5. 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
  6. 6. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  7. 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
  8. 8. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  9. 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. 10. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  11. 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. 12. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  13. 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. 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. 15. 20% discount Discount Convertible note $1mThis 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. 16. SUMMARYVA L U AT I O N C A P bit.ly/valcapfi
  17. 17. SUMMARY
  18. 18. TYPESFriends and FamilyIncubatorsGrantsCustomersConvertible debtEquity
  19. 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. 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. 21. Raise
as
late
as
possible
‐>
less
dilu+onReasonable
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. 22. Friends and Family 0 – 15% Incubators 5 – 10% Grants 0% Customers 0% Convertible debt 10 - 30% EquityDEALS 20 - 35%
  23. 23. ‐ How
much
to
raise?
For
equity
raise
work
backwards
and
look
at
market‐ Investors
usually
take
20
‐
35% 23
  24. 24. OPTION POOLS
  25. 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%
  26. 26. FINDING INVESTORS
  27. 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. 28. NEGOTIATE
  29. 29. ‐ "In life you dont 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. 30. Alignment
  31. 31. ‐
The
most
important
thing
people
forget
to
men+on‐
Make
sure
investors
+
your
incen+ves
and
mo+ves
are
aligned‐
Ul+mately
more
art
than
exact
science 31
  32. 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. 33. Twitter - @nicoperezEmail – nico@mixcloud.com

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