2020 06 Davis Wright Tremains Project W: The Capitalization Stack
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Conventional venture capital – trading growth capital for shares in your company – is the most expensive capital you will ever take. And the least likely to return an ROI to investors. Since conventional VC serves only a tiny sliver of companies well, what can we do to fund emerging companies in better ways?
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2020 06 Davis Wright Tremains Project W: The Capitalization Stack
- 1. Fundraising during a pandemic Gillian Muessig Managing Director, Mastersfund On beyond Venture Equity
- 7. WHITE Wealth: $110k BLACK Wealth: $ 5k FEMALE Wealth: 40% MALE Wealth: 60%
- 9. For toolong, we’vebeen takinga hatchetto scalpel job.
- 10. I.T. STACK
- 14. EQUITY
- 16. We-e-e-e-e-lllllllll…. https://www.amazon.com/Lost-Founder-Painfully-Honest-Startup/dp/0735213321
- 18. VENTURE DEBT Bridge Loans Revenue Share Agreements Dividend Models Royalty Agreements Loans
- 20. DIVIDEND MODEL
- 22. LOANS
- 23. UNAPOLOGETIC. WE FUND WOMEN. With Anne Kennedy and Gillian Muessig
- 24. LET’S RETURN TO A DISCUSSION ON EQUITY
- 25. Capital efficient leadership results in higher returns on VC investment https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx
- 26. SeriesA funding:don’t befemale GenderDiverse with male leadersAll male teams 0.05% of allcompanieswillland Series A funding Female Founders 12.2% 2.8% 85% https://www.fundera.com/resources/startup-funding-statistics
- 27. ConventionalVC by the numbers Gender Diverse Teams All male teams Only4%will returnsignificant capital to their funds ~50%raise SeriesB ~30%raise SeriesC ~4% have“happy exits”
- 28. Women return an averageof 35% higher ROI than allmaleteams But when they do…
- 29. Avoidbeing an unwitting pawn Funding your products business with services works. Leverage what you have!
- 30. SO, WHAT DO WE DO ABOUT ALL THIS?
- 31. ConsiderALL the options https://www.amazon.com/Lost-Founder-Painfully-Honest-Startup/dp/0735213321
- 32. Build the mosteffectiveteam Gender diverse teams Women at the helm Source:https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx † genderdiverseleadershipteams AnneWojcicki, 23andMe
- 33. Your first question… WhatcanI sell to today tobuild whatI need tomorrow?
- 34. Don’t follow others’ paths. The rightquestions illuminate theright answers foryourcompany
- 35. Askhard questions and answer them What is the professional and financial goal? Who am I building this for? What do I want to create? What is my risk tolerance? What’s the end game?
- 36. REGARDLESSOF THE CAPITAL YOU RAISE…
- 37. YOU NEED A GAME PLAN
- 39. Hot List Criteria • Who hasinvested in ‘Version1’ of whatever you are now building ‘Version 2’? • Who was the lead partner who championedthat deal? • Did they have a successfulexit? • They’re on your hot list!
- 43. How to build your brand Listen Listen, lurk, learn… and then comment on powerful sites Learn Learn where your influencers hang out Ask Ask for press coverage Blog Blog, podcast, post Speak Speak publicly
- 45. Boil it down
- 46. The Story is Critical
- 50. Regus, but so much cooler
- 52. Betamax vs. VHS
- 53. Getclarity Decide what you want to build, how, and why Lackof clarity on your part detracts from your power
- 54. Makea choice Choose your capitalizationstack Start with ‘what can Isell….’ Takecapitalwhen it will significantlyincrease your chancesof success. Not before.
- 55. No excusefor lackof preparation Craft a short, simple, emotionally connective story Practice it with 1,000 people. The more you speak it, the smoother, tighter, and better it will be.
- 57. We’re raising $100MM to fund women-led technology companies building better ways to live and work together. gillian@masters.vc anne@masters.vc
Notas del editor
- It’s an honor to be with you – the chosen leaders of Davis Wright Tremaine’s Project W.
- When I say that you are part of a unique cohort of leaders, you can be sure that I am not overusing that overused word. No other group of startup leaders has faced the issues you face in building a company under global economic and social lockdown. No other leaders from the glory-days of fast VC money, large expense accounts, private jets, and obnoxious waste can tell you they had it harder. Or they know better. As of today, they know… NOTHING!
- The CEO of one of my portfolio companies texted me this clip yesterday.
- Early this morning, my business partner Anne Kennedy sent me a link to Jane Elliott and Roland Martin’s conversation on racism and what to do about it. Jane provides the etymology of the word ‘educator’ as someone who ‘leads others out of ignorance.” She talks about indoctrination vs. education.
- Roland Martin leads us through how
- Roland Martin runs through a brutally clear picture of “why”, as he says, “black people can’t their shit together.” 1970 - black Americans became ‘fully ‘free’ Americans. In 2020 - less than 70% of the total electorate will be white Here’s how Roland explains that the pieces come together The GI bill was available to get white soldiers through college; black soldiers didn’t get a GI bill. Blacks could not work in many jobs available to white men. Avg white folks have $110k in wealth. Avg black family has $5k in wealth In the middle class, wealth largely comes from home ownership. Use profiling/targeting, the prison system and red lining to prevent black men from owning homes. Red lining means: don’t invest here. Don’t lend here. In the mortgage crisis of 2009, 53% of black wealth was wiped out.
- Jane talks about indoctrination vs. education in the context of prejudice and racism. I’d like to talk about it in terms of our work… entrepreneurship, investing, and funding. This morning, I’m here to educate, not indoctrinate, entrepreneurs about the expanding options in capitalizing their growing companies.
- You don’t use just one piece of software; you have an IT Stack. Think your company’s capitalization requirements in the same way.
- Your going to need different resources and tools to get across the first ocean than you’ll need as you journey at sea level into the forest and the plains. And you’ll need yet another set of resources to get up and over those mountains to the promised land.
- There are more options available to you than simply equity.
- Let’s get real abut the equity for cash capitalization model. It’s not for everyone. As soon as you take one dollar in equity, you have agreed to sell your company (or in rare instances, go public.) You work at the pleasure of your board… and if your goals diverge from the goals of your investors (ROI to their fund), you can be replaced.
- “Well,” you might say, ”VC funded companies are the big winners. That’s how to make the big bucks in this game. So we have to play by those not-so-nice VC rules.”
- In truth, VC funded companies are not necessarily going to provide you with the highest ROI.
- This simple chart demonstrates how to calculate what you are likely to see at the end of the road, depending on what you raise, and how your stock is diluted over time. Run those calculations; they are a primary factor in determining how you want to manage the entire lifecycle of your company.
- If you are going to capitalize your company with outside capital, rather than grow by using your company’s revenues, consider these instruments before racing to raise capital on the equity model only. You may decide to use one or more of these options to raise equity at a more advantage time or to avoid diluting more than necessary.
- With this model, investors are able to invest in a product, not a company. The question asked is, “Can this company return the expected ROI to the Fund?” rather than, “Will this company likely exit with a 10X or greater ROI to this Fund?” Using a rev-share loan, investors see earlier returns and entrepreneurs have a monthly payment schedule that adjusts with their gross revenues, so they are not hit with an invoice they cannot sustain. At the mid-stage, Lighter Capital is a big player in this field. They took ‘factoring’ out of the manufacturing world and brought it into the 21st century, calling it “non-dilutive growth funding.” Check out their website to see if you qualify.
- If you’re building a company that may remain privately held for the long term, raising capital through the dividend model bears investigation. Similar to equity raises, investors receive shares, but with the expectation that the capital will be invested into the launch and early growth of a company. The founders take a reasonable / low salary based on the local marketplace. Once the company is ‘spun up’, the founders receive additional revenues from their company by declaring dividends, in which their investors share. Investors are likely to receive their initial capital back earlier and founders receive capital in a tax efficient manner.
- For any company that licenses technology (think API’s, etc.). Investors put in capital in, in exchange for returns based on product sales over the long term. Similar to dividend models, this option has nuances that may serve you well. Again – take a scalpel to this process. Carve a deal that works for all parties.
- Often overlooked as dangerous or expensive, consider that equity is the most expensive money you’ll ever take. You’ll take in $1MM and you’re expected to return $10 - $100MM. Have a serious discussion with your significant other(s) whose lives your enterprise will affect. Determine what you will risk and if/when you will call it quits. Ie: don’t mortgage the house or hock family heirlooms… or maybe you DO just that. It’s personal and you should be mindful of the long term consequences to you and your spouse.
- These ladies are raising the Venture Capital fund called the Mastersfund to focus on bridge loans, revenue-share and royalty agreement. The one on the left is me. We work with companies that have a product in the market and at least one more buyers engaged. We provide the ‘dry powder’ to help them expand their sales, giving them the boost they need to fly into a higher trajectory. We believe it is better for investors, entrepreneurs, and society at large on many levels.
- Women receive an average investment that is 44% of the sums that men receive. They generate an average of 10% more capital within a couple of years. Indications are that the gap widens as the company ages.
- If you can crack that critical Series A funding… your odds of getting Series B, C, D, and a positive exit are equal to your male colleagues. Women are hired for their experience; men for their potential.
- And when they do exit successfully using the equity model, women return an average of 37% higher ROI than their all male team colleagues. Note that revenues are not the same as ROI. Women led companies with diverse founding teams return an average of 37% higher ROI than all male teams. Investors could increase their returns by focusing on this leadership ‘hack’. But they still do not. Paradigms are strong.
- “Unless your model is in alignment of the venture model of investing; invest in many companies that will fail in order to find a kernal of absurdly successful mega-winners, the equity path is not for you.” – quote, Rand Fishkin.
- Lots of stats. Messy data. Correlation is not causation The times, they are a’changing’. So many uncertainties in all this information… so what is our action item? How DO we capitalize our companies?
- Companies that take VC money are more likely to fail than any companies that select any other funding. This is a high-risk game for all parties.
- Find VCs who funded companies in your industry. If you can enhance the value of their existing portfolio, so much the better. These VC’s know your industry, your ‘tribal speak’, and will understand what your long term chances for success look like. Seek them out and listen to them.
- A primary reason that women get so little funding is lack of access to power – they do not get warm introductions into VCs or other investors. Reach out early. Ask for advice on your idea, how best to expand your markets, optimize your revenue streams.
- Do NOT ask for help with your pitch deck. That’s ancillary to your business. Focus on serious business issues, not on fund raising issues.
- Becoming well known is a cheat-code. With a large personal brand, your introduction to VCs or other funders will be faster and easier. They will want to meet you because of your existing reputation. Build your reputation now, while you build your business.
- Check out how to do all this here.
- It is much easier to become well known for one thing than for many. Get your story clear in your own heads. Learn the lingo of VCs if you are going to ask them for money.
- Your beta product should be exquisite, perfect, simple and a pleasure to use. It should be self explanatory, easily integrated and so delicious that your consumer cannot help but take a bite. And that applies to B2B as well as B2C products.
- Stories are how the human brain absorbs and RETAINS information.
- Stories are how the human brain absorbs and RETAINS information. Don’t reinvent the wheel. Leverage what we know works.
- This is not in the noise level. Messaging and marketing prowess launches companies far beyond their technically superior peers.
- The most powerful thing Thiel gave to Zuckerberg was , “Drop the “The”’. The Facebook. Facebook. Make every syllable count.
- And I reiterate. This is not time to be shy. Pull out all the stops. It’s not for you; it’s for the survival of your company. Get on with it!