Founder Institute - Fundraising-1

7/31/2019 Founder Institute - Fundraising-1

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Founder Institute

Fundraising

May 23, 2012

Jim ShermanFounder & Chairman, ShermansTravel Media


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1. The Process

2. The Story

3. Deal Terms

4. Lessons Learned

Fundraising for your new business


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The fundraising process is daunting, time-consuming, and

tiring. Are you ready?

What You Need

Persistence The process & the substance

Typically 6 months or more A lot of networking

Business contacts Alumni contacts Conferences

Cold Calls A dedicated full-time job Management presentation

Phone discussion first (often) Innumerable follow-up calls Term sheet negotiations

Due diligence Legal & closing

Prospecting

Presenting

Term Sheet

Deal Close


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A myriad of money sources exist for prospecting more than

ever before.

- Angel List, New York Angels, CommonAngels, The Angels Forum, TheWashington Dinner Club

- Events/Conferences networking opportunities- Crowd Sourcing (Kickstarter)- Customers- Friends, Family & Fools(!)- Start-up Incubators- Alumni Boards/V.C. Groups

V.C.s & Private Equity- Top tier funds- Lesser known

Strategics/Corporations

Narrow down by industry focus, size ofdeal ($1-3M, $3-10M, $10M+), location,stage of investment (seed, venture,growth), etc.

Seed Round

Series A or B


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Getting your foot in the door is no different than an actor

getting his/her audition in front of a talent scout.


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To open doors, you need to start the process of raising

capital 6 months before you need it.

How much? Focus on tangible results/milestones for phase I Assess the amount you need (development cost, marketing/business

development, hardware/systems, legal, etc.) and tack on 25%

Timing?Seed Round

If multiple investors, may have a longer term window of availability (1year?)

0-3 months

Networking

Initial outreach

Pitch meetings

3-6 months

Second meetings

Term sheet

Closing

In general


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Finding the right investor is as important as finding themoney.

Seed Round Start by relationship building; provide updates; ask for money later

after demonstrating progress

Sizing up a professional investor Industry experience Portfolio experience Support services beyond money General reputation

Likely board partner who Outreach to at least 3 CEOs they backed


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After determining whom to approach, the story needs to be

persuasive and you need to be inspiring.

1. The Team Qualifications (industry experience; education)2. The Idea supporting data to validate

3. The Passion presentation style/communications4. The Business Model customers and pricing metrics; marketing data;

industry comps; etc.

The Team(include yourself as

entrepreneur)

The Business

Model

The Passion

The Idea


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Rejection is par for the course but understand key areas of

weakness.

Typical reasons to say No1. Inadequate business plan or idea

Fill a need that no one is doing or find something that can be donebetter

Innovation vs. Imitation2. Inexperienced team3. Business domain is high risk4. Opportunity is not large enough or growing5. No sustainable competitive advantage6. Financial projections appear flawed

Too conservative or too optimistic Need $20M revenue, at minimum, in five years, but not $2B

Common Answer: Keep in touch1. Show a finished product, some customer validation, commerical

partnerships, etc.2. V.C.s often say this; for seed investors you may want to propose this


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Lets say youve enticed one or more potential investors

Negotiating good deal terms is both art and science/math.


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Nothing will generate better deal terms than a competitive

process and/or being in a hot industry.

Founder/Owner as lead negotiator

Hire a banker? Outreach Aid with investment memorandum Warm up prospectus Run a professional process Advise on terms Part psychologist

SeedRound

$2M +

$250K - $2M

Market willset price

You can setprice?

Giving up equity in exchange for $General Rule: 20 30% per round

(5% to 40%)Thus, within two rounds, likely lose control

SeriesA or B


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The key deal terms include valuation, structure, and control.

You cant have it all (unless youre Mark Zuckerberg)!

Deal Structure As valuation goes up, investors will want more protections But you may remain in control of the board (board control/Equity vs. economics/proceeds

share)

Protections include:

1. Multiple liquidation preference in the waterfall- Standard is 1x vs. 1.5x, 2x, or 3x

2. Participation- Participating preferences mean investors get their liquidation preferences

AND their % of whats left (equity portion)3. Cumulative Dividends

- Some preferred shares have a cumulative dividend (e.g. 10%)- Some have a cumulative dividend that converts info shares at a fixed price- Some have both

4. Ratchets- Weighted average anti-dilution protection (protects against a down round)

- Full ratchet all shares reset to the new price

Bells &Whistles

A CleanDeal

vs.


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A clean deal may be best for the entrepreneur, but there are

risks.High valuation/

Bubble but ugly

terms/structure(retain control)

Lower valuation &clean deal (but losecontrol of the board)

vs.

If hit a downturn

Much harder to raise follow on rounds;preference stack; need to recut cap table

Misaligned interests in potential sale;requires high price

Pigs get fat but hogs get slaughtered.- Dont get greedy

Miss the numbers, youre out

(especially after honeymoon period)

Fewer impediments on future capitalraised with a clean deal, even if adown round

Moral of the Story:choose a valuation that is sustainable over the whole lifecycle of the company


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Lessons Learned

Strategics take longer but better deal (avoid right of 1st refusal) A smart banker or financial advisor is critical (esp. if its your first deal) Look forward at the control economics (amount raised, quality of team,

progress made, and the idea/market appeal)

Push back hard on participating preferred Engage good lawyer, especially in regards to board seats and minority

shareholder rights Tough to raise money without proven revenue (and tough to entice a

good banker) Evaluate exactly what you need and ask for the right amount (articulate

the near term) CEOs are always in a fundraising mode Choose your investors carefully

Stay positive. Stay focused.


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Thank you!

ShermansTravel Media

Documents

Founder Institute - Fundraising-1