Startup Fundraising 101
Tom TK Kuegler@TKKuegler
Two Buckets of Financing Options
Self-Financing/ BootstrappingDebt/Bank Financing
Angel FinancingVenture Capital Strategic Financing
Self-financing/BootstrappingFinancing growth from cash flow and personal funds or sometimes familyExample in the portfolio Peku Publications http://www.pekupublications.com Often good bootstrapped companies emerge from a service or consulting companies that are productizing their offeringExample in the portfolio SocialToaster http://www.socialtoaster.com KEY POINT: Second time, successful startup people often self-finance or bootstrap the Early Stage
Things to Think About:Bootstrapped companies almost always spend cash more effectively than equity financed companies WV loves to work with bootstrappers!If they are coming out of service business in the same vertical, they should understand the marketNo outside influences driving startup to places the business shouldnt/doesnt want to goResources for product and market dev constrained by cashflows or size of pockets, but this is a good thingMay miss a big opportunity if other players raise finance and invest heavily, but this is mostly a head fakeA founder has to take on all/most of the risk
Debt / bank financeRelatively limited funds are availableBanks only lend to businesses they can understand and they understand very little in the startup worldProcess is slow and painfulAlmost always need a personal guaranteeNET-NET BANKS ARE WORTHLESS IN THE STARTUP WORLD
Why Should I Raise Outside Capital?
You Believe in Your OfferingYou Believe in Your TeamThe Opportunity is MASSIVE (i.e. over $100MM valuation)
Raising Money Raises the Bar
You have outside investors who have different goalsThe pie to split is smallerSpeed is now more important than ever
What You Get
Financing to executeCredibilityAccess to partnersHopefully some guidance and direction
All of this leads to a big win for YOU.
When to Not Raise Outside Equity Financing?
Is this a company or a feature?
The Opportunity is Too Small
Is this a vitamin or an aspirin?
I want to make the world a better place.
Money is Not Your Primary Focus
Would this better be served as a non-profit.
You like having your hands involved in every aspect.
You Dont Want it to be BIG
You dont want a massive number of employees.
What Happens When You Raise Money When You ShouldntYou let people into your business who are not aligned with your goals and dreams.You will be working at something you may not like for 3 to 7 years and doing it for little pay.Cant do a small exit and call it a win.Almost always means you will be raising money forever.You have lost control of the business when you didnt want to.
Venture Capital What is a VC?Raise a fund from groups/people: Pension funds, financial institutions, and rich individuals. These groups/people are known as LPs, Limited Partners.
Most funds will eventually have to close the fund and send a return to the investors. The one exception are evergreen funds.
They invest money over 3-5 years with the hope that a fund may close in 7 to 10 years~ 5/8 of investments lose money and go to near zero~ 1/4 of investments basically break even~ 1/8 of investments are homeruns and make lots of money
VCs make profits through two items Management fee on funds managed, usually 1 to 2.5%Carry on the profits of the investment 20 to 25%
VC Money Making An ExerciseVC Firm XYZ raises a $100MM fund in 2010 They call it XYZ Fund 2010 LLC2% annual management fee20% carryBetween 2010 and 2015 they make 10 investments for $10MM eachIn 2018, all of the investments have reached some liquidity event5 went out of business and returned nothing = $0 total return3 returned 10% profit = $33MM total return2 returned 800% profit = $180MM total return$213MM total returnXYZ Fund 2010 LLCs Outcome:$113 MM Gross Profit for the fund~$16 MM in Management Fees~$22.6 MM in Carry$174.4 Returned to the Investors
Angels What Makes Them TickAngel = Probably a rich person who has USUALLY been successful in the startup world.Unlike the VC, an Angel invests their own moneyTwo successful exit scenarios for an AngelStartup might be sold quickly for a relatively smaller amount of money (i.e. single digit millions of $$$s) and the Angel can make a quick multiple on his/her money backStartup raises VC money, but has built up interest into a venture-backed startup that is going to shoot for a homerun. NOTE: In many ways, they are at the same risk of dilution as the founders unless they keep investing.NOTE: A vast majority of angels do not invest to make money. They do it just so they can be part of the action or for some other alternative reasoning.
Angel and VC Equity FinancingWV considers them the same from a practical standpointKEY POINT: WV is both an Angel and/or VCAlmost all startups have to raise equity-based financingThe key to raising equity-based capital is knowing when to raise the money
What is a Strategic?Large company or organization that is in the vertical or distribution chain target for a startup (e.g. Ford would be a strategic for an startup building an automobile software-related product)They invest to help innovation and lock out competitorsThings to Think About:Gain instant credibilityCan help with a distribution channelCan occasionally add technical helpOften caps your backend potentialBe careful of becoming the forgotten girl at the danceCan close off opportunities
Key Terms that You Will HearConvertible Note A loan that will convert into equity (with a discount and interest) with the next major financing roundLOTS of Info on this in the Analyst Training RoomTerm Sheet The document that investors sign that describes the terms of the financingCap Table The capitalization breakdown of a company. Who owns what percentage of the companyPre-money Valuation How much is a company worth before a financing takes placePost-money Valuation How much is a company worth after a financing takes placeLiquidity Preferences An investors right to be paid back at a certain rate on a successful exit, e.g. 2X liquidity preference