F317 – Venture Capital & Entrepreneurial Finance

STAGED FINANCING (BOOTSTRAPPING, 3Fs, ANGELS)

Venture Capitalists don’t fund ideas. Too Risky.

So today we’re going to discuss how entrepreneurs get the requisite capital to launch a product or service before

raising Venture Capital

10,000 FT View

Cash Flow

TimeValley of Death

Survival / Growth Capital Seasoned Capital

Early Stage Later Stage

A

B

C

Mezzanine

IPO

Secondary Offerings

Seed Capital / Startup Capital

Break even

Financing Lifecycle – High Potential Venture

Thought 1 - Staged Financing

Risk

Cost of Capital

High

High

Low

Low

The process of raising enough capital to remove enough risk to make the opportunity attractive to the next group of investors

Thought 2 – Value Add is critical early in the start-up process

Founders Angels Series A Series B

Sweat Equity Contribution

Cash Contribution

Cash Flow

TimeValley of Death

Bootstrapping

3Fs

Angels

Financing Lifecycle – High Potential Venture

Crowd Funding

Accelerators

Thinking / Collective Intelligence

Pre-Funding Strategy - Thinking- It’s really hard, and really

cheap;

- Return on investment is massive;

- Diligence on competitors and market…free…and just a few clicks away;

- Gain million dollar strategies/tactics on someone else’s nickel….it’s called READING FOR THE WHYS….not the WHATS.

Pre-Funding Strategy – Talk to others

“Collective Intelligence”

Networking is extremely hard, but the returns are significant.

Share your thinking…it’s free…and the advice could be worth millions….

…but you have to be willing to hear the truth

When thinking/networking are exhausted….you’re ready for:

Bootstrapping

Bootstrapping78% of all businesses are bootstrapped. So what does bootstrapping mean?

- Relying on resources other than external financing.

What are some bootstrapping strategies?

- Don’t quit your day job (40 hours doing paid job / 40 hours working on start-up);

- Sell something….anything

Bootstrapping

Excellent Bootstrappers will utilize the “Low Expectations” Strategy:

- Take the “big idea” and divide it into the several smaller ideas;

- Focus on the “best” smaller idea to get into revenue;

- Then activate the other ideas as the company grows.

Bootstrapping

What are the benefits of Bootstrapping (from an entrepreneur's point of view?

1) Forces the entrepreneur to be scrappy and cheap;

2) Allow the entrepreneur to keep more of his/her equity;

3) Creates an ethos within the company of relying on customers and revenue, not big buckets of money.

When Bootstrapping strategies have been exhausted…next option:

Family & Friends$30 Billion Annually

Family & Friends (2 F Money)

What makes 2F Money attractive?

What makes 2F Money unattractive?

(and….there’s no right answer….just share your thoughts)

Family & Friends (2 F Money)

Friends and Family investors almost never have the knowledge and skills to objectively evaluate:

- Valuations;- Structures;- Market Opportunities- Technology

Thus, this creates a precarious situation when raising money. So how should you approach?

4 Strategies when raising money from the 2Fs:

1) Treat them as strangers (What does this mean?);

2) Structure the investment as debt;

3) Tie repayment to cash flows;

4) If equity, make it non-voting

Family & Friends (2 F Money)

When Bootstrapping strategies have been exhausted…next option:

Angel Investors$20 Billion Annually

Angel Investors

Wealthy individuals who invest money in fledgling ventures in exchange for the excitement of launching a business & acquiring and interest in any financial rewards.

Angel InvestorsAccording to Jay Adleson, Angel Investors are:

- Accredited Investors (Definition?)

- Investment sizes range from: $10K - $250K

- Typically don’t join Board of Directors (unless a super Angel….and then you want him/her on the Board of Directors); and

- Can be excellent connectors.

Angel InvestorsEntrepreneurs should first seek out active Angels (those looking to invest in startups)….Why?

- They Want to be a part of helping building something.

What’s a key ingredient to getting an active Angel to invest?

- A personal connection/affinity with the Founder(s)

Angel InvestorsBut….Active Angels don’t want to see 250 unsolicited emails (and business plans) from entrepreneurs each year……so what’ the best way of approaching them?

- Network with individuals that have the ear and attention of the Active Angels in the community…if they like what you’re doing, they’ll make an intro.

- Odds of success accelerate significantly as compared to a cold call.

Angel Investors / Angel Listwww.Angel.co / Premier Angel Investor Network. Post your opportunity on Angel List and begin marketing the opportunity to Angels throughout the Country.

Angel Investors / Angel List

But Remember: Most Angels prefer to invest in their backyard and are very hesitant to invest in Start-ups outside their Geography. Why??

More Recent Strategies

AcceleratorsStructured Programs that recruit talented technical founders and encourages them to build a startup and launch it in three months

Apply to get into the program

Build and Launch a Product or Service

Present results to multiple investors

1 2 3

Progression through an Accelerator

Accelerators

Accelerators / Basic Structure

Investment size:$25,000 - $150,000

Term: 90 Days

Equity: 7 – 10%

Class Size: 6-12 / 3 Class Per Year

Accelerators / Win Examples

Accelerators

Emerging Strategies

Crowd Funding

Crowd Funding

Create a funding page

Set the amount you need to raise and minimum investment

If you meet or exceed the amount needed, the funds are released

1 2 3

Crowd Funding Progression

“the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”

Crowd Funding

Crowd Funding / Story

The story needs to be about not what you’re doing, but why you do it…..the story really matters.

Think about product commercials.

Crowd Funding

Oculus Rift Goal - $250,000

Raised - $2.44MM

Pebble:Goal - $100,000

Raised - $10.3MM

Crowd Funding / Structure

Most crowd funding has been about receiving a product reward for a contribution.

The next round of sites will be about receiving equity (investment focused)

End of LectureQuestions?