funding & investments - some sources are more equal then others
DESCRIPTION
This is a presentation Funding & Investments explains the most important questions for entrepreneurs. It discusses Angel investments and Venture Capital, their funding methods and sources and explains termsheet language. Author: Eva Hukshorn, EFactorTRANSCRIPT
Funding & Investments Some Sources are More Equal then Others Author: Eva Hukshorn
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1. EFactor is a Smart Network that matches entrepreneurs with the very people who can help them grow
2. Finding Business Partners: from partners to investors, from coaches to customers
3. Largest Entrepreneurial Network in the World with 1mio members in 185 countries
4. An online community Offering you a network, knowledge, events, and every business resources you need to succeed @ discount!
5. GO Online, fix your personal profile & company profile and get MATCHED!
It’s not about connecRons -‐ it’s about the right ones…
Eva Hukshorn: An introducJon
• Work Experience - Current: Partner EFactor
Board of Advisory: TreFoil Energy / CleanDrinks / Global Thinkers / ShowLinq
Coach Startup: Bootcamp Amsterdam / New Venture McKinsey - 2009 – 2010: Dutch BouJque – Marktlink Mergers & AcquisiJons, Amsterdam - 2007 – 2009: Royal Bank of Scotland – Corporate Finance, Amsterdam - 2004 – 2009: ABN AMRO – Corporate Finance New York, Amsterdam - 2003 – 2004: Accenture – ConsulJng London, Amsterdam
• EducaRon - 1997 – 2002: MSc Economics, Finance – University of Groningen, the Netherlands - 2003: InternaJonal & Asian Studies – NaJonal Sun Yat-‐Sen University, Taiwan - 2009 – 2011: CerJfied Management AccounJng (CMA) – InsJtute of Management Accountants
(IMA), United States - 2009 – 2001: Colloquium General & Modern Art – Academy for History of Art, the Netherlands - 2012: InternaJonal Financial Report Standards (DipIFRS) – AssociaJon of Chartered CerJfied
Accountants (ACCA), United States
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FUNDING TUESDAY, EVERY TUESDAY
So what can you expect from us each Funding Tuesday?
1. Webinars on EFactor on Finance & Funding related topics in the EVENT SecJon
2. Blogs & interviews with informal investors and funded entrepreneurs with Jps & tricks in the BLOGS secJon under NOW
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3. Finance & Funding related arJcles on NOW feed
4. In the Finance & Funding GROUP on our website you will find Q&As of the webinars under NETWORK
5. In the KNOWLEDGE base you will find more and more presentaJons on Finance & Funding related topics, including the webinar presentaJons
6. And if you become a VIP MEMBER you will personally be supported on your Finance & Funding related quesJons
Webinar Program Overview 2012
June 19: Business Plan WriJng -‐ A Roadmap to Success July 3: Pitching & PresentaJon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Gehng There July 31: BudgeJng & ForecasJng -‐ PredicJng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaJon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaJve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecJons Dec. 4: MarkeJng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 5
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Some basic ingredients to start a successful company
3 key elements for a successful startup: Ideas, People and Money
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Some basic ingredients to start a successful company
An average idea takes 9-‐12month from creaRon to business plan
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Some basic ingredients to start a successful company
Most successful startups consist of 3 partners
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Some basic ingredients to start a successful company
You start with money. You end with money. And then there is money in between.
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• 85% of ideas do not startup • 50% of the startups are not alive aler 5 years • On average it takes 3.8x companies to be successful • Less then 10% of the startups get funded with equity:
- 0.03% venture capital / 2% by informal investors - It takes 1.5 years, 32 versions of your business plan and speaking to 20 investors at least 3 Jmes
• 65% of entrepreneurs have personal loans • 55% of startups with Angel Funding will get Venture Capital Funding compared to 10% with no Angel Funding will get Venture Capital Funding
• 1 to 100 companies having a meeJng with Venture Capital gets funded
Truth about funding & entrepreneurship
Typical life cycle of a High Content Growth Startup
IDEA PROTO TYPE LAUNCH GROWTH
PRE-‐SEED
SEED
EARLY & LATER-‐STAGE / GROWTH
IPO/EXIT
HIGH RISK
LOW RISK
CAPITAL DEFINITIONS 11
An overview of Funding Providers acJve in each of the stages
PRE-‐SEED & SEED CAPITAL
• Friend Family & Fools • Grant Funding, • University Funds, • Angel Investors,
Crowdfunding, • Bootstrapping • CompeJJons • Incubators
• (Syndicate of) Angel Investors
• Venture Capital • Private Equity • Commercial Bank
• Venture Capital • Private Equity • Commercial Banks • Hedge Funds • Public Market / Stock
Exchange
EARLY & LATER STAGE /GROWTH CAPITAL
IPO/EXIT
USD 0 – 1,5mio USD 1 – 20mio USD 25mio +
HIGH RISK LOW RISK 12
What kind of funding do these Funding Providers give?
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3. Bootstrapping 1. Debt/Loan 2. Equity
Funding through own resources: - Income - Savings - Revenue
Funding external parRes without ownership + fee: - Personal Loan - Bank loan - ConverJble debt - Mortgages - Et cetera
Funding external parRes with ownership: - Common - Preferred - Mezzanine
What kind of funding do these Funding Providers give?
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3. Bootstrapping 1. Debt/Loan 2. Equity
Funding through own resources
Funding external parJes without ownership + fee
Funding external parJes with ownership • Income & savings
• Revenue • Friends, Family &
Fools • Pre-‐Sale/DonaRon
Crowdfunding, • Grant Funding • University Funds • CompeRRons
• Friends, Family & Fools
• Angel Investors • Peer-‐2-‐Peer
Crowdfunding • Commercial Banks
• Friends, Family & Fools
• Incubators • Equity-‐Based
Crowdfunding • Angel Investors • Venture Capital • Private Equity
• Loan + accrued interest (7 %) equity converted into equity • Used by both Angel Investors as Venture Capitalist • Typically used when another investment is on the horizon • Converts when milestones are reached or next financing round established
• Equity against on average 25% discount • Caps & Floors on conversion price • 40% of Seed Capital is done in converJbles • No startup valuaJon is necessary
ConverJble loan
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Common equity • CompensaJon • Economic vs. legal rights • Pre-‐Seed/Seed Capital
Equity: common versus preferred
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Financing stage $$$ % stake
Common equity US$ 50.000 – 1.500.000 10-‐25%
Preferred equity -‐ Series A US$ 1.5mio – 5mio 40-‐60%
Preferred equity -‐ Series B US$ 5mio – 15mio 20-‐30%
Preferred equity -‐ Series C US$ 10mio – 25mio < 20%
Preferred equity • Investment purposes • More rights & priviliges • Higher priced then common • Olen come in series A, B, C • Early & Later and Growth Capital
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1. Funding from own funds & FFF
2. Organic growth through revenue 3. Business type: services / consulRng
4. Lean & mean
5. Driver’ seat
6. Case study…Webinar 23 October
Achieving as much as possible with
as lijle money as possible
Bootstrapping: What is it?
Let’s talk about the players
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Angel Investors: Facts & Figures
• Pre-‐Seed and Seed Capital • Average investment:
- USD 50.000 – USD 250.000 • Equity or debt
- If debt: 7-‐10% interest - Equity: 10-‐25% stake
• Exit Jmeline: 3 unJl 7 years
• Goal: break-‐even & arract other investors
FACTS & FIGURES
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Angel Investors: Background
• Pre-‐Seed and Seed Capital • Average investment:
- USD 50.000 – USD 250.000 • Equity or debt
- If debt: 7-‐10% interest - Equity: 10-‐25% stake
• Exit Jmeline: 3 unJl 7 years
• Goal: break-‐even & arract other investors
• High Net Worth (HNW) individuals
• Personal investments
• CooperaJng with other investors • Fill gap between love money &
professional money
• Successful entrepreneurs, Coach • Exit:
- Sale company: 2-‐5x return - Venture Capital
FACTS & FIGURES BACKGROUND
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Venture Capital: Facts & Figures
• Seed Capital, Early & Later, Growth • Average investment:
- USD 500.000 – 5.000.000 • Only Equity: 20-‐40% stake
• Exit Jmeline: 3-‐7 years
• Goal: accelerate growth, exit • Return: 15% y-‐o-‐y
FACTS & FIGURES
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Venture Capitalist: Business model
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20-‐40% EQUITY STAKE
2.5% FEE / CAPITAL GAINS 80% CAPITAL GAINS
FUND PROVIDERS: InsJtuJonal Limited
Partners, Endowments,
Insurance companies,
Pension funds, Banks Fund,
Family offices, HNW
PORTFOLIO: Several startups & SME
delivering capital return
through IPO, EXITS,
dividend pay-‐outs
$$ $$
VENTURE CAPITALIST:
Fund manager, Investment
manager, ExecuJve & Non-‐
ExecuJve Board
Customer Management Supplier
Venture Capital: Background
• Seed Capital, Early Stage & Growth • Average investment:
- USD 500.000 – 2.000.000 • Only Equity: 20-‐40% stake
• Exit Jmeline: 3-‐7 years
• Goal: accelerate growth, exit
• InvesJng professional managed funds
• Advisory role
• Important with exits
• Less freedom business decisions
• Financially driven • 80% has no building experience
FACTS & FIGURES BACKGROUND
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When to raise funding?
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1 Intense & increased compeJJon
2 Strategic support
3 Partnerships, Network
4 Credibility
5 Increase product development
An external Investor can substanRally accelerate your business
6 MarkeJng & sales acJviJes
7 InternaJonalizaJon
8 Increase personnel
9 Governance
10 OrganizaJonal infrastructure
When not to raise funding?
25 Money is the end-‐game for the investor to whom you are married
1 ApplicaJon is a feature, not a product
2 Market size is small
3 Money is not key moJvaJon
4 Not willing to loose control
What will Investors be looking at?
Viable business model
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Unique Selling Point
Validated idea
Strong management
Proven track record
Technical experRse
MarkeRng know-‐how
Growing market
Scalability
Exit OpportuniRes
Business plan should cover all strategic & operaJonal steps
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Content overview 1. ExecuRve summary 2. Idea descripJon 3. MarkeJng & sales 4. Management team 5. OrganizaJon 6. Finance 7. Risk analysis 8. Funding 9. Milestone & Timeframe
SelecJon criteria Investors compared
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Decision Criteria Angel Investor Venture Capitalist
Passionate 1 1
Trustworthiness 2 2
Unique Selling Point 3 6
Technical experRse 4 5
Social Click 5 7
Growing Market 6 3
Quality Product 7 10
Niche Market 8 4
Return on Investment 9 16
Track Record 10 11
Source: www.mootee.typepad.com, 2007
How to find Investors
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EFACTOR • Fill out Funding Request Form (FREE) and connect to 25.000 members • VIP member (USD 12): get final business plan checked and personal conversaJon on next steps + introducJons
REFERRALS • DO: Friends, Family, Colleagues, Business RelaJons, Lead Investors • CAREFULL: Lawyers, Accountants, Bankers, Social Media, Intermediary
SPAM PERSONAL EMAIL
SOCIAL MEDIA / INTERMEDIARY
MUTUAL CONTACTS
PERSONAL INTRODUCTION
LEAST EFFECTIVE MOST EFFECTIVE
How to interact with Investors
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Contact moment Goal Materials
Pitch Get First MeeJng ExecuJve Summary (10p. in ppt)
First MeeRng 1 hour
Start Dialogue Business Plan + Financial Summary
Pre Termsheet 2-‐4 weeks
ValuaJon range agreement Meet Team Share Company InformaJon Strategic & operaJonal plan Supplier & Customers References Involvement Experts
SupporJng documents BP CalculaJon behind Financials Legal documents Research reports NDA
Closing 1-‐2 months
NegoJate Termsheet Correct Legal EnJty Signing
Personal reference calls Legal & Financial audit Draling legal documentaJon
“Venture Capitalist fund ABC proposes to lead a Series A preferred share financing of US$ 4.5m at a US$ 7mio pre-‐money valuaKon. As part of the investment process an employee opKon pool of 15% on a post money basis will be put in place. Typical venture capital terms including parKcipaKng liquidaKon preference, et cetera
Typical Termsheet language
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Cap Table: Case Study
Shares'(#) Value'($) % Shares'(#) Value'($) %
Common%Equity
Founder'1 2,500,000 2,500,000 35.7% 2,500,000 2,500,000 18.5%
Founder'2 2,500,000 2,500,000 35.7% 2,500,000 2,500,000 18.5%
Founder'3 2,000,000 2,000,000 28.6% 2,000,000 2,000,000 14.8%
Sub%Total 7,000,000 7,000,000 100.0% 7,000,000 7,000,000 51.7%
Preferred%Shares%?%Series%A
Lead'Investor 3,000,000 3,000,000 22.2%
Following'Investor 1,500,000 1,500,000 11.1%
Sub%Total 4,500,000 4,500,000 33.3%
Employee%Share%Options 2,028,607 2,028,607 15.0%
GRAND%TOTAL 7,000,000 7,000,000 100.0% 13,528,607 13,528,607 100.0%
PRE?INVESTMENT POST?INVESMTENT
“Venture Capitalist fund ABC proposes to lead a Series A preferred share financing of US$ 4.5m at a US$ 7mio pre-‐money valuaKon. As part of the investment process an employee opKon pool of 15% on a post money basis will be put in place. Typical venture capital terms including parKcipaKng liquidaKon preference, et cetera
Typical Termsheet language
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Typical deal terms
ü Preferred Equity
ü Employee share opJons
ü Board representaJon
ü LiquidaJon preference
ü ParJcipaJon rights
ü AnJ-‐diluJon rights
ü Reverse vesJng
ü VoJng rights
ü Dividends
ü Exclusivity
ü RegistraJon rights
ü Pre-‐empJve rights
ü Salary payments
ü Non-‐competes
ü Expenses
ü ConfidenJality
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Employee pool
PosiRon # % CumulaRve Equity
CEO 1 5-‐10% 6%
CFO 1 1-‐2% 1%
VP 2 1-‐3% 4%
Direct level 5 < 0.5% 2%
Other ? < 0.25% 2%
TOTAL 15%
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Preferred equity • Investment purposes • More rights & priviliges • Higher priced then common • Olen come in series A, B, C • Early & Later and Growth Capital
LiquidaJon preference
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• Guarantee to get invested money back • Sale or liquidaJon of company • ParJcipaJon preference: right to parJcipate in remaining amounts • Caps included
Example: Company sold for USD 100mio, USD 25mio is incl. in liquidaRon preference
Shares'(#)%'total'Equity
Liquidation'Preference
%'pref.'Equity
Remainder'Payment
Total'Payment
Preferred&Equity
Series&A 3,500,000 23.3% 3,000,000 33.3% 17,500,000 20,500,000
Series&B 4,000,000 26.7% 7,000,000 38.1% 20,000,000 27,000,000
Series&C 3,000,000 20.0% 15,000,000 28.6% 15,000,000 30,000,000
Common&Equity 2,500,000 16.7% 0 12,500,000 12,500,000
Option&pool 2,000,000 13.3% 0 10,000,000 10,000,000
GRANT'TOTAL 15,000,000 100.0% 25,000,000 100.0% 75,000,000 100,000,000
Reverse VesJng
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Common%Equity
Founder(1
Founder(2
Founder(3
Sub%Total
Preferred%Shares%8%Series%A
Lead(Investor
Following(Investor
Sub%Total
Employee%Share%Options
GRAND%TOTAL
Shares((#) Value(($) % Shares((#) Value(($) %
2,500,000 2,500,000 18.5% 2,500,000 2,500,000 20.0%
2,500,000 2,500,000 18.5% 2,500,000 2,500,000 20.0%
2,000,000 2,000,000 14.8% 1,000,000 1,000,000 8.0%
7,000,000 7,000,000 51.7% 6,000,000 6,000,000 47.9%
3,000,000 3,000,000 22.2% 3,000,000 3,000,000 23.9%
1,500,000 1,500,000 11.1% 1,500,000 1,500,000 12.0%
4,500,000 4,500,000 33.3% 4,500,000 4,500,000 35.9%
2,028,607 2,028,607 15.0% 2,028,607 2,028,607 16.2%
13,528,607 13,528,607 100.0% 12,528,607 12,528,607 100.0%
POST8INVESMTENT FOUNDER%3%LEAVES%AFTER%2%YEAR
How to select investors
38 Right partner at good price OR any partner at highest price
• Social aspects: - RelaJonship with key people - RelaJonship broader team
• References: - Do ask other founders
• ValuaRon & Deal terms
Relevant ExperRse
beyond Funds
Match in Size, Stage &
Geography
Excellent ReputaRon & Track Record
Relevant Industry
Available Funds
No Direct CompeRRve Investments
Short list
ValuaJon should not be key factor
VALUE @ EXIT % SHARE IN BUSINESS LIKELYHOOD OF
EXITING X X
• Revenue • Profitability • Growth Rate • Management Skills • Strategic fit buyer • Management exit
• DiluJon • OpJon grants
• Low execuJon errors
• Hiring both quality & speed
• Partnership • Product development
• Infrastructure
Some things to keep in mind while searching for investments
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An Angel Investor is NOT A HOLY GRAIL
Searching for investment, long, LONG process
Social CLICK
Solid BUSINESS PLAN
Manage EXPECTATIONS
The TEAM will make it happen
COURAGE is high risk, high return
Investment is about TRUST
41 You are the biggest investor of them all!
• Your own investment does not consist only of Jme spend
• Become as criRcal as your external investors would be
• Money is the end-‐game of the investor, so is yours
Take a different approach, be your own investor
Webinar Program Overview 2012
June 19: Business Plan WriJng -‐ A Roadmap to Success July 3: Pitching & PresentaJon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Gehng There July 31: BudgeJng & ForecasJng -‐ PredicJng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaRon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaJve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecJons Dec. 4: MarkeJng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 42
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HTTP://WWW.EFACTOR.COM/VIP
Thank you!
This document was prepared by Eva Hukshorn. Several people and organizaRons have inspired
her to write this presentaRon, amongst which are, but not limited to the Founders of EFactor,
ABN AMRO/RBS, University of Groningen, InsRtute for Management Accountants