start up finance
TRANSCRIPT
About Index Ventures
• Over €1.5bn under management
• Active investor in web / internet
• Pan European Venture Fund
• Based London & Geneva
Index Ventures
Selected Investments
Agenda
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect during the investment process
Important reflections before you start
A big undertaking
• Starting a business is a big commitment– Energy & Passion– Time– Financial resources (yours and your investors)
• Before thinking of financing, is worth taking a deep breath …
Key questions about you
• Why am doing this– Make money– Lifestyle– “Change the world”
• How long do you want to commit?
• What level of financial risk are you prepared to take?
Key questions about the business
• Be honest with yourself about the risks / unknowns– Do customers want the product / service?– Do you have the competence to build the
product and the team– Can you monetise the product / service?– How competitive is / will the space be?– How big can the overall market become?
Agenda
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect during the investment process
Important reflections before you start
Overview of financing options
Angel Financing
Venture Capital
Private Equity
PublicStock Markets
Self Finance / Bootstrapping
Debt / Bank Finance
Equity FinancingNon-Equity Financing
Self financing / bootstrapping
• Financing growth from previous cashflow and personal funds
• Obviously need to have cashflows…
• Most good bootstrapped companies emerge from a service or consulting companies that are productising their offering
• Pros– Bootstrapped companies almost always spend cash more
effectively than equity financed companies– Already being close to existing customers, give excellent ability
to understand problems and define good solutions
• Cons– Resources for product and market dev constrained by cashflows– May miss a big opportunity if other players raise finance and
invest heavily
Debt / bank finance
• Relatively limited funds will be available ; likely to want security anyway
• Banks only lend to predictable businesses they can understand
• If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance
• Not particularly useful web or high growth tech industries
Large PotentialMarket
Opportunity
Unique Product Or Concept
PassionateFounding Team
Pre-requisites
Intensecompetition
likely
Need to moverapidly
Implications…
Hiring
Infrastructure
VC funding supports
Rapid Product Development
Internationalisation
Partnerships
Commercialisation
Good reasons to raise equity finance
When NOT to raise VC
Applicationis a feature
not a product
Market size istoo small
Motivation isnot financial
• Risk is not that you waste time unsuccessfully trying to raise finance …
• … real danger is that you do succeed in raising VC funds– Lose opportunity for small exit which could be
personally lucrative– Lose opportunity to run lifestyle business– Get bound in to 3+ yrs work you may not enjoy
Equity Financing
SeedEarly StageSeries A, (B)
Later Stage(B),C,D…
Pre-IPO / Buy-out
PrivateEquity
Investment Size
Potential Sources of Funds
0 - €1m
Grant-funding
University seed funds
Friends and family
Angel Investors
(Venture Capital)
€2m-€20m
Venture Capital
(Wealthy) Angel investors
€5m-€20m
Venture Capital
€30m+
Specialist Late stage tech investment funds
Hedge Funds
Growth Fund
Agenda
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect during the investment process
Important reflections before you start
Venture Capital – How the VC makes money
• Raise fund every 2-4 years– Pension funds, financial institutions and specialist “fund of
fund” investors
• Invest money over 3-5 years~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money
• Very small management fee on funds managed~ 1-2.5% pa
• Carry~ 20-25%x (Total Return – Total Amount Invested)
Angels – How the Angel investor makes money
• Unlike the VC the Angel invests their own money
• Much smaller absolute returns can be very meaningful to an angel
• The Angel approach is to invest small amounts at a very early stage / low valuation– €50-€250k at valuations of €500k-€4m
• Two “exits” for angel– Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x
money– Firm raises VC money, after which Angel typically becomes more passive but has
built up exposure very cheaply to a venture backed enterprise
• The key thing when selecting an Angel therefore is whether they can help you raise VC finance– See which Angel investors have invested with which VCs
• Advice and Strategy
• Hiring– Developers– Country Managers– Sales– CEO / CFO / COO– Advisory Board
• Partnerships
• Profile and PR
• Further access to capital
• Internationalisation
• Trusted service provider relationships– Search / recruiting– Branding / PR– Finance, etc
• Exit optimisation– Knowledge / contacts
with relevant buyers– Experience with process
Venture Capital – What a good VC will add
What does an investor look for?
Technology Traction
• Can evaluate each as– Exceptional– Good / credible– Mediocre / incomplete
• Misconception that being good / credible across the board is what VCs look for– Can always add credible attributes to the mix later
• We focus on finding opportunities which rate as exceptional in one attribute
Team
Identifying relevant VC partners
Has funds to invest
Match of Size/Stage/Geography
RelevantPortfolio
No directlycompetitiveinvestments
Excellenttrack record
Shortlist
• Do create a shortlist
• Rifle is a better weapon than a shotgun
• Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors
Getting on radar screens
• Out of the blue email is a longshot
• Try to build context– Analyse portfolio companies – are there any links
there?– Analyse contact network and advisors– Analyse press coverage– Participate in blog conversations– Attend events and conferences– Relevant PR around product also helps
• VCs spend their time looking for businesses with momentum
Agenda
What are the financing options?
How to attract and engage investors?
Deal structure and what to expect during the investment process
Important reflections before you start
Sharing relevant information
• 100 page business plan not required
• 20 page ppt which clearly answers main questions is best bet– Product– Market– Business Model– Team– Competition– Product Roadmap– Technology Overview– Business Development– Financial Status
Pre - first meeting Pre - termsheet Post - termsheet
• Dialogue rather than documentation – expect lots of meetings
• Calls with current / prospective customers or partners
• Meeting broader team
• Brainstorming around strategy
• Identifying key hires post closing
• Formal presentation to VC partnership
• Some additional reference calls with partners / customers
• Personal reference calls
• Legal / accounting audit (if relevant)
• Drafting legal documentation
2-4 weeks 1-2 Months
Types of investment
• Ordinary Share investment– Simplest form, often used by angels– All shareholders have similar rights– Company Board composed according to
• Convertible Loan– Sometimes used by both Angels and VCs– Typically when another financing is anticipated soon– Loan will convert (with a discount ~25%) into the next
financing round
• Preferred Share Investment– Typical Structure used by VCs and occasionally larger Angels
investing as a group
Understanding a termsheet – case study
• Anything between 2 and 15 pages (if points are spelt out in fuller legalise)
• Sample phrasing is – “[XXX fund] proposes to lead a Series A preferred
share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …”
• What does it all mean?
Case Study – Cap Table
• Board Representation• Liquidation Preference• Participation rights• Anti-dilution rights• Element of reverse vesting• Certain control and veto rights• Period of exclusivity to close legals
but that’s so unfair…
Photo Source: Philip Greenspun, MIT
Venture Capital – “Typical Deal Terms”
Case Study - liquidation preference
Case Study - liquidation preference
Case Study - liquidation preference
Case Study - liquidation preference
Case Study - liquidation preference
Case Study - Antidilution
• If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A)
• Two flavours– Broad-based – Series A price ratchets down based on size of
Series B relative to Previous post-money valuation– Narrow-based – Series A price ratchets down based on size of
Series B relative to Size of Series A
• Say €5m Series B done at €0.75 per share– Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) =
€0.93– Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) =
€0.875
Case Study – Reverse Vesting
• The value of startup is typically in the promise of future labour from the founders
• Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years
• For startups typically all founder stock is subject to reverse vesting.
• For later stage companies perhaps half the stock might be subject to vesting
• NB – this also protects founders from each other
Value at exit
Probability of getting there
% share of business at exit
Entrepreneur’s Equation • Revenues / Profitability
• Growth rate
• Team quality
• Strategic fit with buyer community
• Well managed exit process
• Fewest strategic errors made
• Hiring (quality & speed)
• Partnerships
• Product development
• Valuation at initial round
• Valuation and dilution at subsequent rounds
• Option grants
Choosing the right VC - Valuation should not be the decisive factor
Key things to consider when choosing an investor
Right partner at a fair price
vs.
Any partner at best price
• Relationship– With key individual(s); and – broader team
• References– Speak to other founders
• Portfolio– Relevant experience– Non competitive– Community you want to be part of
• Valuation and associated deal terms
Artwork – (Transparent Layers)