startup - funding manual
DESCRIPTION
A guide for start ups in raising capital.TRANSCRIPT
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Startup
An Entrepreneur’s Manual
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About eContineo - Index Ventures
• Over €1.5bn under management
• Active investor in web / internet
• Pan European Venture Fund
• London & Geneva
eContineo - Index Ventures
Selected Investments
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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
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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 …
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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?
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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?
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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
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Overview of financing options
Angel Financing
Venture Capital
Private Equity
Public Stock Markets
Self Finance / Bootstrapping
Debt / Bank Finance
Equity Financing Non-Equity Financing
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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
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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
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Large Potential Market
Opportunity
Unique Product Or Concept
Passionate Founding Team
Pre-requisites
Intense competition
likely
Need to move rapidly
Implications…
Hiring
Infrastructure
VC funding supports
Rapid Product Development
Internationalisation
Partnerships
Commercialisation
Good reasons to raise equity finance
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When NOT to raise VC
Application is a feature
not a product
Market size is too small
Motivation is not 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
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Equity Financing
Seed Early Stage Series A, (B)
Later Stage (B),C,D…
Pre-IPO / Buy-out
Private Equity
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
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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
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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)
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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
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• 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
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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
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Identifying relevant VC partners
Has funds to invest
Match of Size/Stage/ Geography
Relevant Portfolio
No directly competitive investments
Excellent track 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
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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
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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
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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
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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
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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?
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Case Study – Cap Table
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• 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”
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Case Study - liquidation preference
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80
Payo
ut
to S
eri
es
A (€
m)
Valuation of Company at Exit (€m)
Types of Liquidation Preference
No Liquidation Preference
Non-Participating liquidation preference
Participating Liquidation preference
Participating Liquidation preference (capped at 3x)
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Case Study - liquidation preference
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80
Payo
ut
to S
eri
es
A (€
m)
Valuation of Company at Exit (€m)
Types of Liquidation Preference
No Liquidation Preference
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Case Study - liquidation preference
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80
Payo
ut
to S
eri
es
A (€
m)
Valuation of Company at Exit (€m)
Types of Liquidation Preference
Non-Participating liquidation preference
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Case Study - liquidation preference
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80
Payo
ut
to S
eri
es
A (€
m)
Valuation of Company at Exit (€m)
Types of Liquidation Preference
Participating Liquidation preference
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Case Study - liquidation preference
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80
Payo
ut
to S
eri
es
A (€
m)
Valuation of Company at Exit (€m)
Types of Liquidation Preference
Participating Liquidation preference (capped at 3x)
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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
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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
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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
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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