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Startup Fundraising 101 Revisited

Bernard Moon
Bernard Moon

Basics on the startup process, raising capital, and thinking about valuation, especially for first-time entrepreneurs. Read my article at VentureBeat for details on this slide deck: http://venturebeat.com/2016/09/05/startup-fundraising-101-revisited/

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Startup Fundraising 101 Revisited
≒ Getting Started ≒ Positioning Your Company ≒ How Much Capital You Need? ≒ Who Is Your Target Investor? ≒ How to Think About Valuation ≒ Pitching Your Startup ≒ Final Pointers CONTENT
Establish Your Team You have an awesome idea. Now what? ≒ Remember Two Founders is Better Than One ≒ Define core skills needed for the next 12 months ≒ Know your weaknesses as founders ≒ Lean and focused ≒ Trust is essential and check your egos GETTING STARTED
Discuss and Dividing Equity ≒ Do not nitpick on each founders value ≒ Among peers an equal split of shares in best ≒ Create a C corporation, not S Corp or LLC READ: How to Split Equity Among Co-Founders by Michael Seibel at the Macro (Partner at Y Combinator and previously Co-Founder of Justin.tv, Twitch and Socialcam) Equity should be split equally because all the work is ahead of you. GETTING STARTED
You are not building a lifestyle business, but a billion dollar world changer ≒ Create an outstanding, hard-to-ignore team ≒ Target a big market or create a new one ≒ Make your product or service a must have POSITIONING YOUR COMPANY READ: The Four Main Things that Investors Look for in a Startup by Mark Suster at Both Sides of the Table (Managing Partner at Upfront Ventures) Just four key factors. And theyre easy to remember because they all begin with an M: management, market, money and above all else momentum.
Do Not Fund To Fail ≒ Project how much you need for at least one year ≒ Add a 30% buffer ≒ Assume fundraising will take 6-12 months HOW MUCH CAPITAL DO YOU NEED? READ: How Much Money Should I Raise For My Startup? by Bryan Stolle at Forbes Blog (General Partner, Mohr Davidow Ventures; Founding Partner, Wildcat Venture Partners) Coming up short is even worse than raising too much, as it will almost always cost you even more than the original capital.
Capital Needs Dictate Investor Type ≒ Accelerator, Friends & Family, Credit Cards ≒ Seed Capital ≒ Series A ≒ Smart money is best WHO IS YOUR TARGET INVESTOR? READ: Why Raising Too Much Money Can Harm Your Startup by Mark Suster at Both Sides of the Table (Managing Partner at Upfront Ventures) The larger the round, the higher the price, the harder the next hurdle is to hit.
Research and target your investors ≒ Learn about their preferences for startups ≒ Avoid people or firms with competing investments ≒ Get to know a specific partner / investor on your deal WHO IS YOUR TARGET INVESTOR? READ: Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask) by Scott Edward Walker at TechCrunch (CEO of Walker Corporate Law Group)
Seed Rounds: Convertible Debt or Equity? ≒ Convertible Debt Promissory note that converts to equity upon the next round of qualified financing, which should be a Series A. Better than equity financing since there is less dilution. ≒ Deal hurdles Qualified financing is a standard minimum (i.e. $1 million), and no backstop provision, which sets a time limit (i.e. one year) for closing your next round. Set a reasonable cap. No cap doesnt fly any longer. ≒ Deal Terms Interest of 6%-8% and warrant coverage 20% but can go up to 40%. This is the gravy for angel investors taking the risk early on. WHO IS YOUR TARGET INVESTOR?
To Party Round at Seed or to Not Party ≒ Do not go with just one investor ≒ Do not go with 10 or more unless you have a couple big checks (e.g. $500,000 to $1M for seed) ≒ Get good investors (active help) in your round ≒ Party round follow-on rate was 53% vs 39% of non- party round startups (*CB Insights) WHO IS YOUR TARGET INVESTOR? READ: Party Rounds by Sam Altman at personal blog (President at Y Combinator) In a typical party round, no single investor cares enough to think about the company multiple times a day.
Research and target your investors ≒ Startup valuation is an art. Forget DCF (discounted cash flow) and other valuation methods. ≒ VCs have their valuations VCs have standard ranges for each stage to optimize their returns ≒ Increasing your valuation The way to increase your valuation is to create a horse race HOW TO THINK ABOUT VALUATION READ: Entrepreneurs, heres how to think about your valuation by Bernard Moon at VentureBeat (Co-founder & Partner at SparkLabs Global Ventures) Money burns quicker than most entrepreneurs think. Its not paper, its paper soaked in gasoline.
Pre-money & post-money valuation ≒ Pre-money valuation Share price * premoney shares ≒ Post-money valuation Premoney valuation + investment ≒ % of Ownership Shares issues / Post-money shares ≒ Not just about percentage but about share price HOW TO THINK ABOUT VALUATION
Stock option pool ≒ Standard practice. 10%-20% set aside for for current and future hires during your Series A. Most VCs will ask for 20% ≒ Push back on 20% if not needed Know who you need to hire during the next stage of growth ≒ This is additional dilution Most VCs will dilute you before their money goes in. Unless you are Elon Musk or Ev Williams. HOW TO THINK ABOUT VALUATION READ: The Option Pool Shuf鍖e by Babak Nivi at Venture Hacks (Co-founder at Angel List)
Practice Makes Perfect ≒ Tell Your Story Its about telling a story of momentum, vision, and your team. You have to gain the trust of investors in your product, team and the market potential ≒ Dont oversell Dont oversell yourself or your company. There is a difference between presenting with passion and making up crap. ≒ Listen to all feedback and continually improve. Whether an investor expresses interests or rejects you, listen carefully to all feedback and concerns. Even mediocre investors have good advice to him. PITCHING YOUR STARTUP
Never Easy Being An Entrepreneur ≒ Too high of a valuation is dangerous Its about telling a story of momentum, vision, and your team. You have to gain the trust of investors in your product, team and the market potential ≒ Dont spend too much time negotiating terms. At the early-stages, terms are pretty generic so stay in range and youll be fine. Just be watchful of onerous terms. ≒ Each time you close your round it is a race to optimize your value. Yes, its about growing your business. Rmeember, there is good dilution and bad dilution. FINAL POINTERS
Never Easy Being An Entrepreneur ≒ Raise as much money as possible Remember do not fund to fail ≒ Value every penny. Know all your expenses, burnrate and runway. Do not charter a helicopter for meetings, launch a China office on a whim or hire 200 people in 2 months. A few million isnt as much as you think. ≒ Focus your product and service. Do not try to be everything to everyone. FINAL POINTERS
COMPLIMENTARY ARTICLE Read this article at VentureBeat: http://venturebeat.com/2016/09/05/ startup-fundraising-101-revisited/
SparkLabs Global Ventures is a new seed-stage fund founded by entrepreneurs. We are a global fund that believes exceptional entrepreneurs can be found anywhere. All six partners have created new businesses across the globe, and ABOUT are currently based in London, Tel Aviv, Seoul, Singapore and Silicon Valley. Since December 2013, we have invested in 58 companies across 5 continents.

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Startup Fundraising 101 Revisited

  • 2. ≒ Getting Started ≒ Positioning Your Company ≒ How Much Capital You Need? ≒ Who Is Your Target Investor? ≒ How to Think About Valuation ≒ Pitching Your Startup ≒ Final Pointers CONTENT
  • 3. Establish Your Team You have an awesome idea. Now what? ≒ Remember Two Founders is Better Than One ≒ Define core skills needed for the next 12 months ≒ Know your weaknesses as founders ≒ Lean and focused ≒ Trust is essential and check your egos GETTING STARTED
  • 4. Discuss and Dividing Equity ≒ Do not nitpick on each founders value ≒ Among peers an equal split of shares in best ≒ Create a C corporation, not S Corp or LLC READ: How to Split Equity Among Co-Founders by Michael Seibel at the Macro (Partner at Y Combinator and previously Co-Founder of Justin.tv, Twitch and Socialcam) Equity should be split equally because all the work is ahead of you. GETTING STARTED
  • 5. You are not building a lifestyle business, but a billion dollar world changer ≒ Create an outstanding, hard-to-ignore team ≒ Target a big market or create a new one ≒ Make your product or service a must have POSITIONING YOUR COMPANY READ: The Four Main Things that Investors Look for in a Startup by Mark Suster at Both Sides of the Table (Managing Partner at Upfront Ventures) Just four key factors. And theyre easy to remember because they all begin with an M: management, market, money and above all else momentum.
  • 6. Do Not Fund To Fail ≒ Project how much you need for at least one year ≒ Add a 30% buffer ≒ Assume fundraising will take 6-12 months HOW MUCH CAPITAL DO YOU NEED? READ: How Much Money Should I Raise For My Startup? by Bryan Stolle at Forbes Blog (General Partner, Mohr Davidow Ventures; Founding Partner, Wildcat Venture Partners) Coming up short is even worse than raising too much, as it will almost always cost you even more than the original capital.
  • 7. Capital Needs Dictate Investor Type ≒ Accelerator, Friends & Family, Credit Cards ≒ Seed Capital ≒ Series A ≒ Smart money is best WHO IS YOUR TARGET INVESTOR? READ: Why Raising Too Much Money Can Harm Your Startup by Mark Suster at Both Sides of the Table (Managing Partner at Upfront Ventures) The larger the round, the higher the price, the harder the next hurdle is to hit.
  • 8. Research and target your investors ≒ Learn about their preferences for startups ≒ Avoid people or firms with competing investments ≒ Get to know a specific partner / investor on your deal WHO IS YOUR TARGET INVESTOR? READ: Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask) by Scott Edward Walker at TechCrunch (CEO of Walker Corporate Law Group)
  • 9. Seed Rounds: Convertible Debt or Equity? ≒ Convertible Debt Promissory note that converts to equity upon the next round of qualified financing, which should be a Series A. Better than equity financing since there is less dilution. ≒ Deal hurdles Qualified financing is a standard minimum (i.e. $1 million), and no backstop provision, which sets a time limit (i.e. one year) for closing your next round. Set a reasonable cap. No cap doesnt fly any longer. ≒ Deal Terms Interest of 6%-8% and warrant coverage 20% but can go up to 40%. This is the gravy for angel investors taking the risk early on. WHO IS YOUR TARGET INVESTOR?
  • 10. To Party Round at Seed or to Not Party ≒ Do not go with just one investor ≒ Do not go with 10 or more unless you have a couple big checks (e.g. $500,000 to $1M for seed) ≒ Get good investors (active help) in your round ≒ Party round follow-on rate was 53% vs 39% of non- party round startups (*CB Insights) WHO IS YOUR TARGET INVESTOR? READ: Party Rounds by Sam Altman at personal blog (President at Y Combinator) In a typical party round, no single investor cares enough to think about the company multiple times a day.
  • 11. Research and target your investors ≒ Startup valuation is an art. Forget DCF (discounted cash flow) and other valuation methods. ≒ VCs have their valuations VCs have standard ranges for each stage to optimize their returns ≒ Increasing your valuation The way to increase your valuation is to create a horse race HOW TO THINK ABOUT VALUATION READ: Entrepreneurs, heres how to think about your valuation by Bernard Moon at VentureBeat (Co-founder & Partner at SparkLabs Global Ventures) Money burns quicker than most entrepreneurs think. Its not paper, its paper soaked in gasoline.
  • 12. Pre-money & post-money valuation ≒ Pre-money valuation Share price * premoney shares ≒ Post-money valuation Premoney valuation + investment ≒ % of Ownership Shares issues / Post-money shares ≒ Not just about percentage but about share price HOW TO THINK ABOUT VALUATION
  • 13. Stock option pool ≒ Standard practice. 10%-20% set aside for for current and future hires during your Series A. Most VCs will ask for 20% ≒ Push back on 20% if not needed Know who you need to hire during the next stage of growth ≒ This is additional dilution Most VCs will dilute you before their money goes in. Unless you are Elon Musk or Ev Williams. HOW TO THINK ABOUT VALUATION READ: The Option Pool Shuf鍖e by Babak Nivi at Venture Hacks (Co-founder at Angel List)
  • 14. Practice Makes Perfect ≒ Tell Your Story Its about telling a story of momentum, vision, and your team. You have to gain the trust of investors in your product, team and the market potential ≒ Dont oversell Dont oversell yourself or your company. There is a difference between presenting with passion and making up crap. ≒ Listen to all feedback and continually improve. Whether an investor expresses interests or rejects you, listen carefully to all feedback and concerns. Even mediocre investors have good advice to him. PITCHING YOUR STARTUP
  • 15. Never Easy Being An Entrepreneur ≒ Too high of a valuation is dangerous Its about telling a story of momentum, vision, and your team. You have to gain the trust of investors in your product, team and the market potential ≒ Dont spend too much time negotiating terms. At the early-stages, terms are pretty generic so stay in range and youll be fine. Just be watchful of onerous terms. ≒ Each time you close your round it is a race to optimize your value. Yes, its about growing your business. Rmeember, there is good dilution and bad dilution. FINAL POINTERS
  • 16. Never Easy Being An Entrepreneur ≒ Raise as much money as possible Remember do not fund to fail ≒ Value every penny. Know all your expenses, burnrate and runway. Do not charter a helicopter for meetings, launch a China office on a whim or hire 200 people in 2 months. A few million isnt as much as you think. ≒ Focus your product and service. Do not try to be everything to everyone. FINAL POINTERS
  • 17. COMPLIMENTARY ARTICLE Read this article at VentureBeat: http://venturebeat.com/2016/09/05/ startup-fundraising-101-revisited/
  • 18. SparkLabs Global Ventures is a new seed-stage fund founded by entrepreneurs. We are a global fund that believes exceptional entrepreneurs can be found anywhere. All six partners have created new businesses across the globe, and ABOUT are currently based in London, Tel Aviv, Seoul, Singapore and Silicon Valley. Since December 2013, we have invested in 58 companies across 5 continents.