Startup Fundraising 101

Startup Fundraising 101 Basics on the startup process, raising capital, and thinking about valuation.

Bernard Moon  bernardmoon.blogspot.com

June 2009

Overview  • Get Things in Order  • Packaging Your Startup • How Much Do You Need? • Who Is Your Ideal Investor? • How To Think About Valuation • Pitching Your Startup • Last Food for Thought

Get Things in Order  • Establish your team ✓

Define core skills needed

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Know your weaknesses

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Go lean and mean

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Trust is essential

Get Things in Order  • Discuss and decide on equity  ✓

Do not nitpick on each team member’s value

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 Among peers an equal split of shares is best

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Create a C corporation, not a S corp or LLC.

Packaging Your Startup • Create a solid team • Target a big market • Build an advisory board • Sign strategic partners or   blue chip customers

How Much Do You Need? • Project how much money you need for  one year 

• Add a 30% buffer  • Fundraising will take 6-9 months. (current climate 9-12+ months)

• Angel (seed) or venture capital (Series A)

 Who is Your Ideal Investor? • Capital needs dictate investor type ✓

Micro-seed capital. < $100,000 (i.e. Y-Combin -Combinator, ator, TechStars, friends & family, savings, Visa/Mastercard)

✓

Seed capital. $100,000 - $2 million (angels/angel funds, i.e. Baseline, Harrison Metal, Keiretsu Forum, Omidyar Network)

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Series A round. $2 - $10+ million (i.e. Accel, DFJ, Kleiner Perkins, Sequoia. $2 - $5M for online startup and $5 - $10+M for for a  cleantech venture)

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Smart money is best.  At some point you need money  in. If not smart, smart, then a hands-off hands-off investor is second best.

 Who is Your Ideal Investor? • Ideal Seed Capital Deal ✓

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.

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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.

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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 Ideal Investor? • Research and target your  investors ✓

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Learn about their preferences for startups  Avoid people or firms with competing investments Get to know the lead partner/ investor on your deal

How to Think About Valuation • Startup valuation is an art.

Forget DCF (discounted cash flow) and other valuation methods.

• Venture capitalists have their   valuations.  VCs have standard ranges for each stage to optimize their return on investment.

• Increasing your valuation.

The way to increase your valuation is to create a dog race r ace not a  show where you’re the only dog, or be incredibly  compelling as an investment opportunity.

How to Think About Valuation • Pre-money & post-money valuation. This is the basic framework of startup funding. ✓

Pre-money valuation. Share Price * Pre-money Shares

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Post-money valuation. Pre-money valuation + Investment

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% of Ownership. Shares Issued / Post-money Shares

• Not just about % but about share price .

How to Think About Valuation • Stock option pool.

10%-20% will be set aside for current and future hires during your Series A. Most VCs  will ask for 20%.

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Push back on 20% if not needed. Know who you need to hire during the next stage of growth.

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This is additional dilution. Most VCs will dilute you  before their money goes in. Unless you’re Marc Andreessen and get VCs and the founders diluted at the same time.

Valuation of Startup # of Common Stock # of Preferred Stock

Pre-money

Post-money

$4 million

$6 million

4,000,000 ($1/share)

4,000,000 ($1/share)

0

2,000,000 ($1/Share)

Pitching Your Startup • Tell Your Story.

It’s about telling a story of  momentum, momentu m, vision and your team. You have have to gain the trust of investors in your product, team and the market potential.

• Don’t oversell.

Don’t oversell yourself or your company.. There is a difference between presenting  company  with passion and selling too hard.

• Listen to all feedback and continually  improve.  Whether an investor expresses interests or rejects you, listen carefully to all feedb feedback ack and concerns. There will will be valuable nuggets nuggets within those streams to gather and improve your business upon.

Last Food for Thought • Too high of a valuation can turn off  future investors.

• Don’t spend too much time negotiating early-stages, terms are pretty generic terms.  At the early-stages, so stay in range and you’ll be fine. Just be watchful of  onerous terms.

• Each time you close your round it is a race to optimize your value .  And it is a race toward profitability profitability.. If you slack slack off, your $6 million startup might see a $10 $10 million valuation for its Series B vs. $20 million.

Last Food for Thought • Raise as much money as possible. • Value every penny. Know all your expenses,  burnrate and runway runway.. Don’t charter a helicopter for meetings, launch a China office on a whim, or hire 200 people in 2 months. A few few million isn’t as as much as you think.

• Writing a business plan is a good exercise.

• Focus your product and service . to be everything to everyone.

Don’t try