Startup Fundraising
Startup Fundraising
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Basics on the startup process, raising capital,
Basics on the startup process, raising capital,
and thinking about valuation.
and thinking about valuation.
Bernard Moon Bernard Moon bernardmoon.blogspot.com bernardmoon.blogspot.com June 2009 June 2009
Overview
Overview
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Get Things in Order
Get Things in Order
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Packaging Your Startup
Packaging Your Startup
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How Much Do You Need?
How Much Do You Need?
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Who Is Your Ideal Investor?
Who Is Your Ideal Investor?
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How To Think About Valuation
How To Think About Valuation
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Pitching Your Startup
Pitching Your Startup
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Get Things in Order
Get Things in Order
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Establish your team
Establish your team
✓
✓ Define core skills neededDefine core skills needed ✓
✓ Know your weaknessesKnow your weaknesses ✓
✓ Go lean and meanGo lean and mean ✓
Get Things in Order
Get Things in Order
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Discuss and decide on
Discuss and decide on equity
equity
✓
✓ Do not nitpick on each team member’s valueDo not nitpick on each team member’s value ✓
✓ Among peers an equal split of shares is best Among peers an equal split of shares is best ✓
Packaging Your Startup
Packaging Your Startup
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Create a solid team
Create a solid team
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Target a big market
Target a big market
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Build an advisory board
Build an advisory board
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Sign strategic partners or
Sign strategic partners or
blue chip customers
How Much Do You Need?
How Much Do You Need?
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Project how much money you
Project how much money you need for
need for
one year
one year
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Add a 30% buffer
Add a 30% buffer
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Fundraising will take 6-9 months.
Fundraising will take 6-9 months.
(current climate 9-12+ months) (current climate 9-12+ months)
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Who is Your Ideal Investor?
Who is Your Ideal Investor?
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Capital needs dictate investor type
Capital needs dictate investor type
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✓ Micro-seed capitalMicro-seed capital.. < $100,000< $100,000 (i.e. (i.e. YY-Combin-Combinator,ator,
TechStars, friends & family, savings, Visa/Mastercard) TechStars, friends & family, savings, Visa/Mastercard)
✓
✓ Seed capitalSeed capital.. $100,000 - $2 million$100,000 - $2 million (angels/angel funds, i.e.(angels/angel funds, i.e.
Baseline, Harrison Metal,
Baseline, Harrison Metal, Keiretsu Forum, Omidyar Network)Keiretsu Forum, Omidyar Network)
✓
✓ Series A roundSeries A round.. $2 - $10+ million$2 - $10+ million (i.e. Accel, DFJ, Kleiner(i.e. Accel, DFJ, Kleiner
Perkins, Sequoia. $2 - $5M for online startup and
Perkins, Sequoia. $2 - $5M for online startup and $5 - $10+M f$5 - $10+M for a or a cleantech venture)
cleantech venture)
✓
✓ Smart money is bestSmart money is best.. At some point you need money At some point you need money
in.
Who is Your Ideal Investor?
Who is Your Ideal Investor?
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Ideal Seed Capital Deal
Ideal Seed Capital Deal
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✓ Convertible DebtConvertible Debt.. Promissory note that converts toPromissory note that converts to
equity upon the next round of
equity upon the next round of qualified financing, whichqualified financing, which should be a
should be a Series A. Series A. Better than Better than equity financing equity financing sincesince there is less dilution.
there is less dilution.
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✓ Deal hurdlesDeal hurdles.. Qualified financing is a standard minimumQualified financing is a standard minimum
(i.e. $1 million)
(i.e. $1 million), and no backstop provision, which sets a time, and no backstop provision, which sets a time limit
limit (i.e. one year)(i.e. one year) for closing your next round.for closing your next round.
✓
✓ Deal TermsDeal Terms. Interest of 6%-8% . Interest of 6%-8% and warrant coverage 20%and warrant coverage 20%
but can go up to 40%. This is the gravy for angel investors but can go up to 40%. This is the gravy for angel investors
taking the risk early on. taking the risk early on.
Who is Your Ideal Investor?
Who is Your Ideal Investor?
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Research and target your
Research and target your
investors
investors
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✓ Learn about Learn about their preferences fortheir preferences for
startups startups
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✓ Avoid people or firms with Avoid people or firms with
competing investments competing investments
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✓ Get to know the lead partner/Get to know the lead partner/
investor on your deal investor on your deal
How to Think About Valuation
How to Think About Valuation
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Startup valuation is an art
Startup valuation is an art
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Forget DCFForget DCF (discounted cash flow) and other valuation methods. (discounted cash flow) and other valuation methods.•
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Venture capitalists have their
Venture capitalists have their
valuations
valuations
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VCs have standard ranges for each VCs have standard ranges for each stage to optimize their return on investment.stage to optimize their return on investment.
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Increasing your valuation
Increasing your valuation
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The way toThe way to increase your valuation is to create a dog rincrease your valuation is to create a dog race not a ace not a show where you’re the only dog, or
show where you’re the only dog, or be incredibly be incredibly compelling as an investment opportunity.
How to Think About Valuation
How to Think About Valuation
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Pre-money & post-money valuation
Pre-money & post-money valuation
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This is the basic framework of startup funding. This is the basic framework of startup funding.
✓
✓ Pre-money valuationPre-money valuation.. Share Price * Pre-money SharesShare Price * Pre-money Shares ✓
✓ Post-money valuationPost-money valuation. Pre-money valuation +. Pre-money valuation +
Investment Investment
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✓ % of Ownership% of Ownership. Shares Issued / . Shares Issued / Post-money SharesPost-money Shares
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How to Think About Valuation
How to Think About Valuation
P Prree--mmoonneeyy PoPosstt--mmoonneeyy $ $4 4 mmiilllliioonn $$6 6 mmiilllliioonn 4 4,,000000,,00000 0 ($($11//sshhaarree)) 44,,000000,,00000 0 ($($11//sshhaarree)) 0 0 22,,000000,,00000 0 (($$11//SShhaarree)) Valuation of Startup Valuation of Startup # of Common Stock # of Common Stock # of Preferred Stock # of Preferred Stock
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Stock option pool
Stock option pool
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10%-20% will be set aside for10%-20% will be set aside for current and future hires during your Series A. Most VCs current and future hires during your Series A. Most VCs will ask for 20%.will ask for 20%.
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✓ Push back on 20% if not Push back on 20% if not neededneeded.. Know who you need toKnow who you need to
hire during the next
hire during the next stage of growth.stage of growth.
✓
✓ This is additional dilutionThis is additional dilution.. Most VCs will dilute youMost VCs will dilute you
before their money goes in. Unless you’re Marc Andreessen before their money goes in. Unless you’re Marc Andreessen
and get VCs and the founders diluted at the same time. and get VCs and the founders diluted at the same time.
Pitching Your Startup
Pitching Your Startup
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Tell Your Story.
Tell Your Story.
It’s about telling a story of It’s about telling a story of momentumomentum, vision and m, vision and your team. your team. YYou haou have ve to gainto gain the trust of investors in your product, team and the the trust of investors in your product, team and the market potential.
market potential.
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Don’t oversell.
Don’t oversell.
Don’t oversell yourself or yourDon’t oversell yourself or your companycompany. . There is There is a a difference between presenting difference between presenting with passion and selling too hard.
with passion and selling too hard.
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Listen to all feedback and continually
Listen to all feedback and continually
improve
improve
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Whether an investor expresses interests Whether an investor expresses interests or rejects you,or rejects you, listen carefully to all listen carefully to all feedbfeedback andack and concerns.
concerns. There wiThere will be ll be valuable nuggvaluable nuggets within ets within thosethose streams to gather and improve your business upon. streams to gather and improve your business upon.
Last Food for Thought
Last Food for Thought
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Too high of a valuation can turn off
Too high of a valuation can turn off
future investors
future investors
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Don’t spend too much time
Don’t spend too much time negotiating
negotiating
terms.
terms.
At the early-stage At the early-stages, terms s, terms are pretty genericare pretty generic so stay in range and you’ll be fine. Just be watchful of so stay in range and you’ll be fine. Just be watchful of onerous terms.onerous terms.
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Each time you close your round it is a
Each time you close your round it is a
race to optimize your value
race to optimize your value
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And it is a race And it is a race toward profitabitoward profitabilitylity. . If you slacIf you slack off, your $6 k off, your $6 millionmillion startup might
startup might see a $1see a $10 million valuation 0 million valuation for its Seriesfor its Series B vs. $20 million.
Last Food for Thought
Last Food for Thought
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Raise as much money as
Raise as much money as
possible
possible
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Value every penny.
Value every penny.
Know all your expenses,Know all your expenses, burnrate andburnrate and runwayrunway. Don’t . Don’t charter a charter a helicopter forhelicopter for meetings, launch a China office on a whim, or hire 200 meetings, launch a China office on a whim, or hire 200 people in
people in 2 months. 2 months. A feA few million isn’t aw million isn’t as much as s much as youyou think.
think.
