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FUNDING FOR START-UPS

Session 1 and 2 : Introduction to Entrepreneurship


1. Objectives et Outline
2. Dfinitions
3. Types of entrepreneurs
4. Business creation: an entrepreneurial process
5. The Business plan
6. Other forms of entrepreneurship

Session 3 : Entrepreneurship in Morocco and around the world


1. Business mapping in Morocco
2. Some statistiques in France, Singapour and Canada
3. The legal framework
4. The Institutional framework and government support
5. Mentoring and coaching

Session 4 and 5 : Management of a business creations process


1. The different phases of the entrepreneurial process
2. Testimonials and feedback

Session 6 : The Business Plan and Business Model


Session 7 : Funding for start-ups
Session 8 : Corporate Governance
There are two main ways to finance your
business

Equity
Debt

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Non-Equity Financing Equity Financing

Angel Financing

Self Finance /
Venture Capital
Bootstrapping

Debt /
Private Equity
Bank Finance

Public
Stock Markets
Debt doesnt
Equity exceed 70%
Total
40
value
%

100
%
Debt
60
%
Can be obtained through savings or investors. Investors typically receive an ownership
interest in your company in return for their investment

Start up equity financing is typically sourced


through yourself and people you know:
Personal savings
Friends or relatives
Government
Angel or informal investors

Why invest your Money in the Business?


Least costly source of funds
You are more likely to get a loan with adequate
equity in your business
A business that has adequate equity is more
likely to succeed
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Financing growth from previous cash-flow and personal funds
Obviously need to have cash-flows
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 development constrained by cash-
flows
May miss a big opportunity if other players raise finance and invest
heavily
There are a number of ways to finance a business. The
lender will evaluate your ability to borrow based on strength
of your business plan, management capabilities, financing,
your past personal credit history and collateral available to
secure the loan.
New business owners (in business less than 2 years) typically
require collateral such as mortgages or cash/investments.

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Line of Credit used to cover short term expenses like
supplies, payroll and rent.
Credit Cards to cover and track small expenses or everyday
business expenses.
Suppliers Credit sometimes a very cheap source of
financing, do not overlook the value of this source.
Business Term Loan used to purchase long term assets
required to operate your business.
Leasing used to obtain assets to run your business, may
provide more flexible options than traditional loans.
Government Programs there are many government
programs to support Small Business. Investigate all options.

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The 5 Cs:
Character: You must be trustworthy and have a strong credit
history (maintain a strong credit history personally
and as a Business)
Conditions: How do the current economic conditions impact your
business and industry?
Capital: How much do you have invested in your company?
Capacity: How will your company pay back the debt?
Collateral: What assets are available if your company cannot
repay?

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The business is undercapitalized a business with too
much debt and a cash flow that doesnt support it
Business expansions that are poorly planned and not
appropriately financed

Poor management
The Business offers products and services that nobody wants or cannot
afford
Inability to adapt to a changing environment
Failing to control costs
Poor execution creating dissatisfied customers

Creating an effective business plan will assist you in avoiding the


pitfalls of running a business. Seeking professional help is another
important way to avoid or plan for business challenges.
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Pre-requisites

Large Potential
Unique Product Passionate
Market
Or Concept Founding Team
Opportunity

Implications

Intense
Need to move
competition
rapidly
likely

VC funding supports

Rapid Product
Hiring Partnerships
Development

Infrastructure Internationalisation Commercialisation


Application
Market size is Motivation is
is a feature
too small not financial
not a product

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
Early Stage Later Stage Pre-IPO / Private
Seed
Series A, (B) (B),C,D Buy-out Equity

Investment 0 - 1m 2m-20m 5m-20m 30m+


Size

Potential Grant-funding Venture Venture Specialist Late


Sources of Capital Capital stage tech
Funds University seed investment
funds (Wealthy)
Angel funds
Friends and investors Hedge Funds
family

Angel Investors

(Venture
Capital)
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)
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 Internationalisation
Hiring Trusted service provider
Developers relationships
Country Managers
Search / recruiting
Sales
Branding / PR
CEO / CFO / COO
Finance, etc
Advisory Board
Partnerships Exit optimisation
Profile and PR Knowledge / contacts with
relevant buyers
Further access to capital
Experience with process
Team 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
Has funds Do create a shortlist
to invest
Rifle is a better weapon than
a shotgun
Match of
Excellent
Size/Stage/
track record
Geography Similar process for
Shortlist identifying angels, look at VC
funding press releases to
identify prior Angel investors

No directly
Relevant
competitive
Portfolio
investments
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
Pre - first meeting Pre - termsheet Post - termsheet

100 page business plan not Dialogue rather than Some additional reference
required documentation expect calls with partners /
20 page ppt which clearly lots of meetings customers
answers main questions is Calls with current / Personal reference calls
best bet prospective customers or Legal / accounting audit (if
Product partners relevant)
Market
Meeting broader team Drafting legal
Business Model
Team Brainstorming around documentation
Competition strategy
Product Roadmap Identifying key hires post
Technology Overview closing
Business Development
Formal presentation to VC
Financial Status
partnership

2-4 weeks 1-2 Months


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
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?


but thats
so
Board Representation unfair
Liquidation Preference
Participation rights
Anti-dilution rights
Element of reverse vesting
Certain control and veto rights
Period of exclusivity to close legals

Photo Source: Philip Greenspun, MIT


Entrepreneurs Equation Revenues / Profitability

Growth rate

Value at exit Team quality

Strategic fit with buyer community

Well managed exit process

Fewest strategic errors made

Probability of getting Hiring (quality & speed)


there Partnerships

Product development

Valuation at initial round


% share of business Valuation and dilution at
at exit subsequent rounds

Option grants
Relationship
With key individual(s); and
broader team

References Right partner at a fair price


Speak to other founders vs.

Portfolio Any partner at best price


Relevant experience
Non competitive
Community you want to be part of

Valuation and associated deal terms