Fundraising

David Beatty Founders Institute NY May 23rd, 2012

Thank you to Golden Seeds for use of this material

3 Types of External Capital

Debt

Equity

Grants

Friends & Family Micro loans Bank loans

Founders capital Friends & Family Angel Investors Venture Capital State funds Private Equity

Foundations Academic Research Institutions Government

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Types of Entrepreneurs
Category Sub-category/Industry Key Characteristics Possibly just an idea or dream - beginning to think about entrepreneurship or starting own business Typical Funding Source EXPLORING ENTREPRENEURS

N/A

N/A

SOLO-PRENEUR

Any

Consulting, maybe with employees If marketed well should be self-supporting after startup period

Friends, family, bootstrapping

NORMAL GROWTH COMPANY

Services Light Manufacturing Retail

Grows revenue in direct proportion to number of employees, has low profits or in 5 years, revenues less than $3-4M

Friends & family, debt capital is target

HIGH GROWTH COMPANY Technology Life Sciences/Medical Technology Life Sciences/Medical

Builds a product line (or service) that can be acquired by a larger entity with larger sales distribution Develops intellectual property (IP)

Angel & Venture Capital (VC) $5-10M revenue target (in 3-5 years) with room for growth Expect total capital need: less than $5M

EXTREME HIGH GROWTH COMPANY

Needs to develop family of products with $40M+ revenue & growth potential IPO or high-value M&A exit Develops IP or brand

VCs (large or syndicate) that expect to invest $20M+

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Financing Alternatives
Source
Bank Loans

Time to Get
2-4 months

Financiers Goals
Payback, interest, collateral

Entrepreneurs Concerns
Interest rate and terms

Credit Card

0-1 month

Payments, interest

Ability to payback, interest rate

Friends/Family (debt or equity) Micro financing (Kickstarter.com) Customers/ Partners Suppliers/Trade Government Grants

0-3 months

Success, payback

Ability to sustain relationships, payback, and provide return on investment Ability to deliver

1-3 months

Showing support

3-12 months

Mutual sales, marketing and/or product outcomes Payment relationship Funding particular initiatives

Structure of relationship and ability to deliver Credibility, relationship Long process and timeframe

1-3 months 2-12 months

Angel Investors Venture Capital Investors

4-12 months 4-12 months

Return on investment, control Return on investment, control To keep you buying tickets

Strings & outside involvement & scrutiny Business growth curve, external involvement & scrutiny Low probability

Lottery Tickets

0-infinity

Golden seeds, LLC, 2012

Who invests when?

Phase Seed Early Stage Series A or B Series C or D Public mkt

Type

Common/ Founders Stock

Common, Preferred or Bridge

Preferred Convertible

Preferred, Mezzanine Debt

Listed equity

Players

Founders, Friends, Family Angels

Angels Venture Capitalists

Angels Venture Capitalists

Private Equity, Investment Bank

Investment Bank

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Angels (Investors) look for:

Management talent and team Compelling need for the product $1bn Attractive market Scalable product and business model Beta (occasionally alpha) stage of development 1-2 paying clients

Sustainable competitive position

Clear Exit strategy within 3-7 years with return
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Are you Ready for Angel Funding?

Stage of development
Concept (probably friends and family, maybe an individual angel)

Prototype (some angel group interest)

First revenues (lots of angel group interest)

Product differentiated technology or service with substantial market opportunity

Team in place or identified

Plan for a commercially viable business model Clear understanding of your capital requirements

Executive summary and investor pitch ready

References and diligence materials prepared

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There are 7 key steps in the process

3. Structuring the deal

1. The Pitch

5. Closing 7. Exit

2. Due Diligence

4. Term Sheet

6. Monitoring Investment

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The Pitch Need 11 Slides

1. Problem 2. Solution 3. Business model 4. Underlying Technology 5. Marketing & Sales 6. Competition 7. Team 8. Projections & Milestones 9. Status & Timeline 10. Exit 11. Summary and call to action

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Important Evaluation Criteria

Integrity of the entrepreneur; do I trust him? Does the entrepreneur appear intelligent? Is he a good communicator/sales person? Is he flexible and seem willing to be coached? How well and quickly does he respond to questions? Does he have his own money at risk; alignment of interests Entrepreneurs performance in previous ventures
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Deal Flow Statistics Angel Groups

Screening
Presentation Due Diligence Investment OVERALL

1 in 4 reach screening
Then, 1 in 3 make presentation Then, 1 in 3 reach due diligence Then, 1 in 2 get money Result: 1 to 4 in 100 who apply actually receive investment
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 Golden seeds, LLC, 2012

Rewards & Risks

The reality of investment returns

A single investment is a big gamble

US Data shows
30-40% - total loss 30-40% - breakeven 20-30% - positive return Angels and VCs must see how it is possible to get a 10x return on each investment to make the risk worthwhile.
Golden Seeds 2011
Copyright Golden Seeds, LLC, 2012

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Good Luck