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Early Stage Funding Environment

Sources of Capital for Startups

Itxaso del-Palacio
Partner at Microsoft Ventures
Teaching Fellow at UCL
UC Berkeley

Silicon Valley



2000Berlin 2004 2006 2008 2010 Time

How is Entrepreneurial finance different from
Entrepreneurial Finance is not Accounting
How many of you have raised external

Raised Equity vs Debt?

What can you tell us about the process?

What do you whish you had known?

The Investment Process

Investors Legal
Pitching Meeting Due Final
Meeting Term
to (associate, Diligence Negotiation
(partners Sheet
Investors analyst) (4-12 milestones

- Investor (Opportunity)
Due Diligence Lawyer Time
- Preliminary negotiations

Close & Sign

- Decision to Invest
- Term Sheet negotiation (2-4 weeks)
Date/Wee Lecture Workshop
Jan 19 Sources of Capital: Practical exercises
The VC Game
Feb 2 Due Diligence and Panel of Investors
Pitching to Investors Due Diligence Exercise
Feb 23 Term Sheets Practical exercises
Panel of Entrepreneurs
March 9 Valuations and Cap Cap table exercises
Tables Investment ecosystem
March 23 Case Study Playing the role of
Course Material

• Venture Deals: Be Smarter than your Lawyer and

Venture Capitalist, Brad Feld & Jason Mendelson

• Fundraising Field Guide: A Startup Founder’s

Handbook, Carlos Eduardo Espinal

• 50% Coursework + 50% Examination

– Individual Assignment SIMON (50%)
– Individual Assignment ITXASO (50%) – March 19, 2018
Assignment ITXASO

• Find a company that has raised at least 2 rounds of capital

• Meet the founder for an interview (or two;)
• Get details on the rounds
– How long did it take?
– How many investor did they meet?
– What was the valuation?
– Was that the valuation at the beginning or did it change?
– What are they getting from investors?
– How is their relationship with their investors?
– When would they raise money again?
– What are they looking for in follow on investors?
– …
• Write a report about it – max – 2 pages
Marking Criteria

Topic - Creativity finding an interesting and

“different” entrepreneur
- Creativity regarding the information

Evidence - Unique material collected

- Enough primary data
- Secondary data is well referred to the

Execution - Well written and organized document

- Stay within length limitations
Do’s and Dont’s for the assignement

• Do attend as many events as you can

• Do get connected through friends
• Don’t use linkedIn to email people (with no
• Do meet people face-to-face
• Do offer help/give before you ask/get
• Do make it easy for the entrepreneurs (go to them)
• Do start working on this today!
What do we know…

• Why do we investors invest in startups?

• What is equity? Equity vs Debt
• What do we call an “exit”?
• Risk vs Return
• Pre- Post-money valuations
• “I’m looking for two-fifths of the post-, and for that
I’ll put up to the two”
• The investment process? How long does it take?
• What is Venture Capital?
Investor Explosion – Sources of Capital
(Equity vs Debt
Investment Rounds

Source: adapted from Engel @UC Berkeley

Investment Stages Milestones Sources of Capital
for Tech Companies for Tech Companies for Tech Companies

Complete the team, beta Angels, grants,

Seed round
launch, metrics, Customer 3 F’s (love $)
start-up / bridge
development, pivot! Accelerators

Product development, VCs

Series A
Development prototype, product launch, sales

Growth and expansion VCs

Series B, C, D…
phase. Corporate VC
Growth Venture Debt

Mezzanine / PE Get ready to be acquired Banks,

(Exit) competitive context. Public equity market
Why is this important for an entrepreneur?
Venture Capital (VC) is
NOT the only source of funding
Who is the right investor for
3F’s: Family, Friends, Fools
- When? In early stages; with little validation. This is LOVE money
- Money invested by Family and Friends
- How much? Up to £150K (SEIS)
- During this time we assume you are bootstrapping
- It helps you to:
- Start small and prove the market asap
- Learn from your customer (lean start-up)

Advantages Disadvantages
- Low pressure on valuation (no equity**) - Unable to fund growth phase
- Easy terms on ownership - Lack of funding commitment for future
- Control by founders - Loss of advice from investors
- Little time on finding investors
Source: Dorf &Byers, 2008
Public Funds/Grants

- When? When building complex tech/IP based startups (public grants)

- When? There are industry focused grants/competitions (private prizes)
- How much? Up to £50K
- Government public grants: regional, national, sector specific,…

Advantages Disadvantages
- It doesn’t require re-payment** - Complex and long process
- No taxes or interests to be paid** - Huge effort on paperwork
- Finance seed stages (high risk) - Subjected to government audits
- No limit in the number of grants - Sometimes an accountant is needed
- Do not provide professional advice
- When? When support needed (rather than just cash)
- Provide intensive mentorship (3-6 months)
- How much? £50-100K for 8-10% equity (aprox.)
- They are different models with or without investment, space, equity,…
- Startup Bootcamp, Techstars, Y Combinator, 500 startups
- Industry focused: Collider, TrueStart, Barclays Accelerator
- Corporate Accelerators: Wayra, Deloitte

Advantages Disadvantages
- Experienced mentors - Do not always get financed
- Significant development in a short time - Most of them are ICT oriented
- Access to a huge network of
experienced entrepreneurs
- Smart money

- When? Online platforms for “Collective fundraising”

- Wide pool of small investor
- Good for products (pre-sale) or one-off projects
- How much? Up to £1m
- Strong marketing campaign and community required
- Examples:
- Crowdcube: Escape the City raised £600K from 394 individuals in 14 days (24% equity)
- Kickstarter: Smarter Stand for iPad raised $140K from 7,656 backers

Advantages Disadvantages
- Community Engagement - Small amount of money
- Social test of the idea - No feedback from investors
- No investor pressure (milestones) - Lack of expertise of investors
Venture Debt
- When? Need a “bridge” in between equity rounds
- How much? £1-5m
- Debt financing for equity-backed companies (provides short term liquidity)
- No valuation required (it is cheaper than equity)
- Interest rates: 10-15%
- Repaid (generally) on monthly payments over the life of the loan
- Dilution: (generally) <1% (warrants)
- Institutions providing Venture Debt: Silicon Valley Bank, Columbia Lake Partners,…

Advantages Disadvantages
- Minimize dilution - Can reduce companies’ flexibility if
- Allows increase of valuation utilized poorly (e.g. unfavorable terms)
- “Venture Debt makes venture more - Not good for big rounds of funding
efficient” - Not good if not combined/follows equity
- Quicker than equity financing (no - Not good when it is used as a last resort
valuation and no board seats to be (the weaker the company the worse the
negotiated) terms)
Angels and Super Angels
- Individuals investing their own money
- When? Early stages, looking for investors who know the industry
- How much? £50-£250K (they invest their own money)
- “Usually” experienced entrepreneurs
- More and more “super angels” (Former successful founders): Skype, Deepmind…
- Often get involved in the day-to-day management of the firm
- Might benefit from SEIS/EIS (Who qualifies?)
- Organized in networks (AngelLab, LBA, HBS Angels, Band of Angels,…)
Advantages Disadvantages
- Value adding - Little follow-on money
- Network of contacts in the industry - Few are “super angels”
- Prefer start-ups and early-stage firms - Want to have a vote in all decisions
- No high fees/ownership
- Invest in all industrial sectors (high-tech,
manufacturing, fashion, leisure,…)
Let’s talk about Venture Capital
What is Venture Capital?
How does it work?
How is it structured?
Venture Capital

Venture Capital is a type of financing provided by firms or

funds to small, privately owned, early-stage firms that are
deemed to have high growth potential

The startups are usually based on an innovative

technology or business

VCs invest in exchange of equity (shares)

VCs invest in several stages: Seed stage, Series A, Series

B, Series C, etc…
How do VCs make money?

Venture Capitalists get money from

Limited Partners (LPs) who expect to get a
return on their investment

• Venture Capitalist = General Partners (GPs)

• Limited Partners are pension funds, endowments of universities,
insurance companies, charitable foundations, etc,.
• Return expected: 10x in Seed stage funds – 3-5x in later stages
Venture Capital Industry
Portfolio companies

Limited Partners
Deal origination

(General Partners) Screening


How are investors paid?

1. Management Fee (2% of capital under management) Structuring

2. Carried Interest (20% of profits)

Post Investment
How do Venture Capitalist make money?

• Typical fund: 10 year fund cycles, 2/20 structure

• GPs contribute with 1% of the fund (99% is LPs)
• 2% management fee and 20% carry
• Fee: 2% of capital under management (years 1-5)
• Fee: based on costs (years 6-10)
• Total fee (over 10 years): ±15% of the fund
• Carried Interest: 20% of return goes to the GP and
80% goes to the LP
How do Venture Capitalist make money?

• Example:
$100m fund will have $99m from LPs & $1m from GPs
Will cover ±$15m management fees (over 10 years)
The return will be distributed:
1. 99/1 for the first $100m
2. and 20/80 for the remaining return
Recycling: If an early investment returns $20m, $15m
(same as management fee) will be re-invested
Venture Capital
- They invest others’ money (pension funds, university funds,…)
- Look for extraordinary returns
- Invest thinking of an exit (acquisition, IPO) – liquidity event
- Invest in exchange of ownership (shares, seats in the board)
- Exchange of CEO
- Want to see milestones

Advantages Disadvantages
- Value adding - reputation - High control with milestones
- Network of contacts in the industry - Staged investment
- Attract other investors - Ownership in exchange (negotiation)
- Follow-on investments - Voting rights
- Accelerate growth
- “Find the right CEO”
Understanding VC firms

1. VC have a clear mandate and want to make money

2. Size of fund ≠ number of deals
3. Capacity to follow on - reserves
4. Check the vintage year (when the fund started investing)
5. Check the partner who will be involved
- Do your own Due Diligence
6. Track record of the firm/partner
7. “What’s your process?” - timeline
Who is the right investor for
Investment Rounds




Source: adapted from Engel @UC Berkeley

Syndicated deals

A syndicate is a self-organizing group of individuals (angel

investors), venture capitalists, accelerators and other
investors that pursue a share interest by investing together,
under the same terms, in the same round of funding

• Most of the deals are syndicated deals

• There is always a lead investor who negotiates the terms
of the round (e.g. valuation, liquidation preferences, etc,…)
• Lead investors set the terms (issue a term sheet)
• The lead investor carries most of the Due Diligence
Exercise III

• You are the founder of You and your co-founder

aim to build a ML tool help you select the best present for
your girlfriend/boyfriend based on past searchers
• To have a fully operating product and growing customer base
you think you might need to raise £20 million over the next 5
• Define a realistic investment strategy/process for the
company including:
– stages of the investments (amount per round and timing)
– milestones to be achieved per round
– source of capital (including name of fund/investor)
Exercise I
• Classify the list of investors depending on the type of
investor, the stage they invest in and the sector. Find out
also which interesting companies are in their portfolio
Andressen Horowitz Hussein Kanji
Sequoia Capital Serena Capital
London Business Angels The Accelerator Group
TechStars Frontline Ventures
Notion Capital Entrepreneur First
Y Combinator Startup Bootcamp
Seedrs Unilever Ventures
Index Ventures Balderton Capital
Passion Capital Kickstarter
Connect Partners
Balderton Capital
Exercise II (A)

Julia is the founder of, a platform

that allows fans to customize the accessories that
their favourite celebrities wear and then print them
on 3D printers. Julia raised £50,000 from family and
friends and she used this money to build a first
version of the platform. She has also bought a 3D

Julia is now looking to raise a further £200,000 in a

second investment round. She is considering
several sources of capital:
Exercise II (B)

• One of her friends has mentioned that she should

consider raising this round on Seedrs.

– Based on the classification of investors discussed

during the course, what type of source of capital is
– What are the benefits of raising this round on Seedrs?
Exercise II (C)

• While Julia is working on her Seedrs campaign,

Julia receives an investment offer from her
mother’s friend Marie. Marie is the founder of a
highly successful fashion brand. Marie wants to
invest £100,000 in Julia’s business. Julia’s mother
suggests she takes the money, arguing that Marie
is a “super angel”.
– What does she mean with the term “super angel”?
– Do you agree with Julia’s mother when she says that
Marie is a “super angel”?
Exercise II (D)

• A couple of weeks ago, Julia applied to Startup

Bootcamp. Julia gets accepted in the program and
she is considering the offer.
– How much money will Julia receive from Startup
Bootcamp if she accepts to get in the program and what
is the pre-money valuation?

– What are the advantages for a startup like when they enter in a program like
Startup Bootcamp?
Exercise III

• You are the founder of You and your co-founder

aim to build a ML tool help you select the best present for
your girlfriend/boyfriend based on past searchers
• To have a fully operating product and growing customer base
you think you might need to raise £20 million over the next 5
• Define a realistic investment strategy/process for the
company including:
– stages of the investments (amount per round and timing)
– milestones to be achieved per round
– source of capital (including name of fund/investor)

Itxaso del Palacio