The Funding Lifecycle

The Founder Institute – March 18, 2010 Presented By: Jeff Stewart

What We Hope To Address Today:
• How does startup funding work?

• When can my company raise capital?
• How does one begin the fundraising process? • How much money should I raise, and how long should that

money last?
• What are the stages in a typical funding lifecycle? • What are the milestones and expectations?

• What are some tips and tricks to succeed?

Jeff’s 6 Milestones of Valuation:
Your Funding Strategy, and Execution Plan should work “hand in glove”
Multiple Exit Opportunities

Positive Cash Flow

Value
First Paying Customer Full-Time Team Fully Vetted Initial Idea

Functional Product

Time

The Right Investors Can Help:
Investors can Help in 3 ways: • Achieve milestones sooner (Compress X Axis) • Superior step-up (Expanded Y Axis) • Help prevent you from running out of money
Multiple Exit Opportunities

Positive Cash Flow
Functional Product

Value
First Paying Customer Full-Time Team Fully Vetted Initial Idea

Time

What You Want:
Multiple Exit Opportunities Positive Cash Flow

Value

Functional Product First Paying Customer Full-Time Team Fully Vetted Initial Idea

Good Investors can: • Provide outside perspective • Give you a dry run for a sale • Introduce key hires • Lend Credibility • Provide Cash • Introduce Customers • Introduce Exit Opportunities • Increase Exit Valuations

Time

What You Will Get:

“Entrepreneurship is often 2 steps forward, 1 step back”
Positive Cash Flow

Value
Functional Product
First Paying Customer Full-Time Team Fully Vetted Initial Idea

Time

What You Don’t Want:
Company runs out of money!

Value
First Paying Customer Full-Time Team Fully Vetted Initial Idea

Functional Product

Time

Budgeting and Cash Flow:
Rule 1: Rule 2:

Don’t Run out of Money The rule of 2x3 …It will take either twice as long and cost three times as much or it will take three times as long and cost twice as much You can’t choose or predict which it will be! Be very frugal, make every penny count Don’t be too frugal, know where to invest Don’t Run out of Money

Rule 3: Rule 4: Rule 5: Rule 6:

“There are plenty of investors that want to invest. Good teams with good business models will get funded”
Joseph Bartlett - 1994

Which Source Is Right For You:
1. 2. 3. 4. 5. Sweat equity, and the kindness of others Customer Funding (Revenue) Vendor/Supplier Funding (Payables and Special Agreements) Friends and Family (the 3 Fs) Angel wannabes (Accredited via inherited wealth or dental school)

6.
7. 8. 9.

Angels (Accredited via relevant business success)
Venture Capital – Seed Stage Venture Capital – Later Stage Strategic Inventors “Where you are in milestones achievement should drive who you approach”

Pipeline Rules of Thumb:
• Have a pipeline report
Example Funding Pipeline Report Investor Type Chance
Bob Smith Frank LLc Donna Jones Jeff Duke Larry Leftco Sam Socks Ken Kim West Wheeler Don Obon James Jones Angel Seed VC Angel Angel Friend Angel Super Angel Angel Seen VC Angel 5% 30% 30% 80% 100% 30% 90% 30% 20% 2%

Amount
$ $ $ $ $ $ $ $ $ $ 25,000 100,000 100,000 50,000 25,000 100,000 75,000 25,000 250,000 50,000

Expect
$ $ $ $ $ $ $ $ $ $ $ 1,250 30,000 30,000 40,000 25,000 30,000 67,500 7,500 50,000 1,000 282,250

Notes
in Aspen till June Passed Reviewing Commited Meet Friday

Follow Up

• Investors often lead to more investors

• Your pitch will get better
• Manage urgency and timing • Leads can be elusive, be your own lead

Know What To Expect:
Median Pre-Money Value (Millions):

*Data courtesy of Cooley Godward Kronish, based on their internal deal flow

Are You Being Careful?
Not all rounds are up:

*Data courtesy of Cooley Godward Kronish, based on their internal deal flow

Beware: Bad Investors Can Kill Your Business
• Investors can add enormous value up till just before they

invest (enjoy the process)
• They might add value after they invest, but you need to be intelligent, strategic and proactive

• The right investors should save you time, not cost you time
• The wrong investors can kill your business • The wrong terms can kill your business
“Time is your most precious resource… having useful investors is an investment of your time”

• Have big aspirations • Seek the right amount of capital

• Beware Evil
• Have Fun

Stewart’s Approach To Fundraising:
• Assume revenue is the best form of funding • Assume outside investors, or more importantly, the process of raising outside money, will make your business more valuable and impactful • Never “need” to raise money, ALWAYS have plan B • ALWAYS have competing fundraising choices • Plan ahead 2 to 5 years • Be intelligent about your choices (Security types, terms, conditions, preferences, governance) • Check references and reputation, It’s not all about valuation • Consider long term equity value and liquidity events • Drive the process.. don’t be a victim

Creating Choices and Competition:
• Control Burn, more then spend (discretionary vs. non-discretionary) • Good Angels will introduce you to good VCs • Good VCs will attract more VCs • Multiple referrals are key • Try to have an open instrument (the ability to close anytime) • Use convertible bridge structures when appropriate

Beware of Piers:

Other Tips and Tricks:

• • • • • • •

Protect and Inform your existing investors Understand Blue Sky Laws The right Attorney can help Think International Tour NY, then Boston, then Silicon Valley Include both East and West coast Angels Go big, or go home!

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