Founder Institute Fundraising

May 23, 2012

Jim Sherman Founder & Chairman, ShermansTravel Media

Fundraising for your new business

1.

The Process The Story Deal Terms Lessons Learned

2.

3.

4.

The fundraising process is daunting, time-consuming, and tiring. Are you ready?
What You Need

Persistence

The process & the substance • Typically 6 months or more • A lot of networking • Business contacts • Alumni contacts • Conferences • Cold Calls • A dedicated full-time job • Management presentation • Phone discussion first (often) • Innumerable follow-up calls • Term sheet negotiations • Due diligence • Legal & closing

Prospecting

Presenting

Term Sheet

Deal Close

A myriad of money sources exist for prospecting – more than ever before.
Seed Round
-

-

Angel List, New York Angels, CommonAngels, The Angel’s Forum, The Washington Dinner Club Events/Conferences – networking opportunities Crowd Sourcing (Kickstarter) Customers Friends, Family & Fools(!) Start-up Incubators Alumni Boards/V.C. Groups

Series A or B

V.C.’s & Private Equity
-

Top tier funds Lesser known

Narrow down by industry focus, size of deal ($1-3M, $3-10M, $10M+), location, stage of investment (seed, venture, growth), etc.

Strategics/Corporations

Getting your foot in the door is no different than an actor getting his/her audition in front of a talent scout.

To open doors, you need to start the process of raising capital 6 months before you need it.
How much? • Focus on tangible results/milestones for phase I • Assess the amount you need (development cost, marketing/business development, hardware/systems, legal, etc.) and tack on 25% Timing? Seed Round • If multiple investors, may have a longer term window of availability (1 year?) In general…
0-3 months • Networking • Initial outreach • Pitch meetings 3-6 months • Second meetings • Term sheet • Closing

Finding the right investor is as important as finding the money.

Seed Round • Start by relationship building; provide updates; ask for money later after demonstrating progress Sizing up a professional investor • Industry experience • Portfolio experience • Support services beyond money • General reputation • Likely board partner – who • Outreach to at least 3 CEOs they backed

After determining whom to approach, the story needs to be persuasive and you need to be inspiring.
The Team
(include yourself as entrepreneur)

The Idea

The Business Model

The Passion

1. 2. 3.

4.

The Team  Qualifications (industry experience; education) The Idea  supporting data to validate The Passion  presentation style/communications The Business Model  customers and pricing metrics; marketing data; industry comps; etc.

Rejection is par for the course but understand key areas of weakness.
Typical reasons to say “No” 1. Inadequate business plan or idea • Fill a need that no one is doing or find something that can be done better • Innovation vs. Imitation 2. Inexperienced team 3. Business domain is high risk 4. Opportunity is not large enough or growing 5. No sustainable competitive advantage 6. Financial projections appear flawed • Too conservative or too optimistic • Need $20M revenue, at minimum, in five years, but not $2B Common Answer: “Keep in touch” 1. Show a finished product, some customer validation, commerical partnerships, etc. 2. V.C.’s often say this; for seed investors you may want to propose this

Let’s say you’ve enticed one or more potential investors…

Negotiating good deal terms is both art and science/math.

Nothing will generate better deal terms than a competitive process and/or being in a “hot” industry.
Seed Round
$250K - $2M

Founder/Owner as lead negotiator

You can set price?

Hire a banker?

Series A or B
$2M +

• • • • •

Outreach Aid with investment memorandum Warm up prospectus Run a professional process Advise on terms Part psychologist

Market will set price

Giving up equity in exchange for $
General Rule: 20 – 30% per round (5% to 40%) Thus, within two rounds, likely lose control

The key deal terms include valuation, structure, and control.
You can’t have it all (unless you’re Mark Zuckerberg)!
Deal Structure
• •

As valuation goes up, investors will want more “protections” But you may remain in control of the board (board control/Equity vs. economics/proceeds share)

Protections include:
1.

Bells & Whistles

2.

vs.
3.

A Clean Deal
4.

Multiple liquidation preference in the waterfall Standard is 1x vs. 1.5x, 2x, or 3x Participation Participating preferences mean investors get their liquidation preferences AND their % of what’s left (equity portion) Cumulative Dividends Some preferred shares have a cumulative dividend (e.g. 10%) Some have a cumulative dividend that converts info shares at a fixed price Some have both Ratchets Weighted average anti-dilution protection (protects against a down round) Full ratchet  all shares reset to the new price

A clean deal may be best for the entrepreneur, but there are risks.
High valuation/ Bubble but “ugly” terms/structure (retain control) Lower valuation & clean deal (but lose control of the board)

vs.

If hit a downturn…

Much harder to raise follow on rounds; preference stack; need to recut cap table Misaligned interests in potential sale; requires high price “Pigs get fat but hogs get slaughtered.” - Don’t get greedy

• •

Miss the numbers, you’re out (especially after honeymoon period) Fewer impediments on future capital raised with a “clean deal,” even if a down round

Moral of the Story:
choose a valuation that is sustainable over the whole lifecycle of the company

Lessons Learned
• Strategics take longer but better deal (avoid right of 1st refusal) • A smart banker or financial advisor is critical (esp. if it’s your first deal) • Look forward at the control economics (amount raised, quality of team, progress made, and the idea/market appeal) • Push back hard on participating preferred • Engage good lawyer, especially in regards to board seats and minority shareholder rights • Tough to raise money without proven revenue (and tough to entice a good banker) • Evaluate exactly what you need and ask for the right amount (articulate the near term) • CEOs are always in a fundraising mode • Choose your investors carefully

Stay positive. Stay focused.

Thank you!

ShermansTravel Media

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