Founder Institute - Fundraising-1

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 Angels 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
Lets say youve 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 cant have it all (unless youre 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 whats 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. - Dont get greedy
Miss the numbers, youre 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 its 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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Founder Institute Fundraising

May 23, 2012

Jim Sherman Founder & Chairman, ShermansTravel Media

Fundraising for your new business

The Process The Story Deal Terms Lessons Learned

V.C.s & Private Equity

Top tier funds Lesser known

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

The Business Model

Lets say youve enticed one or more potential investors

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

Founder/Owner as lead negotiator

You can set price?

Market will set price

Giving up equity in exchange for $

The key deal terms include valuation, structure, and control.

Bells & Whistles

Moral of the Story:

Stay positive. Stay focused.

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