3. Financing options
Right tool for the job
• Self-finance (Bootstrapping)
• Government grants
• Loans
• Selling Equity
Options available depend on
• Stage the company is at
• Type of business
4. What is Equity Financing?
Trading shares of your company for cash
Taking on a new partner!
When to consider it
• Up front costs not fundable from cash flow
• Need to move fast
• Unique product or technology with large potential
market
• Exit possible in 5-7 years for $30M+
5. Equity Types
Common shares
• Simple
• Founders and investors have similar rights
Preferred shares
• Can be complex, typically used by VCs
• Provides special rights
Convertible Loan
• Simple and avoids valuing the company
• For Seed or Bridges
6. Equity financing pros and cons
Pros
• Have resources to move quickly
• Help with strategy, critical hires, fundraising,
partnerships, exits, etc.
Cons
• Give up control
• Locked in for the next four years
• Higher rate of failure
• Give up possibility of lucrative small exit
• Give up possibility of running lifestyle business
7. Angel investors
Successful business people
Invest their own money often in groups
Typically more involved than VC
Usually only invest at Seed level
Small exits can be wins
8. Venture Capital (VC)
Raise funds that have 10 year lifespan
Risk reduction based on
• Funding over multiple rounds
• Portfolio approach
50% investments lose money
20% break-even
20% make some money
10% make lots of money
Large funds require large exits
• Swing for the fences
9. VC fund example (simplified)
$100M fund. Goal is $250M or 2.5x
20 investments. Aim for 20% ownership at exit
• 50% (10) = 0x (written off)
• 20% (4) = 1x (break even)
• 20% (4) = 2x - 3x
• 10% (2) = 10x or more!
$250M / 2 = $125M per company
Own 20% => Need two $625M exits!!!
10. Investment stages
Startup Seed Early Stage
(Series A, B)
Late Stage
(Series C, D, E)
Mezzanine /
Buy-Out
$0 - $50K < $500k $1M - $5M $5M - $30M > $50M
Friends &
Family, Angels
Friends &
Family, Angels,
Seed Funds
Angel Groups,
VC
VC, Expansion
funds
Specialized
funds
Validate idea,
Prototype
Launch Beta Build team,
grow users,
first revenues
Ramp up
growth, sales
Exit or remain
private
11. Investors are looking for:
Team
• Doers
• Complementary
• Deep knowledge of sector
• Coachable or experienced
Technology / Product
• Unique, disruptive
• Defendable is nice
Market
• Big to huge
• Growing fast or ripe for disruption
• Traction, Traction, Traction!!!
12. What you should look for
Has funds to invest
Invests in your sector
Complement existing portfolio
Track record / reputation
Share common vision
Good relationship with Partner
* Take “Smart Money” with a grain of salt.
13. Approaching investors
Do your homework
• Shortlist of investors
• Get an introduction through your network
• Show how you would be a good fit
It’s like dating
• Compatibility matters
• You can’t force it
Build the relationship before you need it
14. Fundraising process
Initial Meetings Term Sheet Closing
What’s involved Short list investors,
Prep deck and
other docs.
Get introductions
Agree on roadmap
and use of funds,
Lots of back and
forth over terms,
Some due diligence
Legal and financial
due diligence,
Reference checks,
Haggling over
details
Goal Get investor excited Get signed term
sheet
Close, i.e. cash the
cheque!
Time 3 weeks to prep
3 weeks for mtgs
6 weeks 6 weeks
15. Valuation
Driven by the investors
• How much money they think you need
• Percentage they want to own
Entrepreneur controls one thing
• How much risk has been removed from the business
Miscellaneous
• Pre and Post Money
• Option Pools
• Avoiding valuation with Convertible Debt
16. Valuation example: Seed
Shareholders (Founding) Money In Common shares %
Jack $0 500,000 50
Jill $0 500,000 50
Total $0 1,000,000 100
Shareholders (Seed) Money In Common shares %
Jack $0 500,000 35
Jill $0 500,000 35
Angels (pre $1M, post $1.25M) $250,000 286,000 20
ESOP n/a 143,000 10
Total $250,000 1,429,000 100
17. Valuation example: Series A
Shareholders (Seed) Money In Common shares %
Jack $0 500,000 35
Jill $0 500,000 35
Angels (pre $1M, post $1.25M) $250,000 286,000 20
ESOP n/a 143,000 10
Total $250,000 1,429,000 100
Shareholders (Series A) Money In Common shares %
Jack $0 500,000 26.3
Jill $0 500,000 26.3
Angels (pre $1M, post $1.25M) $250,000 286,000 15
ESOP n/a 143,000 7.5
VCs (pre $6M, post $8M) $2,000,000 476,190 25
Total $2,250,000 1,905,190 100