Talk I gave at McGill University to students interested in startups.

1. Understanding Venture Capital
Daniel Drouet
McGill University
April, 2012

2. About Me
Blog: danieldrouet.ca
Twitter: mtlluo
Email: daniel@montrealstartup.com

3. Financing options
 Right tool for the job
• Self-finance (Bootstrapping)
• 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
 Convertible Loan
• Simple and avoids valuing the company
• For Seed or Bridges
 Preferred shares
• Can be complex, typically used by VCs
• Provides special rights

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
 30% break-even
 20% make (lots of?) money
 Large funds require large exits
• Swing for the fences

9. VC fund example (simplified)
 $100M fund. Goal is $200M or 2x
 15 investments. Aim for 30% ownership at exit
• 50% (7) lose money = $0M
• 30% (5) break even = $30M
• 20% (3) make money = $170M
 $170 / 3 = $57M per company
 Own 30% => Need three $189M exits!

10. Investment stages
Startup Seed Early Stage Late Stage Mezzanine /
(Series A, B) (Series C, D, E) Buy-Out
$0 - $50K < $500k $1M - $5M $5M - $30M > $50M
Friends & Friends & Angel Groups, VC, Expansion Specialized
Family, Angels Family, Angels, VC funds funds
Seed Funds
Validate idea, Launch Beta Build team, Ramp up Exit or remain
Prototype grow users, growth, sales private
first revenues

11. Investors are looking for:
 Team
• Doers
• Complementary
• Deep knowledge of sector
• Coachable
 Technology / Product
• Unique, disruptive
• Defendable is nice
 Market
• Big to huge
• Growing fast or ripe for disruption
• 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

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, Agree on roadmap Legal and financial
Prep deck and and use of funds, due diligence,
other docs. Lots of back and Reference checks,
Get introductions forth over terms, Haggling over
Some due diligence details
Goal Get investor excited Get signed term Close, i.e. cash the
sheet cheque!
Time 3 weeks to prep 6 weeks 6 weeks
3 weeks for mtgs

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
Share- Money Common % Money In Common %
holders In shares shares
Jack $0 500,000 50 $0 500,000 35
Jill $0 500,000 50 $0 500,000 35
Pre = $1M
ESOP n/a 143,000 10
Angels $250,000 286,000 20
Total $0 1,000,000 100 $250,000 1,429,000 100
Post =
$1.25M

17. Valuation example: Series A
Share- Common % Money Common Preferred %
holders Shares In Shares Shares
Jack 500,000 35 500,000 26.25
Jill 500,000 35 500,000 26.25
Angel 286,000 20 286,000 15
Options 143,000 10 143,000 7.5
Total 1,429,000 100
Pre = VC $2M 476,190 25
$6M
Post = Total $2M 1,905,190 100
$8M

18. Resources
 Finding investors
• http://www.cvca.ca/membership/directory/it.aspx
• http://www.angelinvestor.ca/Find_Angels.asp
• http://angesquebec.com/
 Fundraising
• http://www.slideshare.net/startupcfo/investor-readiness-
workshop
 Pitching investors
• http://venturehacks.com/pitching
 Understanding Term Sheets
• http://www.feld.com/wp/archives/2005/08/term-sheet-
series-wrap-up.html