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Show Me The Money - The Ying and Yang of Entrepreneurial Finance
- 1. SHOW ME THE MONEY! High Anxiety: The Ying and the Yang of Entrepreneurial Finance Babson College Babson Speaker Series #4 April 17, 2019 John Landry john@johnlandry.com
- 2. Show Me the Money! Agenda • Are You Ready? • Why should you Raise Money? • Should you? Should You Now? • When should you Raise Money? • When you need it… or not? • Where should you Raise Money? • Sources • Methods • How should you Raise Money • Getting Meetings • Pitching • Closing
- 4. Why Should You Raise Money? • Fundraising? It’s Not Fun!... • It’s a Marketplace that’s…Not Rational! Seldom Fair! … and ALWAYS DEMORALIZING!! • You’ll Hear “NO!” a lot… maybe! • You need to be a Learning Machine.. Tough, Resilient and Upbeat Regardless! • You need to KEEP BELIEVING! • But do you need it? • Alternative: Bootstrapping! Hewlett Packard’s $583! Mail Chimp! M&D! • Big, Big Choices: Lifestyle Business?... or Going for the Gold? • Ownership & Control • Competitive Advantage & Survival
- 5. Are You Ready? … and then you’ve got this?
- 7. When Should You Raise Money? • When You Need It! Right? • Well, actually, it’s easiest when you don’t need it! • Investors Can Smell “Desperation” From Afar! • Selling the Promise vs. Selling the Numbers • How Much Do You NEED? Enough to get you to • Persuasive Milestones to Raise the Next Round or • Self-Sufficiency • Do the Planning, do the Math • Build in a Cushion (particularly for tech)!
- 8. When Should You Raise Money? Have An Idea? Have a Demo? Have A Prototype? Have Users? Have Customers? V a l u a t i o n “We Need Money To Grow” • Hiring! Really? # Employees Not a Great Metric! • User Acquisition! Really? Get Free Ones First • Customer Service! OK! Best Reason to Raise Money!
- 10. Where Should You Raise Money? Friends & Family… & Fools? • Moms, Dads, Uncles, Aunts, Grandparents • … preferably RICH! • Why? They Want To Support YOU! • Use ONLY if they can afford to LOSE EVERYTHING! • Let them know that most VC funded startups don’t produce a return! • Pitch as if you’ve never met them! • Be Thoughtful – Don’t take advantage! Prepare! • Be Professional – Full Pitch, Appearance… It’s Good Practice! • Be Knowledgeable – What you’re doing and why! • Be Respectful – Reasonable Valuation • KISS Structure: Conv Note, SAFE, Debt
- 11. Where Should You Raise Money? Accelerators • i.e. Investors with Education Programs • Y-Combinator, TechStars are the Best • How It Works • Application (Teams and Traction) • Admission & Investment • Moving & Location • Classes & Events & Networking • Mentors • Demo Day & Graduation • Accelerators vs. Co-Working Spaces • Cambridge Innovation Center (CIC), MassChallenge, WeWork • Benefits & Drawbacks • The Surge in Accelerators • Opportunity? Meta-Accelerators • Be HIGHLY Selective!
- 12. Where Should You Raise Money? Accelerators https://www.techstars.com/faq/
- 13. Where Should You Raise Money? Angels and Angel Groups • Rich People with Time and Money • Invest THEIR MONEY for Fun & Profit • Research & Ask for References • Sources: Previous Investees, Angel List, VCs • Previous Success as Entrepreneur? • Similar Knowledge Domains? • Expertise Current? • Contacts Valuable? Current? VCs? • Say “No!” to Blowhards! Name-Droppers! Time-Wasters! Tiring Critics! Peeps with Deep Pockets and Short Arms … and most of all, anyone that makes you ‘uncomfortable’! • Typical Mechanics: • SAFE – Simplified Agreement for Equity • Convertible Note • Seed Equity Round Participant • Revenue Royalty • Beware of Dilution! ( http://angelcalc.com )
- 14. Where Should You Raise Money? Venture Capital • Professional Investors with Outside Money • Sources: Pension Funds, Endowments, The 1% • Invest Other Peoples MONEY for Fees & Carry • Committed Capital vs Invested Capital • Fund Life Typically 10 Years (Plant, Grow, Harvest) • Biz: 2% Fee/Yr on Committed Capital, 20% on ‘Carry’ • Structural Changes: • The Care and Feeding of Unicorns • FASB Mark to Market! Start New Fund in 3-5 Years • All the Wood Behind One Arrow!
- 16. Where Should You Raise Money? Venture Capital • Research for Your Unique Competitive Advantage • Previous Success as Entrepreneur?.. Or just out of HBS? McKinsey? • Complementary Knowledge Domains? Expertise Current? • Contacts Valuable? Current? Later Stage VCs? Investment Bankers? • Say “No!” to Blowhards! Name-Droppers! AND IN PARTICULAR, TIME WASTERS! • No Aholes! • Typical Mechanics: Equity Round!
- 17. Where Should You Raise Money? Alternatives • Revenue Royalty Funding • Debt Innovation • Mr. Wonderful • Agree on a multiple of investment • Agree on Revenue Royalty % / Initial Timing • Agreement in tact until Investment Multiple has been paid • Indie.VC… Wow! Google It! • Crowdfunding • Investor Syndicates • Kickstarter Product Funding
- 18. Where Should You Raise Money? Structure
- 19. Where Should You Raise Money? Structure: Convertible Note / SAFE • A Promise of Future Equity • Optional Terms: • Discount Percentage off next equity round valuation • Optional valuation “Cap” on either pre-money or post-money next round valuation • Optional Interest Rate Accrual • Optional “Call” feature • Pros: • A Solution When Valuation Not Known • Quicker/ Less Expensive than Equity Round • Rewards Early Investment • Cons • Uncertainty of Dilution • Size might ‘crowd out’ too much of next financing • Investors have no control over terms of next round
- 20. Where Should You Raise Money? Structure: Equity • Ying & Yang: Valuation and Dilution • Pre-Money & Post-Money • Incentive Stock Option Pool • Needed: Lawyers, Money, Independent Directors, Laser Focused Attention to Docs! • Handling SAFE’s & Convertibles • Preferred Investor Rights: Board Seats, Observers, Veto Rights, Drag Along Rights, Voting Rights, Anti-Dilution, Participation, Liquidity Preference, ad nauseum! • Compensation Committee • Venture Debt
- 21. Where Should You Raise Money? Mechanics of Dilution – Initial Equity Round w/Conv & Caps
- 22. How Should You Raise Money? The Story • What Are You Doing and Why It’s Important • Keys: • It’s Interesting • It’s Believable • It’s Memorable • It’s Scalable • It’s Future Friendly • It’s Scarce • It’s In Demand • Record It, Listen to it, Do It Again
- 23. How Should You Raise Money? The Hunt • Be Where Investors and Entrepreneurs Are! • Monitor EventBrite • Join Organizations (MassTLC) • MassChallenge, CIC • Microsoft, Google, Amazon • SPEAK! VOLUNTEER! MAKE FRIENDS WITH THE PRESS! • Establish a “Personal Brand”! • Really Research Investors That Will Get Excited with Your Space • Investor Blogs, Investments, Linked-Profiles, Press Clips • Warm Introductions Best from successful entrepreneurs, Angels • Cold Email Can Work.. ONLY if it’s highly Customized & Interesting
- 24. How Should You Raise Money? The Hunt – Cold Email Request
- 25. How Should You Raise Money? The Hunt – Cold Email Request
- 26. How Should You Raise Money? The Deck (Google “YC Seed Deck Template”) • Clear, Concise, Interesting, Customized Deck Delivered with Excitement • Title: Name, 1 line Description of What You Do • Problem, Pain: Clearly Stated, Impact on Business/People • Solution: Clear, in Few Words the Benefits for Business/People • Traction 1: Key Stats, Graphs on how your already seeing success • Traction N: More Exciting Metrics on Success and Control • Why We Are Special: Our Unique Insights and Continuing Discoveries • Business Model: The Great Economics of our Model.. Revenues, Low Costs, Scalable Business • Market: Market Size, Market Growth, Our Position Now and Later. Investors Will Make Money! • Team: Why You Peeps? CEO, CTO, VP Engineering, Growth Hacker • How Much Money? Enough to confidently get us to Milestone to get Series A done
- 27. How Should You Raise Money? The Close